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Daily Currency Update

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Several USD-positive factors will have greenback supported today

USD - US Dollar

The current market environment appears to offer the perfect combination of factors for a supported dollar. Inflation-related fears and higher yields weighed on global equities, as US stocks faced the worst trading day since May yesterday. Any signs of recovery in risk sentiment during the Asian session overnight were held down by the market’s concerns about another potential missed coupon deadline by Evergrande today, while Fitch cut the company rating again – now to one notch above default level.

Incidentally, the dollar has received an extra lift from rising USD short-end yield, as markets appeared to start aligning with the Fed’s Dot Plot after having largely dismissed it as too hawkish last week. Today, Fed Chair Jerome Powell is on the list of central bank heads speaking Economic and Financial Analysis forum. The uncertainty around the timing of debt-ceiling legislation may continue to unnerve a debt market that is already weighing inflation and tightening concerns. Ultimately, this should contribute to keep any dollar caused by improvements in the risk environment as short-lived, in our view.

CAD - Canadian Dollar

The CAD is outperforming most of its major peers with the support of crude oil’s rise. The rates backdrop is also acting as a tailwind for the CAD, as Canadian 5-yr yields rose to their highest level since March 2020 and their spread against 5-yr Treasuries rebounded. With the BoC nearing the end of QE and teeing up rate hikes for H2- 22, we expect the CAD to outperform. Commodity prices should remain CAD-supportive in the short run as energy deficits look set to worsen. OPEC+ meets next Monday but increases in supply are unlikely to come soon enough, or be large enough, to fully alleviate current imbalances.

EUR - Euro

The EUR was amongst the least hit currencies yesterday in a generalized risk-off environment. Given the lingering dovish stance by the ECB, the FX impact of any more upside surprises in the Eurozone’s CPI numbers released between today and Friday (tomorrow we'll see Germany and France’s numbers) may be quite limited. For today, some improvements in risk sentiment may give some support to EUR/USD, but we think any rebound in the pair may lose steam around the 1.1750 highs seen last week.

GBP - British Pound

GBP sensitivity to global risk sentiment has continued to rise, and yesterday’s sell-off in equities saw the pound underperforming the G10 commodity FX segment. Such downside pressure on GBP, however, does not appear to be also linked to any re-pricing in the BoE rate expectations, which have remained broadly unchanged after the BoE meeting last week. Let’s see today whether Governor Andrew Bailey will give markets reasons to cement their hawkish views as he participates in Sintra’s forum today. All in all, we suspect the pound may have over-reacted to the risk-off environment yesterday, and unless Bailey gives reasons to doubt the current pricing on BoE tightening today, we could see GBP rebound more than others to any sentiment stabilization today.

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