Trade-weighted measures of the dollar are steady, off about 2% from the highs of the year seen in May. The wobble in equity markets last month had thrown into question whether the Fed would be taking rates as high as 3.25% after all, but recent equity stability and encouraging US data (including strong April consumer credit released last night) support the view that Fed tightening remains at full throttle.
Given that Fed policy has been such a crucial driver of the dollar's turnaround over the last 12 months, we expect the dollar to remain broadly supported into next week's FOMC meeting. For today, there is no US data of note and no sign that high oil prices (a dollar positive) are set to turn.
With the pressures of softer stocks and lower—though still elevated—interest rates, the CAD hasn't moved too far from yesterday's highs against the USD. Rising Canadian yields should provide some cover for the CAD in the short term, limiting spot gains through the 1.26 zone. Following the Bank of Canada's rate hike and hawkish rhetoric last week, markets have taken a more aggressive stance on the country's policy outlook, with year-end pricing in a target rate of 3.20 percent, considerably ahead of Fed pricing for December, which remains stable around 2.85 percent. The CAD will be well supported not only against the USD, but also against the main crosses, thanks to the Bank of Canada's policy stance. Observe the USD/CAD chart.
EUR/USD has held up quite well in the face of this week's dollar strength. Supporting the euro is the prospect of a hawkish European Central Bank meeting tomorrow. While it looks far too early to expect a rate hike, the prospect of a hawkish meeting is lending the euro some support. At least the ECB looks to have taken the decision to get real interest rates higher - unlike its counterparts in Japan. On that subject, money markets only seem to be pricing the 25bp hike scenario for the ECB on 21 July. That could easily edge some way towards the 50bp scenario over coming weeks and could nudge EUR/USD back above 1.07 later this week.
The pound seems to be shrugging off speculation over Prime Minister Boris Johnson's future. GBP will face more volatility around two UK by-elections to be held on 23 June - both of which the Conservatives stand a real risk of losing. Yet the Conservatives still retain a substantial majority in the Commons and if anything, pressure at the polls could translate into earlier tax cuts to appeal to the base. We continue to see the GBP/USD trade a little higher in the short term.
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