The volatile market reaction to yesterday’s poor GDP figures has provided us with an idea of what we should expect for the coming weeks: an elevated sensitivity of rate expectations and incoming data points. From an FX perspective, we don’t see the dollar suffering from much more Fed dovish repricing considering the current economic backdrop – only 90bp tightening is priced in by year-end – and more weakness might, if anything, derive from a further rebound in global equities. Data releases to watch today are the 2Q employment cost index, June’s personal income and the MNI Chicago PMIs. Expect a smaller reaction compared to yesterday, but USD data sensitivity should remain relatively elevated.
The US dollar extended its losses and fell to 1.2790, its lowest level since mid-June before rebounding to new session highs around CAD1.2835 in the European morning. Firmer oil prices and strength in the commodity sector broadly may be providing the CAD with a little support. There is not much else for the CAD to go on beyond the broader USD tone, stocks and commodities at the moment. Domestic data has been thin on the ground, with May GDP due today. We do, however, think the BoC’s resolve to chase down inflation makes a 75bps hike in September a more likely outcome which should help support CAD sentiment and reinforce the ceiling on USD/CAD above 1.30 at the very least.
Yesterday’s CPI numbers out of Germany sent signals that a smooth decrease in inflation will not be the base case scenario. Today, we’ll see the eurozone-wide CPI report, with another acceleration set to support expectations around a 50bp hike by the ECB in. We’ll also see 2Q GDP figures for the whole euro area today. With the ECB firmly focused on inflation rather than growth, and given the backward-looking nature of GDP releases, the impact on the euro should be larger from CPI readings today – barring major surprises in the growth figures. EUR/USD may end the week close to the 1.0200 area.
Around 9bp of tightening expectations ahead of next week’s Bank of England (BoE) meeting has been priced out in the past two days. This is another testament to how a potential 50bp would be largely a function of global monetary tightening trends rather than primarily driven by domestic dynamics. Currency GBP volatility has been almost entirely driven by global risk sentiment and given the lack of any major domestic drivers in the UK before the 4 August BoE meeting, this should continue to be the case.
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