An extension of supported risk assets kept the dollar under pressure at the start of this week. In particular, European sentiment appears to be rebounding quite sharply, largely on the back of falling gas prices and some market optimism around developments in the Russia-Ukraine conflict. The question is whether this correction is sustainable and the dollar has indeed peaked last week. In our view, the narratives behind the recent FX moves are not solid enough for the strong bearish call on the dollar just yet. Today’s US CPI figures for August an event risk for the dollar. The consensus is centred around a deceleration in headline inflation from 8.5% to 8.1%, largely due to lower gasoline prices. Core inflation may accelerate above the 6.0% mark from 5.9% in July. All in all, and given the recent hawkish messages by Fed Chair Jerome Powell, it appears unlikely that – barring significantly below-consensus reads – expectations around Fed tightening will be heavily affected by today’s CPI report.
The US dollar has fallen from a little above CAD 1.3200 to below CAD 1.3000. So far today, the greenback is trading in a tight range (~CAD1.2970-CAD1.2995). A convincing break will target 1.2900 next. Last week’s Canadian jobs report was soft; a third consecutive decline in employment and a clear slowing in trend jobs growth suggesting that the BoC’s aggressive tightening is having a cooling impact on the economy. There are no Canadian data reports due today.
The market’s growing optimism on Europe is fuelling a rebound in European equities, and the euro’s parallel recovery is keeping FX-stocks well correlated. Markets may have turned optimistic too early on the gas and Ukraine themes, but the euro may also have been helped by some hawkish comments from ECB officials. Today, some focus will be on the ZEW survey out of Germany, while there are no scheduled ECB speakers. Another potential good day for risk assets if US CPI moves lower may keep EUR/USD bid for now: a break above 1.0200 is possible at this stage, but a return to the 1.0000 level parity remains our base-case scenario into year-end for EUR/USD.
Jobs data released this morning were largely in line with consensus expectations and confirmed the UK jobs market has remained quite tight. Most crucially for the Bank of England, evidence that wage growth has continued to accelerate may suggest more aggressive tightening. GBP is trading slightly higher after this morning’s release but should have a larger reaction after tomorrow’s CPI data.
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