The dollar has remained well in demand to start of this week, enjoying an ideal combination of a) markets reinforcing their hawkish expectations ahead of Jackson Hole; b) global risk sentiment fuelling instability; and c) further rises in gas prices worsening the outlook for other parts of the world (the eurozone in particular). Today, there is no scheduled Fedspeak and investors will instead monitor August’s PMIs across major economies. Some price action in USD-crosses may end up being determined by any divergence in the surveys between the US and Europe, but the broad global macro picture that is currently supporting the dollar seems unlikely to be changed much from data at the moment.
The US dollar made a marginal new high for the month against the Canadian dollar last night, just shy of CAD1.3065. Weaker stocks and softer oil prices remain headwinds for the CAD and while the BoC policy backdrop remains supportive in broad terms, there is little opportunity for the CAD to differentiate itself from the USD ahead of the key Jackson Hole event at the end of the week. The broader USD tone is expected to overshadow the CAD in the medium term. Observe the USD/CAD chart.
EUR/USD suffered another sharp drop yesterday, as a breach of parity led to a break below 20-year lows. A key question is whether the ECB will start discussing active support to the currency now that we have broken decisively below parity. We’ll hear from Fabio Panetta today in a scheduled speech, but keep an eye on any unscheduled remarks by hawkish members that may well become even more vocal on the weak euro. On the data side, today’s PMIs will be the main highlight of the week, and our economists expect another drop after July’s grim readings, which may leave EUR/USD vulnerable to the 0.9800-0.9850 area.
Rising energy prices should put pressure on UK PMIs and this may keep the pound without any real solid floor against dollar appreciation. Downside risks to GBP/USD remain quite elevated, and a move to the 1.1500 mark now looks like a tangible possibility. The UK’s economic outlook looks bleak and is likely to follow a rocky path. Expect some significant downside pressure on the GBP in the near term.
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