Macro themes continue to drive financial markets. Bank of England Governor Andrew Bailey yesterday said that the global growth outlook has 'deteriorated markedly'. The big question for financial markets is whether this deterioration in growth prospects is enough to curtail tightening cycles - especially that of the Fed. Today we see the release of the June FOMC minutes where the Fed hiked 75bp. Expect these minutes to sound hawkish and to emphasize that the Fed is likely to further tighten. Continued Fed tightening amidst a global slowdown remains a very positive environment for the dollar. After this Friday's June nonfarm payroll data, next week's release of June CPI (13th) looks like an enormous event risk for FX & Rates markets. The USD should stay bid and probably edge higher against most majors.
The CAD is back above 1.30 while also extending to a high of 1.3085 yesterday as it follows the dollar-positive/risk-off mood. The currency generally ignored the results of the BoC’s business and consumer surveys and is trading on broader market sentiment. The surveys showed higher expected inflation—two years ahead, businesses see it at 4.5% and households at 5%—that should motivate a 75bps hike from the BoC next week. The hawkish BoC remains an important tailwind for the CAD alongside an economy that appears more resilient than that of other major advanced countries. However, markets will continue to trade cautiously given the macro themes of a deteriorating global economy. Observe the USD/CAD chart.
When it came, the break of EUR/USD to a new cycle low was unexpected. If anything, driving yesterday's market activity was the continued rise in European natural gas prices as Russian supplies decline. Already running at only 40% of capacity, Russia's Nordsteam 1 pipeline will be closed for maintenance 11-21 July and exposes the friction of continuing European dependency on Russian gas. The German Bundesbank estimated that the German economy could take a hit of 5% of GDP in the case of gas being rationed. It feels like we are now not far away from such a scenario. Expect some significant volatility in the weeks ahead with the euro continuing to be exposed to significant downside risk.
The GBP has tended to ignore the indiscretions of Boris Johnson's government - largely because the Conservatives have a large majority. But the resignations of the big-hitters in charge of the Treasury and Health will leave the PM rocking and has hit the GBP hard since the announcements. It is not clear whether the new chancellor, Nadim Zahawi, will represent a shift in economic policy, although he may be tempted to loosen up fiscal policy earlier than expected. A tough summer ahead suggests that the GBP will remain vulnerable to the 1.14/15 area.