Despite some mixed data out of the US yesterday, markets have continued to push their hawkish bets on the Fed tightening further, and with 75bp fully priced in for next week’s meeting, March 2023 Fed Funds futures now trade at around 4.50%. This marks a 50bp+ increase in peak rate expectations since the start of September. In such an environment, risk sentiment is struggling to recover and this is just another factor delaying any correction in the dollar. Today, University of Michigan sentiment and inflation surveys will be watched, but we may need to see some significantly below-consensus reads to dent the hawkish Fed expectations. Expect the dollar to stay on solid ground into Wednesday’s FOMC announcement.
Canada reports August housing starts and wholesale trade this morning. With the S&P 500 falling to two-month lows yesterday, the US dollar finally closed above CAD1.32. Follow-through buying today lifted the greenback to almost CAD1.3300, a new two-year high. A move above 1.3340 could signal a break 1.3400-20. The CAD remains hitched to the risk on/off tone and the broader moves in the USD in the short term.
Today’s final CPI numbers for August in the eurozone are expected to confirm the preliminary 9.1% print, and there are no other data releases to watch meaning all attention will remain on: a) developments in the Russia-Ukraine conflict; b) gas prices and EU measures to cap energy bills; c) ECB speakers. The euro has displayed a reduced sensitivity to ECB communication recently and the unstable risk environment mixed with a strong dollar may keep EUR/USD upside capped for now despite the recent decline in gas prices. The 1.0000 level could remain an anchor over the coming days.
This morning’s retail sales in the UK continued to show a deteriorating consumption picture in the UK, which emerged more from the continuation of a steady downtrend rather than a single data point. This has been the last important piece of data before the Bank of England meeting on Thursday and has hit the pound this morning. Despite the seemingly unstoppable re-pricing higher in Fed rate expectations, the BoE’s pricing has stalled, now around 65bp for the September meeting. There is a high chance of a 75bp move next week, which could help the GBP, however, domestic growth fears are likely set to keep a lid on any GBP recovery.