USD: The heavily European-weighted DXY remains pretty close to its recent highs at 93.00, which is a good performance given the bearish re-assessment of US and global growth prospects that have taken place over the last month. Dollar bulls will feel comfortable that the dollar out-performs on a both a global recovery - where the Fed looks poised to begin policy normalization. Most analysts expect US rates will turn higher later this year as the Fed is forced to respond to persistently high inflation. Immediate focus remains on the breakout of the Delta variant particularly in those countries where vaccination rates are low and the only recourse to policymakers is fresh lockdowns.
CAD: The CAD has rallied sharply over the last few days. Fundamental drivers for the CAD—such as historically elevated, short-term rate spreads versus the USD have failed to support the CAD as investors have steadily bailed out of long positions since June. Most think there is some short-term value in the CAD but a return to the May/June highs looks a distant prospect for now and we expect the CAD to remain rangebound over the coming weeks.
EUR: It is hard not seeing the ECB's strategy review as a means to weaken the EUR. Based on yesterday’s commentary the ECB's forward guidance will mean that EUR rates stay lower for and the EUR will be seen as one of the preferred funding currencies. There was nothing bullish for the EUR in yesterday's ECB meeting. In all, the ECB will be pleased that their trade-weighted EUR has dipped to lows seen last July. For today the focus will be on the flash PMIs for July. EUR/USD looks vulnerable to a retest of the March low near 1.1700.
GBP: GBP has found some good support this week. Yes, the ECB has done well to weaken the EUR with its strategy review which has certainly affected the GBP. The UK-EU relations look to be returning to an increasingly rocky period as Downing Street seeks to unpick the N. Ireland protocol in an effort to protect the United Kingdom. It seems unlikely the EU will soften its position of a hard border on the Irish Sea and instead October 1st - when the grace period for N. Irish trade concessions end - is shaping up as a big event risk for financial markets. Today's June UK retail sales figures were not bad, but we may well see recovery stalling in the 1.3800/3825 region.
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