The dollar sold off around 1% across the board on yesterday's softer-than-expected July CPI number, which investors felt made the case for a 50bp instead of 75bp hike at the Fed's next meeting on 21 September. However, the brief move in US interest rate markets did not last long. Having fallen 20bp in the immediate aftermath of the CPI release, US two-year Treasury yields have since risen 15bp as markets re-assess the implications of the release. It looks too early to expect a significant turn lower in core inflation meaning that core inflation could be back at the 6.5% year-on-year cycle highs as we move into the fourth quarter. Additionally, Federal Reserve speakers were quick to re-affirm their commitment that the policy rate will be taken to 3.25/3.50% by the end of the year, with some risk to even 4% into next year. Despite the greenback’s sell off yesterday, we expect the US to gain against most of the majors in the medium term.
The US dollar slumped to almost 1.2750 yesterday, it is the lowest level in nearly two months. Like the other pairs, it is consolidating today near the lower end of yesterday's greenback range. Domestically, the softer run of domestic data reports of late has attracted a little attention in the market but we think policy makers will overlook the softer jobs growth data, given high wages and low unemployment; market pricing for the BoC’s Sep policy meeting (+65bps) continues to reflect the strong probability of a 3/4 point hike. We suspect that the US dollar can recover into the CAD1.2800-20 area today.
Do not expect the modestly softer US rate environment to last too long. We expect the 1.0350/1.0400 level to be the top of the August trading range for EUR/USD. In addition to the Russian threat from energy prices, the European manufacturing industry now has to contend with drought conditions and low water levels on the Rhine. This will challenge coal shipments, amongst other cargoes, and is keeping European natural gas prices near record highs.
The softer dollar allowed a decent reprieve to GBP/USD yesterday, but the move stalled below the 1.2300 level. We think cable will struggle to get above that level and would favour a return to the 1.20 area. The next local input for sterling will be tomorrow's 2Q22 UK GDP data, widely expected to contract 0.1/0.2% quarter-on-quarter.
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