The dollar is set to face a second consecutive week of losses against all G10 currencies. While risk sentiment has remained the primary driver of FX moves, the market’s tentative speculation about a pause in the Fed’s tightening cycle in September is surely contributing to keeping the dollar soft. In the past week, we have seen around 10bp of tightening being priced out of the Fed’s rate expectations for this year. In our view, however, it's hard to see a much calmer risk environment amid global monetary tightening and multiple downside risks (China, Russia/Ukraine), and a further shrinking of the USD’s short-term rate advantage over other G10 currencies, given that the FOMC rhetoric is still very hawkish. We see a higher chance of recovery in US rate expectations, which should put a floor under the greenback Today, risk-sentiment dynamics are still set to drive the vast majority of dollar moves, although markets will keep an eye on any drop in the US personal spending figures for April and in the Fed’s preferred inflation measure – the PCE deflator.
The CAD is little changed on the session, holding near the low reached in later trade yesterday and holding on to the mid-1.27 zone as the choppy range seen over the past week between 1.2875/85 and 1.2765/75 extends. We look for the CAD to pick up a little more support in the short run if the data run continues to support the impression that the domestic economy is running ahead of BoC expectations, which will keep policy makers on a relatively aggressive tightening path in the next few months. There isn’t much in terms of data today, leaving the currency to trade on broad market themes. Observe the USD/CAD chart.
EUR/USD is making a fresh attempt at breaking significantly above 1.0750 this morning, continuing to benefit from the soft dollar environment and some recent eurozone data having left markets more comfortable with pricing in front-loaded tightening (100bp) by the ECB this year. We see a higher chance of some recovery in the dollar from the current levels rather than an extension of the drop, and with a lot of ECB tightening now in the price, the room for the euro to benefit further from the monetary-policy factor appears limited. We expect a return below 1.0700 in the coming days.
The pound received only some modest support yesterday as British Chancellor Rishi Sunak announced a £15bn support package to fight the rising cost of living. The fiscal measures should in theory allow the Bank of England to fully focus on fighting inflation and feel more comfortable hiking interest rates – ultimately, a GBP positive. However, markets had previously been quite reluctant to price out the bigger chunk of the BoE tightening cycle, and were already pricing in a policy rate in the 2.00-2.25% area for year-end before Sunak’s fiscal package. This helps explain the pound’s somewhat muted reaction yesterday, and also suggests the bar to trigger further hawkish repricing in the BoE rate expectation curve is quite elevated. In the longer run, as we expect the BoE to underdeliver compared to rate expectations, the pound is still looking likely to face some pressure from the short-term rate differential side.
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