The dollar is now about 2% off its highs seen late last week. Driving consolidation has been this week's stability in the Chinese renminbi (CNY). Emerging market environment still looks challenged given that the stronger dollar is effectively exporting tighter Fed policy around the world. Yesterday we saw rate hikes in Egypt, South Africa, and the Philippines. For today, the data calendar is relatively quiet and there may be some interest in what G7 finance ministers and central bank governors have to say after their meeting in Bonn. The USD is likely to remain a bid until the Fed pours cold water on tightening expectations. Yesterday Fed hawk, Esther George, said that even this 'rough week' in equity markets would not blow the Fed off course. Observe the USD/CAD chart.
This week’s CPI data and general data continues to suggest that inflation and growth continues to run ahead of BoC expectations which tilts risks towards the BoC raising rates a little more aggressively than the Fed. The CAD found firm support in the mid/upper 1.28s, however, has performed relatively well this week vis-à-vis G10 FX.
Minutes of the April ECB meeting released yesterday show that the hawks are calling the shots. The market now prices a 31/32bp ECB rate hike at the 21 July ECB meeting – pricing which has plenty of scope to bounce between +25bp and +50bp over the next two months. This could push the EUR/USD back to the 1.0650/70 area over the coming days. Our core EUR/USD view for 2H22 is one of heightened volatility and probably EUR/USD getting close to parity in 3Q22.
UK retail sales have come in a little better than expected and break/suspend the narrative that the cost of living squeeze is large enough to derail the Bank of England tightening cycle. We would not get carried away with the GBP recovery, however. The Pound is showing a high correlation with risk assets – trading as a growth currency – and the outlook for risk assets will remain challenging for the next three to six months. GBP/USD may struggle to breach the 1.2500/2550 area and 1.20 levels are very possible over the coming months.