After much focus last week on the Jackson Hole speech and what it means for Fed tapering, attention has turned more to Europe this week. For the dollar itself, analysts still favour a benign environment. Here, even a strong nonfarm payrolls figure on Friday (look out for ADP jobs data today expected at +638k) does not mean the dollar has to rally hard. Yes, it can cement views that the Fed may announce tapering in September - to start in November - but the dovish Fed under Jerome Powell looks unlikely to hawkishly surprise markets with an early or aggressive Fed taper.
In fact, the clear signs of ebbing consumer confidence in the US will very much support the gradualism under the Fed. And we suspect we will hear more from Powell on efforts to break the link between tapering and tightening.
CAD - Canadian Dollar
USD/CAD has been rather bid this morning, paying no attention to the price of oil futures. Oct futures contracts advanced to $68.73 while USD/CAD firmed up. Asia was also doing a follow-through from last night after yesterday’s GDP print. What is likely to happen on the back of this data is one of two things, either: i) the Street raises 2022 growth figures to maintain hiking profiles, or; ii) pushes back the output gap closure and therefore pushes hike/s into 2023. We do not believe yesterday’s data is enough in isolation to delay a tapering at the October Monetary Policy Report. Most analysts continue to expect a C$1.0bn reduction to the weekly pace of the Government Bond Purchase Program. Put together – expect the CAD to remain supported in the short term.
EUR - Euro
The European Central Bank hawks were out in force yesterday and used the opportunity of 3% headline inflation to argue in favour of reducing pandemic stimulus or the Pandemic Emergency Purchase Programme. Unless we hear from the doves later this week, the idea that the PEPP scheme is up for debate in September could lend a little more support to the EUR and also German Bund yields, where our strategy team sees a further 5-10bp of upside. Having shifted strategy as recently as July, market consensus suggests that heavy-hitting doves like Christine Lagarde would not allow an ECB 'taper' to emerge ahead of the Fed and at this stage, we believe PEPP will stay at its current elevated rate.
Given that the 9 Sep ECB meeting has become that little bit more interesting, expect EUR/USD to stay supported - but it might require some centrists shifting towards taper for EUR/USD to decisively break to the upside.
GBP - British Pound
GBP is nudging higher on the back of some independent EUR strength. There is still much doubt about what the ECB will do next (our team favours dovish settings retained), while the Bank of England is more formally looking to get the tightening cycle underway - probably in late 2022. A greater chance for the GBP to break higher probably comes later in the month when extensions on Northern Ireland trade adjustments expire and the mood music between London and Brussels could deteriorate once again.
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