CAD
While most eyes were on the Fed yesterday, Canadian GDP data for May proved much more informative for USDCAD traders, seeing the pair fall 0.3%. The data showed that the economy grew by 0.2% MoM, exceeding market expectations that had looked for an expansion of just 0.1%. Even so, this left growth on an annual basis unchanged at 1.1% YoY. More to the point, when set against population growth in the 3-4% range, this is still incredibly soft, suggesting to us that economic risks to the Canadian economy remain on the downside. As such, while the immediate market reaction was to take USDCAD lower on yesterday’s beat, we continue to think the pair should be trading much closer to 1.39 based on weak fundamentals and a BoC that looks likely to ease at every meeting this year.
USD
Last night’s Fed meeting largely met our expectations, seeing the FOMC hold rates once again while Chair Powell demurred when questioned over the prospect of a September easing. On this latter point, however, the Fed Chair failed to hit the mark with traders. Despite Powell suggesting that a rate cut would be data dependent, and broadly dismissing growing signs of economic softening, swap markets accelerated Fed easing bets – with some participants now speculating about the prospect of a 50bp cut next meeting. While we are inclined to agree with the view that the economy is slowing, and the Fed looks like it is increasingly behind the curve, we doubt that the data will slow sufficiently to convince Fed voters to ease rates by 50bps in September, or indeed, cut rates at every meeting this year as markets currently imply. Instead, the Fed’s current caution leads us to think that rate cuts in September and December remain the base case for now before an acceleration in the pace of rate cuts in the first half of 2025. With this in mind, yesterday’s 0.4% slide for the broad dollar looks overdone to us – we think risks are skewed towards the greenback retracing higher in the short term, supported by a Fed that is likely to prove more hawkish than expected and lingering geopolitical risks.
EUR
As expected, yesterday’s CPI figures made only a limited impact on the euro, as did the evening’s FOMC meeting, despite the Fed’s continued hold. All told then, the sum total of yesterday’s events was a 0.1pp uptick for EURUSD – hardly a move to write home about. Limited data flow and a lack of ECB speakers should mean more of the same today for the pair too. Instead, GBPEUR is likely to be the focus, with a finely balanced BoE decision offering two-sided risks, though given our view on the meeting (see below) we think risks are tilted towards GBPEUR upside.
GBP
While the Fed was front and centre yesterday, this morning traders turn their gaze to the other side of the Atlantic, where another rate decision is set to be unveiled on Threadneedle Street. Unlike last night’s decision, however, the announcement on Bank Rate is truly a tossup. On the one hand, the limited public commentary from BoE speakers since early May has skewed hawkish, while services inflation specifically continues to track well above Bank Staff forecasts, both factors that would suggest a hold in rates. On the other hand, the details of the data point to disinflation below the surface, even if not reflected in headline readings, while the June meeting minutes indicated a clear shift amongst some of the MPC in favour of cutting. We are off consensus on this occasion, expecting Bank Rate to stay on hold. That said, the past week has seen markets increasingly tilted in favour of policy easing later today, with swaps now implying a 63% chance of a cut, while economist consensus splits 32-9 in favour of easing according to Bloomberg, despite most sell-side desks characterising today’s decision as close to 50-50. The upshot is that GBPUSD has given up half a percent early morning as traders position for a cut – but that leaves plenty of space for the pound to bounce higher if market expectations are disappointed, suggesting to us that risks are skewed to the upside for sterling later today.
This content was originally published by our partners at Monex Canada.