CAD
Yesterday’s CPI release had minimal impact on the loonie, and on BoC easing expectations, as expected. Price growth cooled to 2.5% YoY while underlying inflation measures also eased, checking another box for the Governing Council ahead of the BoC’s early September rate decision. We continue to look for rate cuts at every meeting this year, as do markets. Considering this though, USDCAD scans as cheap, albeit this is largely a function of dollar weakness following the greenback’s recent selloff. Even so, the pair’s fortunes for the remainder of the week should rest in the hands of Fed rhetoric, which we expect to skew hawkish relative to current expectations. If we are right, then a move higher for USDCAD should see the pair better reflecting fair value in the coming days.
USD
The broad dollar slipped a further 0.5% yesterday, albeit the move lower belied a lack of market-moving data. Today, the focus should remain on the greenback, with payrolls revisions and FOMC meeting minutes the main upcoming events for FX traders. The former is likely to see only modest revisions but given the focus on the US labour market in recent weeks, the release at 15:00 BST should garner even more attention than usual. Even so, with no basis to offer a forecast, risks to the revisions are two-sided for the dollar. In contrast, the FOMC meeting minutes released at 19:00 BST should lean hawkish relative to current Fed easing expectations. Bear in mind, these are from the July policy meeting which took place before the recent market freakout. Admittedly, this may also mean that markets are inclined to discount this release as outdated, but we still think it should offer a steer as to the FOMC’s thinking in advance of Jackson Hole. If the meeting minutes tilt hawkish, as we think they will, this should help arrest the dollar’s recent slide and offer the prospect of a bounce higher into the weekend.
EUR
While the dollar is likely to steal the limelight today, euro traders will also be keeping one eye on tomorrow’s PMI reports. We expect both developments will help EURUSD retrace its move higher, with the pair having smashed through several key technical supports in recent days to finish Tuesday trading at year-to-date highs. Even so, while the light data calendar has seen the pair drift higher over recent weeks, it also leaves the pair looking rich to us. A signal that markets have underestimated Fed hawkishness, combined with weak eurozone growth indicators, should help snap markets out of this stupor – setting the scene for the pair to surrender some of its recent gains heading towards the end of the month.
GBP
Like the euro, GBPUSD also charted some notable highs through Tuesday trading, briefly flirting with year-to-date highs before easing into the end of the session. That said, we are inclined to see GBPEUR price action as better reflecting economic fundamentals once again, with the pair exhibiting minimal volatility in recent days, in keeping with the lack of market-moving events on either side of the channel. With this in mind, we look to tomorrow’s PMIs as key for the cross, with signs of continued UK outperformance likely to put levels close to 1.18 back in range for GBPEUR, if our expectations are met.
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