CAD
The return of Canadian traders to the office yesterday after the Canada Day holiday saw USDCAD drop by 0.4%, largely reversing Monday’s climb. This price action belied yet another signal that domestic growth remains soft. Specifically, the June Manufacturing PMI which printed at 49.3, unchanged from May, and crucially, still below the 50 no-change mark in activity. We doubt this weak growth narrative is likely to be upset by today’s services reading either, though given an expansionary reading in May a marginally more positive print looks likely. Nevertheless, the rally in US equities on the back of a cautiously optimistic Powell seemed to distract traders from the economic realities at home in Canada, leaving CAD to bounce off its lows and defy our expectations once again.
USD
Speaking alongside ECB President Christine Lagarde and BCB President Roberto Campos Neto at the ECB’s central bank forum in Sintra yesterday, Fed Chair Jerome Powell struck a more optimistic tone on the Fed’s battle with inflation. This weighed moderately on Treasury yields and sparked a rally in US equities, which together dragged the dollar moderately lower. That said, the moves were minor outside of the equity space, as Powell stopped short of endorsing a rate cut at September’s meeting, instead characterising the risks to the Fed’s outlook as more two-sided.
Powell’s more optimistic characterisation of inflation developments relative to last month’s meeting should negate the impact of the latest meeting minutes, released tonight, which based on the adjusted dot plot were always likely to read in a hawkish light. This leaves markets at the mercy of the ISM services data instead, which at 15:00 BST today will be closely monitored by markets given the S&P PMI a fortnight ago showed the US economy bucking the DM trend with continued strong growth, a factor that wasn’t replicated in the ISM manufacturing index on Monday. Signs that the US economy is in fact slowing will only endorse expectations of a rate cut from the Fed in September, weighing further on the dollar as a result.
EUR
The eurozone composite measure of inflation matched the preliminary national estimates and cooled marginally on a year-on-year basis from 2.6% to 2.5%. That said, the pace of underlying inflation remained stable at 0.2% as did the annual rate of core inflation at 2.9%, despite expectations for it to fall by 0.1pp. The data once again confirmed the ECB’s cautious message, but with expectations of a second cut in July already at rock bottom, this did little to affect the euro. Neither did the marginally hawkish messaging from ECB members at Sintra yesterday. After all, guidance from ECB policymakers has little follow through beyond July’s meeting given another round of influential wage data is due before the ECB next meet in September, where markets place the next viable odds of a rate cut.
Instead, we expect politics to remain in the driving seat for the euro and euro crosses this week. According to data compiled by Le Monde, over 221 candidates from the New Popular Front and Ensemble had withdrawn from the second round of voting this weekend, further increasing the odds that Marine Le Pen’s National Rally will fall short of an outright majority as the anti-right vote has now been unified. That said, the risk isn’t completely neutralised, and as such we don’t expect the euro to catch a significant bid heading into the weekend, even if the US data strikes the right balance for a risk rally this week.
GBP
Despite little domestic news flow of note, sterling still managed to post gains of 0.3% against the dollar and 0.2% on the euro over the course of yesterday’s session. Today, a final services PMI reading for June is unlikely to offer much impetus for the pound either, though we would note that given a downgrade to the manufacturing print earlier in the week, risks are skewed towards a negative revision which could weigh on sterling at the margin. Instead, the real focus for traders is tomorrow’s general election, albeit this should be a non-event for the pound, if our central expectations are met and polls prove accurate. This sees a large Labour majority of around 250, with the Conservatives securing roughly 100 seats. Where there are risks, these are skewed to the downside in the event that the Tories underperform even our dismal projection, raising fears of a shift leftward from a Labour party unchecked by parliamentary scrutiny and an effective opposition. Whatever the outcome, this should begin to play out from 22:00 BST tomorrow, when the first exit polls are released. Until then, reporting restrictions in the UK, a barren data calendar and holiday thinned liquidity should see only limited sterling price action.
This content was originally published by our partners at Monex Canada.