CAD
USDCAD rose modestly on Wednesday after briefly threatening to consolidate below 1.37. Even so, we are still inclined to view the loonie as rich given the divergent economic realities playing out on either side of the US-Canada border. This should be front of mind for traders today too in advance of US retail sales figures being released. Further signs of US economic resilience later today should see the pair continue to retrace higher, in line with our longstanding call for the pair.
USD
The broad dollar ended Wednesday trading flat, ending the greenback selloff that has been a major theme through the early part of the week. Stepping back though, this leaves the dollar scanning as cheap in our eyes, with Fed rate cut pricing still looking overly aggressive to us. Indeed, we think yesterday’s CPI data largely confirmed this view. Core inflation rebounded to 0.2% MoM, which should be the sweet spot for the FOMC. On the one hand, this is soft enough to be consistent with the FOMC’s 2% inflation target. On the other, it is still strong enough to suggest that recession risks are not an immediate concern, despite recent rhetoric from some quarters to the contrary. With this in mind, we continue to expect 25bp rate cuts from the Fed in September, November, and December – a slower pace of easing than markets currently project. Today, however, it is July’s retail sales data that is in focus. We expect a modest tick-up in consumer activity, reinforcing the message that the US economy remains in expansion. If we are right, this should see markets continue to align with our view for Fed easing, a dynamic that we expect to prove positive for the greenback.
EUR
A distinct lack of major domestic releases has seen the euro left at the mercy of events elsewhere over recent days. All told, this meant a drift sideways for EURUSD on Wednesday, as US CPI failed to offer much direction for the broad dollar. Given our view on the greenback, we continue to think that a break below 1.09 is likely to come before EURUSD tests 1.11. That said, barring any surprises from US retail sales today, both levels look unlikely to be challenged until next week when eurozone PMIs and commentary from Jackson Hole should see a pickup in price action for the pair.
Instead, the focus for European traders is likely to be on the Norges Bank this morning, where a rate decision is due at 09:00 BST. We expect a hold in rates, accompanied by hawkish guidance stemming from the recent krone weakness, an outcome that should see upside for NOK later today.
GBP
The pound traded under pressure through Wednesday’s session, easing three-tenths against the dollar and close to half a percent versus the euro. The move lower for sterling came in response to July CPI readings that pointed to UK inflation cooling faster than expected. Granted, headline price growth rose from 2.0% to 2.2% YoY, but this was less than the 2.3% markets had priced in because of energy base effects. Core inflation continued to ease, as did services price growth, which dropped from 5.7% YoY to 5.2%. While we are inclined to think that some of this drop is temporary given that accommodation services prices fell sharply last month, this was nevertheless a dovish signal for both markets and the BoE, with the prospect of lower rates weighing on the pound at the margin. This morning, however, brings with it better news for sterling bulls. UK GDP figures showed that the economy expanded 0.6% in Q2, matching consensus estimates despite weak details for June. Even so, with these figures contrasting favourably with counterpart readings from other major economies, this has still been sufficient to see sterling catch a bid in early trading.
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