CAD
Yet more evidence of the Canadian economy’s ongoing struggles saw the loonie on the back foot to start the week, with USDCAD rising by 0.3pp on Monday as a result. Specifically, the Bank of Canada’s business outlook survey for Q2 pointed to a continued weakness in economic activity. This comes against a backdrop where firms’ reported wage expectations slipped below their pre-pandemic peak, with the survey also suggesting that consumers are increasingly concerned about the health of the labour market. Given the emphasis placed on the Business Outlook surveys by the BoC, yesterday’s report will make for some ugly amongst the Governing Council. As we see it, the survey suggests that policymakers waited too long to cut rates, weighing strongly in favour of a further rate cut being delivered by the GC next week. Moreover, we think such a move should be confirmed by the June inflation report released later today, an outturn that will be key for the short-term prospects of the loonie, and the longer-term outlook for BoC easing. A reversal in last month’s upside inflation surprise – the outcome we expect – would confirm that the disinflation path remains intact, removing any lingering doubts that the May uptick was a temporary blip in an otherwise downward trend for price growth returning to target. If so, this should see market-implied July BoC easing odds accelerate from the 71% currently priced to somewhere close to 90%, a dynamic that is likely to see the loonie taking another leg lower this afternoon, if our expectations are met.
USD
With Fed Chair Jerome Powell scheduled to be interviewed by David Rubenstein at the Economic Club of Washington DC yesterday afternoon, Powell’s characterisation of inflation progress was the major focus for FX traders to start the week, especially after June’s inflation data once again surprised to the downside. On this point, Powell’s comments were in keeping with other recent statements, noting that price pressures in the second quarter “do add somewhat to confidence” that inflation will return to the Fed’s target, coming after inflation readings failed to provide such confidence earlier this year. But Powell also declined to offer a steer on the possibility of easing at the FOMC meeting later this month, despite a recent pick up in speculation that a July cut might be a possibility. Given the FOMC’s reticence to surprise markets with policy decisions, we are inclined to think that this implicitly rules out a rate cut at the upcoming meeting – if a rate cut were on the table, Powell would likely have tried to prime markets by hinting at such a possibility yesterday. This view was reflected in swap markets too following yesterday’s comments. Fed easing bets for 2024 accelerated modestly on the further note of disinflation confidence, even as traders trimmed the odds of a cut in July, a dynamic that saw the dollar rally modestly yesterday evening, with this climb continuing into this morning’s early trading.
For today, retail sales data is the major US-specific event. Another round of soft readings is expected, further suggestive that a slowdown in consumer demand is underpinning the current step down in US price pressures. Meanwhile, the Republican National Convention will also continue to loom in the background for FX markets, with political risk continuing to drive dollar price action at the margin. In particular, Donald Trump’s newly announced VP pick, J.D Vance, will be closely watched, having appeared to signal a preference for dollar weakness prior to his announcement as running mate yesterday – a notable counterpoint to the current market bias to view a potential Trump Presidency as a herald of dollar upside.
EUR
A quiet start to the week for euro traders looks set to continue today, with little on offer to move the single currency in advance of the ECB meeting on Thursday. Granted, today should be slightly busier than Monday at the margin, with ZEW survey readings, a speech by the Bank of France’s Villeroy, and an ECB bank lending survey to contend with. That said, we doubt that any of these events will be decisive, either for euro price action or for moving the needle on markets ahead of the ECB meeting. Given the consensus for a rate hold on Thursday, coupled with the absence of a new round of updated forecasts, this should mean that the meeting itself holds little in the way of secrets for traders. Instead, we suspect the focus will be on any forward guidance from President Lagarde, or any new clues that reveal that there may be a growing divide in the vote of policymakers. Given that the latest decision brought with it the first hawkish dissenting voice, we do not rule out that the opposing views of doves and hawks will become more evident from now on.
GBP
The pound broadly tracked sideways to start the week, with little domestic news flow to dictate sterling price action. Moreover, a similarly barren data calendar today should keep traders focused on the June CPI report, released tomorrow, as the next significant catalyst for the pound. As we noted in our preview for tomorrow’s data, we think risks are skewed in favour of a modest undershoot relative to market consensus. Specifically, we think the temporary upside impetus to services inflation provided by the April National Living wage began to fade in June – leading us to look for a 5.5% YoY services print, 0.1pp below consensus. With this in mind, we would not be surprised to see the pound softening at the margin today as traders’ position for tomorrow morning’s release, with the moment of truth set to come at 07:00 BST.
This content was originally published by our partners at Monex Canada.