CAD
Despite the upside surprise to US core CPI, the loonie made headway through yesterday’s session. USDCAD finished Tuesday’s trading down 0.25%, almost entirely reversing Monday’s price action. With a light docket of events in North America heading towards the end of the week, this should leave USDCAD at the mercy of cross asset conditions – a backdrop that we suspect is likely to be marginally supportive for the pair.
USD
The dollar finished Tuesday trading on the front foot, helped by August’s core CPI which printed at 0.3% MoM, marginally stronger than the 0.2% reading markets had expected. Ultimately, this saw the greenback claw back some early losses to end the day up 0.1% as traders began to roll back Fed easing bets. On this point, we think yesterday’s events leave traders with a few key takeaways. First, yesterday’s core inflation overshoot was largely attributable to shelter inflation. Given the lagged effects of monetary policy on housing costs, this should not be overly concerning for the Fed. Second, a rebound in underlying inflation momentum might be starting to pick up steam. While this remains subdued in absolute terms, it should nevertheless steer against an overly aggressive pace of policy easing. Finally, market reaction to yesterday’s print was muted relative to other recent inflation misses, highlighting that markets are now squarely focused on the employment side of the Fed’s dual mandate, with price growth playing second fiddle. With this in mind, today’s PPI reading should do little to upset the dollar at 13:30 BST this afternoon. Instead, the focus is likely to be on initial jobless claims where a print of 227k is expected – unchanged from last week, and on Monday’s retail sales data, ahead of what is almost certain to be the FOMC’s first rate cut of this cycle on September 18th.
EUR
An ECB policy decision later today should offer plenty to keep euro traders busy. We expect a 25bp cut to rates, in line with the overwhelming market consensus. More relevant for traders will be a revised set of forecasts, which should offer a hint on the future pace of easing. Considering the evolution of recent data, we look for a downgrade to the Bank’s inflation forecasts, offering a dovish steer to markets that currently price 2.5 ECB rate cuts by year-end. That said, President Lagarde is unlikely to provide further details on this point in her press conference, which should keep any reassessment in rate expectations contained. All in all, then, this should see some modest euro downside, but not a wholesale sell-off for the single currency. That said, one euro cross we will be keeping a close eye on this afternoon is EURCHF. The SNB’s Jordan speaks at 15:25 BST, and we suspect that the current strength of the franc is causing concern amongst Swiss policymakers. As such, pushback looks likely later today, meaning that not only is EURCHF likely to miss out on the broader euro move, we think upside for the pair is more likely than not this afternoon.
GBP
A combination of hot US core CPI and soft UK GDP saw sterling trade under pressure on Tuesday. GBPUSD gave up 0.3%, while GBPEUR dropped 0.2%. It is the latter of these that is likely to remain in focus this afternoon given a blank domestic data calendar and an ECB meeting. If our expectations for eurozone rates are met, then a reversal of yesterday’s losses for GBPEUR looks to be the most likely outcome.
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