CAD
A positive session for equities saw the loonie finish Wednesday training in the green, notching gains of just over one-tenth against the dollar in spite of the barren data calendar. Today, all eyes should be focused south of the border on the US CPI report for June. If the release meets expectations, then further signs of softening price pressures, accompanied by a modest acceleration of Fed easing expectations, should see yesterday’s slow USDCAD slide extend on a continued pick up in risk conditions.
USD
Fed Chair Powell’s appearance in front of the House Financial Services Committee was once again a non-event for markets yesterday. Unsurprisingly, Powell largely stuck to the same talking points delivered 24 hours earlier to the Senate banking committee, offering little new information for FX traders. Even so, we think the lack of steer for markets is indicative of FOMC preferences at this juncture, suggesting a level of comfort with current market pricing for Fed easing expectations, and a willingness to let the data do the talking. With this in mind, today’s June CPI report will be closely scrutinised by markets. In particular, traders will be looking to see if core inflation prints in line with last month’s 0.2% MoM reading, which notably undershot expectations. We think it will, and look for a modest rebound in volatile components such as airfares, which weighed notably on last month’s reading to offset a broader cooling across the remainder of the consumption basket. If we are right, this will see a modest uptick in the unrounded figure, but not by enough to see the headline core inflation print rise to 0.3%, an outcome that should see modest dollar downside on the growing likelihood of a soft landing for the economy. That said, risks to this afternoon’s release look two-sided to us. A stronger-than-expected rebound in volatile components would see markets sharply pare Fed easing expectations, which currently see a 68% chance of a September rate cut, boosting the dollar on the prospect of high for longer rates. Another sharp slowdown in core inflation driven by stronger-than-expected cooling price pressures, meanwhile, would raise fears around the strength of the US consumer, and therefore economic growth. While this could put a July rate cut back on the table, recession risks under such a scenario would limit the ability of the dollar to sell off.
EUR
French political risks remain the key short-term driver for the euro in the absence of any tier-one data prints for the eurozone this week. As such, we are inclined to view a public letter released by French President Macron, published yesterday, as notable. In it he called on forces in the Republican bloc to assemble a solid majority in the National Assembly, suggesting that this would be a requirement for him to name a Prime Minister. As we see it, this is an attempt to forge a coalition between Macron’s Ensemble, the Republican party, and the Socialists who are currently part of the left-wing NFP alliance. Whether or not he succeeds will have a significant bearing on the euro in the short term. As we have previously noted, a moderate centrist coalition would likely see much of the political risk priced out of French bonds, resulting in a roughly 1% rally in the euro. The likely alternative, a government led by the NFP coalition, risks a sharp break lower for EURUSD on the prospect of a significant expansion in fiscal commitments. For now though, continued political uncertainty is likely to weigh progressively on the single currency at the margin, acting as a drag on EURUSD upside, even as broader risk conditions turn more constructive for the euro.
GBP
Bank of England Chief Economist Huw Pill was front and centre for sterling traders on Wednesday, delivering his first speech since the election blackout period ended in what was widely seen as a key indicator for the prospect of a cut to Bank Rate next month. On this point, Pill offered mixed messages to markets. While he kept the door ajar for an August cut in rates, his comments were not the dovish confirmation that many were looking for. Instead, his characterization of recent data overshoots as hinting “towards some upside risk to my assessment of inflation persistence”, leaves the odds of an August rate cut up in the air as we see it, a view also shared by swap markets which now see a 55% chance of a cut next month versus 65% prior to Pill speaking. All told, this helped propel a 0.5% sterling rally against the dollar yesterday, a move that has extended this morning on news that the UK economy grew by a better than expected 0.4% MoM in May. While the backdrop of a more hawkish BoE and strong growth is sterling positive for now, these latest developments place extra emphasis on next week’s labour market and inflation releases. Signs of softening, particularly in the latter report, would almost certainly reestablish an August rate cut as the market base case, reversing this week’s sterling strength. But we are less confident in this view than we were Wednesday morning, with risks now finely balanced between August and September as the most likely start dates for BoE easing.
This content was originally published by our partners at Monex Canada.