News & Analysis


Despite the fact that a substantial amount of economic data is set to be released ahead of the Bank of Canada’s September 6th decision, we did believe that market pricing of a further hike could drift higher on June’s inflation report. While the core measures and more specifically the BoC’s preferred 3-month annualised core measures supported this view after they continued to show concerning signs about inflation persistence, there were some narrow signs of optimism within the data which muddied the signal for markets. Specifically, services inflation moderated considerably, led by weaker price growth in some consumer discretionary items such as food at restaurants and recreation services. However, the data showed merely green shoots of optimism. As such, the market reaction was fairly limited, with the inconclusive data ultimately leading traders to move their subjective judgement on when the next hike was most likely from September’s meeting to October, when the BoC have another MPR to hand. However, despite the implied probability of an October hike drifting back above 50%, it took some time for FX traders to get on board with taking CAD higher. In our view, the main takeaway from yesterday’s data is that during this part of the cycle, the incoming releases are unlikely to provide a clear signal, increasing the the level of scrutiny and importance of each metric while also leaving plenty of hurdles for the data to clear before unlocking our 3-month target of 1.30.


After a mildly risk-on tone throughout the morning of yesterday’s session following a joint statement by Chinese officials on additional marginal support measures for households, the dollar bounced back after the release of June’s retail sales data. While the headline measure undershot expectations as it fell from 0.5% MoM to 0.2%, mainly due to a decline in gas station sales and a drop in building materials, the core doubled expectations with a 0.6% expansion. Specifically, growth remained robust in durable household goods and online shopping, both suggesting that the US consumer remains in a healthy position despite the continued squeeze to real incomes and tighter credit conditions. The data saw markets fully price a hike from the Fed next week for the first time, while the implied risk of a second hike in Q4 drifted up slightly to 32%. The uplift this had on Treasury yields saw the dollar drift higher over the course of the US session, with the data reminding markets that the disinflation trade isn’t as clean cut as initially thought following June’s inflation report. Further aiding the marginal increase in the DXY index was a retracement in USDJPY following comments by Bank of Japan Governor Ueda. Speaking at the G20 summit, Ueda reiterated his comments from Sintra that Japan is still some way from sustainably achieving its 2% inflation target. While at the ECB conference in June these same comments had little market impact, this time was slightly different as they come after another strong round of wage data and more bullish positioning in Japanese assets on the prospect of some form of monetary tightening next week. With Ueda’s comments prompting JPY to be offered shortly after the US retail sales data, the DXY continue to eke out gains, leaving it to close the day out 0.05%. This morning, the dollar’s momentum higher continues following another difficult overnight session for Asian equities and the yuan, with the pound’s sell-off this morning in European hours further fuelling inflows into the greenback. For the remainder of the day, flow and positioning are likely to be in the driving seat with no data due out stateside.


Soon after we published yesterday’s morning report, ECB Governing Council member Klaas Knot cast a more neutral stance on the potential path for interest rates when appearing unscheduled on Bloomberg TV. His comments that anything beyond the July meeting is by “no means a certainty” were notable given his position as one of the more hawkish members in the central bank’s decision making body, however, despite the impact his commentary had on sending eurozone yields lower, they ultimately had little bearing on EURUSD which finished the day lower if you squinted at a chart. This morning, the single currency opens the European session marginally lower against the dollar, dragged lower in part by the snap in GBPEUR to the downside after the release of UK inflation. Price action in the cross is likely to be the main driver for the single currency today, unless there are any revisions to June’s final inflation release at 10:00 BST. On the ECB front, only Croatia’s Governing Council member Boris Vujcic is scheduled to speak, but his comments are unlikely to be market moving.


In the morning’s big news, UK CPI came in soft, breaking a streak of four upside surprises in a row. Printing at 7.9% YoY,  headline CPI was significantly softer than market expectations of 8.2%, and well down on the 8.7% price growth recorded for May. This pattern was repeated in core numbers as well, showing a 6.9% increase against an anticipated 7.1% and no change. For the Bank of England, this well and truly opens the door for a 25bp rate hike at the August policy meeting, in line with our base case. Combined with recent labour market data that showed initial signs of weakening, together this suggests a disinflation channel is beginning to emerge for the UK. Despite this, risks for the BoE remain skewed to the upside. Having opted for a jumbo rate hike in June, they may choose to play it safe once again, especially with wage growth and services inflation remaining well above forecast and suggestive of an emerging wage-price spiral. Whatever the BoE chooses, communication will be both difficult and key at the upcoming policy meeting, with policymakers having flip-flopped over recent months. Nonetheless, this morning’s soft print saw Bank Rate expectations get trimmed and the decline in sterling towards the end of yesterday’s session extend this morning, with the pound giving up another seven tenths against both the dollar and the euro. Finally, whilst markets are likely to spend much of the day continuing to digest the inflation data, analysts will also have to keep an eye out for signs of a cabinet reshuffle, with rumours emerging last night that it could come as soon as this week.



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