The loonie flexed its defensive characteristics against a stronger dollar environment once again last week as it effectively closed the week flat against the greenback. This followed on from inflation data earlier in the week which for all intents and purposes could provide enough support for the BoC to continue hiking should they deem it necessary. However, we don’t believe they do based off of their latest communications. Nonetheless, there is scope for interpretation in the Bank’s latest messaging, hence why this week’s release of the last meetings minutes will be key for markets on Wednesday. Potentially moving the needle further for pricing of the BoC’s September meeting will be May’s GDP data on Friday. Given the BoC pointed to growth resiliency as one of the deciding factors for them to resume their hiking cycle, any sign that the economy lived up to its 0.3% preliminary growth reading or even exceeded it would definitely inflation expectations of further hiking.
Last week was all about consolidation, with the DXY index reclaiming over a percentage point to rally off its 15-month post-CPI low and US Treasury yields rallying back towards 5%. Enabling the dollar rally was data showing growth and labour market conditions holding up better-than-expected, leading markets to price back in the risk of one final hike from the Fed in Q4. This week, pricing of a potential second rate hike this year will remain a prominent driver of the dollar, alongside data on growth conditions in the rest of the world. On the US data calendar this week is July’s preliminary PMIs, which are due out today ahead of a swathe of housing market data, an interest rate decision from the Fed on Wednesday, and the first glimpse of Q2 GDP on Thursday. Finishing off the week is June’s PCE report, where the inflation measure will once again be overlooked for the real personal spending measure for the last month of the second quarter. Should the data once again confirm that the US economy remains on a stronger footing, we expect the dollar to continue making incremental gains as the threat of inflation persistence and an extension in the Fed’s hiking cycle comes back into scope.
The single currency fared better than most G10 currencies last week, but even so it managed to sustain a loss of close to a percent on a re-widening in rate differentials. While the bulk of the price action was driven by developments in the US, the focus re-centres on the eurozone this week, starting with the release of July’s preliminary PMIs this morning. All eyes will specifically be on the French services figure at 08:15 BST after it dramatically dipped below 50 in June to show the sector was in contractionary territory. While one negative figure can be chalked off by markets, especially because of the temporary impact strike action had on growth that month, a second consecutive negative reading will raise fears that the eurozone economy is beginning to markedly slow. Any indication to this effect will raise questions about the extent to which the eurozone can benefit from portfolio reallocations, a dynamic we think is required for EURUSD to break back into its pre-war ranges of 1.12-1.20 on a sustained footing. Therefore, should this morning’s PMI data out of France, Germany at 08:30 BST, and then the eurozone at 09:00 BST paint a picture of stagnant eurozone growth, we expect EURUSD to drift back further towards pre-CPI levels over the course of the week.
A hawkish ECB later in the week could act as a support for the single currency. However, the extent to which it can provide any upside for the euro will depend on the growth data preceding it as markets are unlikely to buy any guidance towards a final hike in September if the economic outlook is seen as souring. Shortly after the ECB decision on Thursday, where we expect a final 25bp hike in the deposit rate to 3.75% but for the ECB to not officially call the end of its hiking cycle, preliminary inflation data for July will be released. Here, core inflation figures will be scrutinised to assess the viability of any further tightening.
While data last week compounded signs that the storm clouds covering the UK economy are starting to break, the dovish repricing it caused in UK fixed income markets led the pound to fall close to 2% against the dollar on the week. This week, the data calendar is less dense for the UK economy, with the main piece of data coming out at 09:30 BST this morning in the form of July’s preliminary PMIs. As the last piece of top-tier data ahead of next week’s BoE decision, signs of resilience in services sector activity, and specifically price growth, may tip the balance back in favour of a 50bp hike. At present, markets are only assigning a 47.5% probability of such an outcome next week. For the remainder of the week, second-tier data on the UK retail sector and Nationwide’s house price index are released. While informative, the data is unlikely to influence markets too significantly.