News & Analysis


The Canadian dollar once again outperformed in yesterday’s session as strong US growth conditions boosted growth expectations in Canada, leading BoC implied rates to track the Fed’s higher. At one point in yesterday’s session, a further hike from the BoC in the next two meetings rose as high as 90% before settling back to 70% this morning. The CAD outperformance came in spite of a negative session for US equities. Growth conditions will remain in focus today with the release of May’s GDP data at 08:30 ET/ 13:30 BST. Signs that the Canadian economy was set to accelerate into the middle of Q2 as per StatsCan’s preliminary estimate was one of the main reasons why the BoC hiked earlier in the month. Should the data undershoot the Statistics agency’s forecast and the market consensus of 0.3% MoM, expectations of a further BoC hike are likely to fall considerably, weighing on CAD. On the contrary, should the data print in line with expectations or even provide a positive surprise, we expect BoC expectations to tilt more hawkish yet again, providing CAD with another tailwind before the week is out.


The dollar firmed across the board yesterday after the advance reading of Q2 GDP showed the US economy continues to grow in excess demand territory, posing a risk of inflation persistence and further rate hikes from the Fed in Q4. The data, released less than 24 hours after Wednesday’s Fed decision, highlighted exactly what Chair Powell cautioned against when claiming early victory in bringing down inflation. At 2.4%, the data didn’t only exceed consensus expectations and the Fed’s estimated neutral rate by 0.6 percentage points but it also exhibited strong breadth. Notably, personal consumption, which the Fed is monitoring closely to determine the extent to which non-housing core services inflation will remain above target, fell less than expected with a reading of 1.6%, while domestic final sales also fell by a smaller degree with a reading of 2.3%. The data saw the yield on the US 2-year climb back to the top of its post-CPI range, contrasting with falling core yields globally. The widening in rate spreads led the DXY index higher over the course of the session, with the dollar composite now trading at levels last seen on July 11th.

Today, the broad dollar DXY index is largely consolidating yesterday’s gains ahead of June’s PCE inflation and real personal spending report and July’s final reading of the University of Michigan’s inflation expectations data. However, the flat opening of the DXY index to the European session masks the drama that unfolded in the overnight session as the Bank of Japan arrived just in time to catch the last few remaining G10 central banks at the tightening party. The decision to expand the intervention thresholds around the 10-year JGB from 0.5% to 1% either side of the 0% mid-point initially led USDJPY a percentage point lower, however, this has soon retraced as BoJ officials have talked down the importance of the steps in terms of future policy normalisation. Nonetheless, given the BoJ has constantly talked markets down to avoid any further need to intervene via open market operations, we believe the latest rhetoric to be an empty promise. With inflation pressures in the Japanese economy building, we expect further tightening tweaks to be enacted at October’s meeting, where the FY2024 inflation projection is likely to be revised up to 2%


The ECB followed in the Fed’s footsteps yesterday, hiking rates 25bps to take the deposit facility rate to 3.75% but materially dialled down its forward guidance, stressing instead data-dependency. The one discernible difference between the two is that the growth data in the eurozone is considerably less concerning from an inflation standpoint than in the US, meaning an extension of the current hiking cycle is more credible in North America than on the continent. This was put on full display just before President Lagarde took to the press conference, with the advanced reading of US Q2 GDP surprising to the upside to show the US economy continued to expand at a pace above the central bank’s estimates of the neutral rate. Ultimately, the mix of a more neutral sounding ECB and stronger growth conditions in the US led EURUSD  to drop near a percentage point lower on the day to trade back below pre-US CPI levels; in line with our main conviction call for this week. Today, the likelihood of a September rate hike from the ECB faces its first challenge in the form of flash Q2 GDP readings out of Spain and France alongside preliminary CPI reports from France, Spain and Germany. The growth data has generally printed on the positive side of expectations, especially in France with the QoQ measure printing well above expectations at 0.5%. However, this was largely discounted by markets, given the impact deliveries of certain large ticket items had in the second quarter. Meanwhile, the inflation data continues to print on the more dovish side, with headline inflation in France printing at 0% and the uptick in Spanish annual CPI figures driven largely by base effects as the monthly readings came in at 0.1% MoM for headline inflation and 0% for core. This has seen EURUSD struggle to retrace any of yesterday’s decline this morning, with further losses likely if US growth data prints above expectations and German inflation comes in softer this afternoon.


Sterling fell alongside expectations of a 50bp hike from the BoE yesterday as the ECB joining the Fed in taking a more neutral stance on hiking rates from hereon in raised concerns that the groupthink in G10 central banking would lead the BoE to take a more conservative approach as well. Having rallied strongly at the beginning of the month, there was arguably more bullish GBP positioning to flush out in yesterday’s session following the stronger US growth data, leading to GBPEUR to fall on the day despite no UK specific developments and a more dovish ECB decision. Today, sterling will likely be driven once again by cross-currency dynamics with a swathe of eurozone data due out and a very light domestic data calendar.



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