News & Analysis


The inability of crude to break $80, US equities to post a convincing rally, and for US-Canadian rate differentials to widen on a Fed decision that was viewed as mildly dovish in other corners of markets meant CAD slumped once again in yesterday’s session. Also providing no support to the loonie was the latest edition of the BoC’s meeting minutes, which outlined complete data-dependency by BoC policymakers moving forward and highlighted that the decision to hike back in July was driven primarily by the cost of delaying outweighing the benefit of waiting. With little new information provided in the minutes, we continue to see Canadian policy rates at their terminal level. Today, the loonie is playing catch-up slightly on yesterday’s price action alongside other higher-beta currencies, although it remains in recent ranges. The only data released later is the CFIB business barometer for July (06:00 ET) and the highly detailed SEPH report on employment (08:30ET).


The dollar mildly sold-off during yesterday’s Fed decision, however, in comparison to the reaction to June’s meeting, this will be viewed as a job well done by Chair Powell and FOMC policymakers. By retaining language that inflation remains “elevated” and downplaying the importance of one soft inflation report by stressing longstanding dislocations in the labour market and above–trend growth, the Fed managed to keep markets pricing the tail risk of one further rate hike in Q4, with the probability stable at around 40%. The lack of fireworks at yesterday’s Fed meeting are likely to be replicated by the ECB today (more on that below). Instead, we believe the interesting events for markets will instead be the advanced reading of Q2 GDP at 13:30 BST, which is forecast to fall in line with the Fed’s median estimation of trend growth at 1.8%, and inflation forecasts out of Turkey. Any upside surprise in today’s US GDP data will undoubtedly add credibility to the Fed’s view that upside risks to inflation remain due to more resilient growth conditions and that further rate hikes can’t be discounted so early on, leading to another brief flurry of USD strength. Outside of the US release, focus will also be on the Central Bank of the Republic of Turkey’s inflation forecasts under newly appointed Governor Erkan, which should add further information to how much the central bank seeks to tighten more orthodox monetary measures under the changing regime.

While the aforementioned events are likely to be the primary focus for markets today, most traders will also be keeping one eye on how markets are positioning for tomorrow’s Bank of Japan meeting, which is set to take place in the early hours of the European session. Although recent commentary by BoJ officials has led us to push back our expectation of policy tightening, we note that the risk of the BoJ altering its yield curve control framework overnight are extremely elevated and could result in a sizable shift in global capital allocations if embarked upon. We currently estimate that a 50bp widening in the 10-year tolerance band could see USDJPY fall by three big figures from current spot rates, however, it is much more difficult to gauge how this will impact the broad dollar. While on the one hand a tumbling USDJPY would weigh on the DXY index like it did back in December given the yen is the second-largest contributor, on the other hand the turmoil such actions could inflict in global markets could prompt a broader risk-off bid for the dollar. Nevertheless, we suggest extreme vigilance in tonight’s overnight session.


After last night’s Fed decision, the focus on central banks flips to the eurozone where the ECB is set to follow in the footsteps of its peer by hiking the deposit rate by 25bps to 3.75% at 13:15 BST. The similarities don’t stop there, however. In the press conference, we expect President Lagarde to strike a similarly non-committal stance on the future of monetary policy, although one that encompasses a mildly hawkish bias due to ongoing labour market dynamics. For markets, the return of true data-dependency at the ECB won’t be a surprise and will only move the focus on from the central bank’s rate decision to the next batch of top-tier data due out on Friday. That is unless more ECB “sources” stories hit the newswires shortly after President Lagarde concludes the press conference. On the data, we expect national growth and inflation data to chip away at the prospect of a September rate hike from the Fed and continue to see the chances of EURUSD returning below 1.10 as elevated even though the pair currently trades close to a percent above this level.


Given the pound’s sensitivity to rate spreads of late, it is unsurprising to see it rank as the second best performing G10 currency against the greenback yesterday, lagging just the Japanese yen which has a much higher beta to rates. Despite the constructive ranking, it is worth noting that the daily moves were fairly limited, with GBPUSD closing the day just a third of a percent higher. However, this adds to its week-to-date gains of 0.68%, which is notable given the lack of UK specific information out this week. While the data calendar remains sparse yet again with just the Conference Board of Industry’s reported sales data for July due out at 11:00 BST, the UK news cycle is far from quiet. Not only is the debacle over Nigel Farage’s banking situation ongoing, but Bloomberg is also reporting that a majority of Chancellor Jeremy Hunt’s economic advisory council are concerned that the BoE may hike the UK into a recession in the coming months. The headlines come on the back of a recent improvement in the inflation and wage data and further compounds our view that the BoE are likely to drop back down to a slower pace of hiking next week as they approach the terminal level of interest at 5.5%. While the story has had little impact on markets, it will undoubtedly be read amongst staff in Threadneedle street.



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