News & Analysis


There wasn’t much to say about yesterday’s trading session, with CAD keeping in a fairly tight range against USD and closing the day where it started. Building permits came in surprisingly strong, rising by 6.1% from last month versus expectations of a -3.5% decline, but this is a volatile series with the strength driven by the even more volatile non-residential sector. The loonie was resilient to losses in the US equity market, countered by rising yields and a considerable rally in oil. There is nothing left on the Canadian data calendar for the rest of the week, but today’s market should pick up in terms of both volatility and trading volume with US CPI set for release. Markets are looking for confirmation that the Federal Reserve will remain on pause through year-end.


Following several days of thin news flow dominated by developments in China, it is the turn of the US to take centre stage today. CPI data out at 13:30 BST is expected to show a modest uptick in headline inflation, rising from 3.0% to 3.3% YoY, as base effects drag price growth higher in a reversal of recent trends. For markets and the Fed though, more emphasis will fall on core measures which are expected to show underlying pressure continue to ease. Stripping out the volatile food and energy components, core CPI is expected to ease to 4.7%, down from 4.8% last month. The continued fall in core inflation is likely to further build market expectations that the Fed is done with hiking rates. In this vein, it was notable that following the recent policy meeting Fed Chair Powell discounted June’s soft inflation print as “just one report”. A continued easing, particularly a below expectations print would make this position far harder to hold. Granted, markets currently see just a one in four chance of a further rate hike this year, meaning any greenback downside should be limited if this tightening is priced out. Therefore risks for the dollar today look skewed to the upside, with a possible upside surprise likely producing a sharp market reassessment of Fed hiking prospects. But more probably, an on-expectation reading should leave the Fed in a good position to hold rates for the remainder of the year, with inflation set to continue cooling as a slowing economy finishes the Fed work to date in bringing price growth back to target.


The holiday malaise continued yesterday in European news flow, meaning it was an unsurprisingly quiet day once again for the single currency, with EURUSD nudging up just two tenths of a percent. Granted, European equities had something of a bounce back day, led by Italian banking stocks. But given this came largely in response to backtracking by the government on the newly announced windfall tax, this had only minimal spillover for FX markets. One story that did catch the eye though was news of spiking gas futures, which surged over 40% on Wednesday on news of strike action in Australia that threaten to disrupt global LNG supplies. Given the roller coaster ride in energy markets last year, traders could be forgiven for having flashbacks of market disruption once again. For now, it looks like any market impact is likely to be more limited, but a more prolonged upset in Australian exports will naturally raise fears of a repeat of last year’s energy price shock in Europe as we head towards the winter heating period.

Sticking with Europe, although outside the eurozone, Norwegian CPI is the event of note so far this morning, with some welcome relief for the Norgesbank being delivered. Following an alarming recent reacceleration in price growth measures, headline CPI significantly undershot expectations this time around, printing at 5.4% YoY against the consensus anticipation of 5.9% and down a full percentage point on last month’s reading. Granted underlying CPI was less impressive, delivering an on expectations 6.4% print. But this still marked a 0.6% fall from June and should give the Norgesbank some confidence in returning to smaller 25bp rate hikes at the upcoming policy meeting next week.


Despite the barren UK data calendar, the pound still managed to deliver some price action over the course of yesterday’s session, falling four tenths against the euro and two tenths against the dollar. However, this came alongside some better news at last for UK consumers with several lenders announcing cuts to mortgage rates on Wednesday. Granted this was not entirely unexpected given that market expectations for BoE tightened have trimmed markedly over the past month or so. But still a welcome relief nonetheless for mortgage holders that had up till now been expected to bear the brunt of rising interest rates. Given this rapid turnaround in the outlook for buying a house in the UK, markets are likely to somewhat discount the latest edition of the RICS survey published this morning. Whilst the headline balance showed a fall once again, it is notable that the survey period predates the recent BoE meeting and is unlikely to fully capture some of the recent falls in Bank Rate expectations, meaning traders are likely to de-emphasise this latest publication to some degree. This is certainly true of FX markets so far this morning, with price action for sterling remaining limited so far as we head towards the main event of US CPI later today.



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