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CAD
Intraday volatility picked up somewhat after the release of the US CPI report, but after all was said and done, the loonie was still where it roughly started prior to the report. It’s unsurprising considering that the inflation report was almost perfectly in line with expectations. The loonie drifted slightly lower later in the day, largely due to a pullback in oil prices and a small increase in the US-Canada yield spread on 10-year govies. Canada’s data calendar will be quiet until Tuesday, when we will receive both CPI and manufacturing sales. With underlying inflation pressures back to normal in the US, we are keen to find out if the same has occurred in Canada. Core prices have proven stickier up North, however. The most newsworthy item out of Canada was an admission from the federal housing minister that their plan is to avoid lowering prices, while also increasing the supply of affordable new homes, a clear contradiction. For markets, the key implication is that housing could lead to further persistence in core inflation.
USD
Despite hopes of it triggering some market action yesterday, US CPI proved something of a damp squib for traders. Prices increased by 0.2% on both the headline and core measures in July, just as markets anticipated pre-release. If anything, the print was modestly dovish with a slight undershoot of expectations on the headline YoY figure. Whilst the measure did show a modest uptick due to energy prices, this was fully anticipated by markets given a recent rise in the oil price and with. favourable base effects fell out of the CPI basket. If anything, yesterday’s print confirmed what many already suspected, that conditions in the US economy do not warrant any further rate hikes from the Fed. Based on current data, policy is tight enough and a cooling economy later in the year should finish the job of returning inflation to 2% on a sustainable basis. Whether or not this same view is held in the Fed remains an open question. It was notable that Chair Powell chose to dismiss June’s soft inflation print as just one release as recently as the July policy meeting. But more recent comments by William’s stressed data dependence, suggesting that rates may already be high enough to tame inflation. On the basis of yesterday’s data we are inclined to agree, and maintain our call for no more rate hikes this year. Given the lack of surprise in the release, price action in the dollar was limited – reversing early losses into the inflation print, the DXY dollar index finished the day up around one tenth of a percent.
EUR
A good day for European equities failed to translate into much euro strength yesterday, with limited data leaving EURUSD price action dictated by events on the other side of the Atlantic. Therefore, despite a rally leading up to the US CPI release, this was ultimately reversed by the end of day as on-expectation print left the euro virtually unchanged over the session. Today looks set to deliver a muted end to the week with little data of note due to be published. Instead, it looks likely that events elsewhere will be the likely suspects for what should otherwise be a quiet day for the euro.
GBP
Whilst market attention was largely focused on the US yesterday, price action in the pound still delivered some moves to catch the eye. Sterling fell by 0.3% against the dollar and 0.4% against the euro as expectations for Bank Rate were trimmed through the afternoon. Granted markets still see a peak of 5.75% as more likely than not, but this is no longer fully priced, with traders increasingly aligning with our view that the BoE will ultimately pause monetary tightening with Bank Rate at 5.5%. This morning though saw GDP numbers print better than expected, with the UK economy growing by 0.2% in Q2. Most notable though was the collection of other indicators that accompanied the GDP figures, particularly industrial production which rose by 1.8% in June, painting a picture of the UK economy that looks far better than anticipated pre-release. The unexpected signs of economic robustness saw expectations for Bank Rate move reverse and the pound pick up some modest support to begin the day.
FX Elsewhere
A policy decision overnight from Banxico left policy rates unchanged as we had previously anticipated. Having reached the current level of 11.25% on March 30th, few in markets were looking for a change in stance, especially given an inflation print that matched expectations earlier in the week. Therefore, despite a US CPI aided rally in USDMXN immediately following the announcement, the move ultimately moderate to leave the pair around the levels at which it began the week.