USD
Yesterday saw yet another greenback slide, with the broad dollar dropping 0.5% as a soft PPI print saw traders reassess their PCE estimates, triggering a further modest acceleration in Fed easing expectations. This leaves the market implied odds of a 50bp Fed rate cut next month at close to 50%, and the dollar scanning as cheap. As we have noted previously, a jumbo rate cut looks unlikely to us – absent signs that the US economy is falling into recession, and the data hasn’t met that threshold yet. Granted, we can see risks building on the horizon, but they continue to look like next year’s concerns to us. For now, the US economy is slowing consistent with the economic normalisation needed to achieve a soft landing. Whether or not that remains true, however, sees a key test later today. After undershooting expectations in both May and June, today’s July CPI release will be closely watched by markets. Consensus expectations look for a 0.2% MoM core inflation print, as do we. Another undershoot remains a risk, one that would validate concerns that the US economy is slowing at a worrying pace, justifying current market easing bets. Match expectations though, and markets should begin to trim Fed easing odds in line with our base case, an outcome that should see the dollar trading stronger this afternoon if we are right.
EUR
Eurozone Q2 GDP figures at 10:00 BST are the main domestic attraction for euro traders today. Markets expect to see 0.3% QoQ growth, matching the expansion seen in Q1. We are inclined to think risks are skewed to the downside, however, considering the range of poor activity indicators that have been published for the bloc in recent months. Moreover, even if an overshoot is delivered, we would be inclined to take this with a large pinch of salt. External conditions continue to look unfavourable for the eurozone, while domestic demand conditions scan as weak, while the timelier PMI reports have slowed alarmingly over recent publications. With this in mind, EURUSD looks rich flirting with the key psychological level of 1.10. We continue to expect that weak growth and softening inflation pressures will see the ECB ease more rapidly than markets expect over coming meetings, which should see the euro retrace lower as markets increasingly price this in.
GBP
While US CPI is likely to capture market attention later today, this morning it is the counterpart UK report in the spotlight. Headline price growth rose to 2.2% YoY, up from 2.0% in June, a result of energy base effects. More interestingly, this was a smaller rise than expected, with markets predicting a 2.3% print, while Bank staff looked for 2.4% price growth last month. This unexpected weakness stemmed from a slowdown in services price growth, which has proven notably sticky as of late. Indeed, the services CPI reading eased from 5.7% YoY in June, to 5.2% in July, well below BoE forecasts for the month, and undershooting even the 5.3% YoY Bank staff projection for year-end. The result for markets has been a modest acceleration in BoE easing bets, rising from a 37% chance of a September rate cut pre-release to stand at 45% as of writing, while sterling has softened around 0.2%.
CAD
With little on the radar domestically, US CPI will be the focus for loonie traders later today. As noted above, we expect to see a 0.2% MoM core inflation print, matching expectations, with Fed easing bets seeing a modest pullback as a consequence. As previously noted, the expected rate differential priced by markets between the Fed and the BoC continues to look too narrow based on domestic fundamentals. A widening in favour of the dollar today would see markets better aligned with our view and should see USDCAD move higher, reversing yesterday’s post-PPI slide for the pair.
