USD
A double header of US risk events is in store for FX markets this week, with an FOMC meeting on Wednesday, followed by Friday’s jobs report. The former should see the Fed holding rates – we think for the final time – while the latter is likely to see further signs that the labour market continues to cool at the margin. All told this combination of outcomes should see the dollar weakening modestly, with a soft landing for the US economy seemingly still in play.
Even so, we would caution against turning too dollar negative just yet, with risks favouring greenback upside front of mind to start the week. Chief amongst these is the risk of escalation on the Israel-Lebanon border. A rocket attack on northern Israel over the weekend has seen another ramp-up in rhetoric and with it the prospect of a further escalation in violence. Such an outcome, if realised, is likely to see dollar upside on a haven bid, with traders wary that current hostilities are spiralling into a broader regional conflict.
EUR
While this week sees eurozone inflation figures for July crossing the wires, the impact on the euro should be minimal, for two reasons.
First, a rate cut in September looks like a done deal, despite non-committal noises from the Governing Council in recent weeks.
Second, ECB speakers have begun their summer holidays, meaning that any outturns are unlikely to trigger the typical volley of commentary. All told then, this should see euro volatility remaining contained this week, with risks largely stemming from events outside the bloc, with developments in the US and the Middle East the most likely catalysts.
GBP
Thursday’s Bank of England meeting should be the key event for sterling traders this week. We continue to think the outcome is a tossup, markets place the odds of a rate cut at just north of 50%. While this, along with events in the US leaves a wide range of credible outcomes for GBPUSD, we think the balance of probabilities favours an MPC hold, suggesting that risks are to the upside for the pound. Before then though, traders will likely have one eye on Chancellor Rachel Reeves who is set to speak later today. Her speech on the public finances is widely expected to set out the fiscal challenges facing the new government, with this in turn set to be used as a rationale to lay out some painful spending choices. Such an outcome is likely to see some of the gloss taken off sterling, suggesting to us that the immediate risks for the pound are to the downside.
CAD
The loonie should take more of a back seat this week, with central bank meetings in the US, UK, and Japan in focus for traders, though given the market bias to continue pricing BoC easing expectations in concert with those for the Fed, events south of the border still pose risks for CAD.
On the domestic front, May GDP is the one major release of note – we expect another soft reading, which should do little to disrupt the narrative of weak Canadian growth. If we are right, then easing at every meeting this year should stay the base case for the BoC, with the loonie set to extend last week’s slide.
