USD
The dollar underperformed our expectations throughout last month, with the DXY index sinking almost 3.5% by August 27th. That said, a rally into month-end gives us confidence that markets are starting to come to their senses. As we have noted previously, the dollar now looks distinctly cheap at current levels. US growth remains strong, and market expectations for Fed rate cuts look overly aggressive to us. Not to mention, US political risk should increasingly become a factor heading towards November, a dynamic that we also expect to lend some dollar strength at the margin. The key factor for the dollar in the short term, however, is likely to be the strength of the US labour market. With this in mind, this week’s jobs data will be closely scrutinised by FX traders. As we see it, a set of prints that broadly meets expectations should help further dispel concerns triggered by last month’s jobs report, supporting an extension in the current move higher for the dollar in advance of the Fed’s next meeting, and likely their first rate cut of the cycle, on September 18th.
EUR
Although US labour market indicators should be front and centre for FX markets this week, political risks are likely to continue to loom in the background for euro traders. Results over the weekend indicate a strong performance for the AfD in German regional elections, while French politics is likely to return with a vengeance, with a budget needing to pass through a divided National Assembly. It is this latter dynamic that we will be keeping a particularly close eye on, with risks that the process becomes increasingly fractious in the coming weeks, potentially seeing a return of political risk premia that weighed on the euro before the summer break. Beyond this, next week’s ECB meeting is also likely to be a focus, though with a rate cut fully priced, all attention will be squarely on any forward guidance. Today though, final PMI readings should have little impact on markets, leaving the euro relatively undisturbed, at least for now.
GBP
A relatively quiet week should be in store for sterling, with a light data calendar likely seeing the pound take a back seat. Considering this, and events elsewhere, this suggests to us that a retreat off recent highs is likely for GBPUSD. Nevertheless, GBPEUR could still stand to benefit from a lack of market-moving news in the short run. With markets left to continue pondering a mix of strong UK growth and political stability, set against stagnation and uncertainty on the continent, we favour sterling upside against the euro ahead of the BoE’s rate announcement later this month. The one domestic risk event of note this week comes tomorrow, with a speech from the BoE’s Breeden. Given that she has only recently joined the MPC, her policy views remain largely unknown. However, she did vote to cut rates last month and is seemingly one of three central swing voters on the committee. As such, while we expect her to keep her cards close to her chest for now, any dovish indications risk an acceleration in Bank Rate easing expectations and a sharp sterling selloff tomorrow.
CAD
While Friday’s doubleheader of US and Canadian payrolls is likely to be the key set of risk events for USDCAD, before then, Wednesday’s BoC rate decision should be a close second in importance. Another rate cut looks like a done deal to us, however. Instead, the key point for markets will be the Bank’s willingness to continue with back-to-back rate cuts through to year-end. We suspect that they are, and that an indication of this is likely, in keeping with the Bank’s previous guidance. If correct, this outcome should see the loonie trading under some modest pressure in advance of Friday’s jobs numbers.
