USD
The greenback rallied as a risk-off tone gripped markets on Monday, with the prospect of escalating tensions across the Israel-Lebanon border seeing traders looking for the safety of the US dollar. All told the 0.25% climb for the broad dollar was the major market dynamic to start the week, a theme set to continue playing out with traders still holding their collective breath over potential developments in the Middle East. Even so, today also sees the data calendar come into focus, with the start of a busy few days of releases kicking off this morning in Europe (more below).
On the US front, JOLTS job openings are the most notable release today, the first of many labour market indicators scheduled for this week, culminating in Friday’s jobs report. Amidst all these data points, markets also get to see rate announcements from the Fed, BoJ, and BoE, the latter two of which are expected to be live meetings. Taken as a whole then, a busy week of events should help keep FX market volatility supported and traders on their toes, before the calendar begins to tail off next week and traders start to drift off to enjoy their summer holidays.
EUR
While a quiet data calendar saw Middle East risks front of mind for euro traders Monday, leaving EURUSD to shed 0.35pp, today domestic conditions should take centre stage. A busy docket of eurozone releases coming up sees the publication of GDP readings for France, Spain, Germany, and Italy, CPI data for Germany and Spain as well as confidence indicators for the bloc as a whole.
Despite this jam-packed schedule, we would caution about getting too excited over potential euro price action. We doubt that there is much that data can do at this juncture to shift the odds of a September rate cut from the ECB, not least given that the Governing Council is now in its summer quiet period, with many euro traders also likely to begin heading off on holiday too in the coming days. All told then, we suspect that EURUSD volatility is set to remain relatively muted, with external risk conditions the key factor to keep an eye on, in what is likely to be a theme through August.
GBP
After initially shedding close to half a percent early morning, sterling spent much of Monday trading paring early losses. Perhaps surprisingly, this came as Rachel Reeves delivered a statement to the Commons about the state of the public finances. Granted, her comments largely met expectations, unveiling a £22bn black hole while also accepting the recommendations of the independent pay review body. Even so, it might look a little odd at first glance to see markets fail to react negatively to news that the UK’s fiscal situation is much worse than initially feared. That said, we think several of the announcements were sensible from an economic perspective such as cancelling the A303 tunnel and abolishing the winter fuel payments for most pensioners amongst other measures. The former involved spending £2.5bn to fulfil a job that could have been done by a hedge.
The latter, while well-intentioned, still involved handing out dollops of cash to wealthy pensioners, a giveaway that has looked increasingly hard to justify in recent years given the growing pressures on other government budgets. Taken as a whole, we are inclined to see this as broadly sensible, bolstering a sense that Labour is taking a prudent approach to the public finances, allaying pre-election fears of fiscal incontinence. The next big test for the government is now set for October 30th when the government will set out its budget. For the remainder of this week though, it is the BoE that is in focus for sterling traders. We expect to see the MPC maintain rates on Thursday, an outcome that should produce another leg higher for the pound later this week.
CAD
The slow grind higher for USDCAD continued to start the week. Despite a lack of domestic catalysts from either the US or Canada, a risk-off tone on Monday helped the loonie to slide a further 0.15pp. Today, US jobs data is in focus, with Canadian GDP figures coming up tomorrow. The former is unlikely to see much movement for the pair, while we expect another soft reading from the latter, suggesting that the balance of risks tilts towards a further extension of the current move higher for USDCAD.