USD
In contrast to last week’s drama, the broad dollar has seen a relatively muted start to the week, trading rangebound on Monday. We see little reason for this dynamic to change today either. The main US-centric event this week remains tomorrow’s CPI report, where core inflation is widely expected to land at 0.2% MoM. As noted in our preview, this should see further progress towards the FOMC’s “greater confidence” condition to begin easing policy. But we doubt this is soft enough to justify the 50bp rate cut currently seen as close to a 50% likelihood by swap markets. Fed pricing remains overly dovish in our eyes, suggesting that risks are skewed towards a stronger dollar this week. And that is before considering the looming geopolitical risks, most notably tensions in the Middle East. Even so, neither of these dynamics is likely to be a major factor today, with minimal other dollar catalysts of note, suggesting another session of rangebound trading for the greenback with a more exciting day in store tomorrow.
EUR
EURUSD notched marginal gains to start the week, climbing 0.15pp through Monday’s session. Today, ZEW survey data is in focus for euro traders, though this is unlikely to change the narrative around the bloc’s grim economic outlook. The current situation reading for Germany is projected to take another leg lower by economists, while the expectations print is also expected to dip, albeit while remaining in positive territory. If realised, this should see the euro trading under more pressure later today, keeping EURUSD on track toward our month-end target of 1.08.
GBP
This morning’s UK jobs report offered a mixed set of signals for the MPC, and sterling traders. On the one hand, further wage growth normalisation is likely to be welcomed on Threadneedle Street, suggesting that April’s National Living Wage rise is unlikely to have a sticky impact on longer-term pay pressures. On the other, the unemployment rate surprisingly dropped to 4.2%, having been expected to rise 0.1pp to 4.5% by markets. Given data quality concerns, we think the MPC can look through this jump, with the broad picture still one of a cooling labour market. That said, given the muddied picture, today’s data does little to settle the debate on whether the labour market is cooling quickly enough for the MPC to cut Bank Rate in September, though the headline surprise to unemployment has delivered a modest uptick for the pound this morning. Even so, we continue to see hawkish Bank Rate pricing as a notable downside risk for sterling, albeit with another round of data set to be released before the next BoE meeting, this is likely to be a September story, barring any surprises with tomorrow’s CPI print.
CAD
Similar to the greenback, the loonie also saw a quiet start to the week. A lack of cross-asset price action and minimal domestic catalysts left USDCAD to drift through Monday trading, with little prospect of an uptick in price action today considering the light North American data calendar. All told then, this leaves tomorrow’s US CPI reading as the key event in focus this week for loonie traders. If our expectations are met, seeing a paring of FOMC rate cut expectations, then widening expected rate differentials should see the USDCAD retrace higher, in line with our base case for the pair.