All you need to know about USD, EUR, GBP & CAD.

With equities directionless this morning, the USD is struggling for guidance, although the day’s US calendar is busy 11:30pm on Sydney time we will have Federal Reserve speakers, a series of US data releases is expected, albeit mostly of secondary importance. The upcoming data includes durable goods trade balance and retaiil inventories for May. The HSBC economic surprise index for the US has shown fluctuations but has mostly remained steady in recent months, contradicting the narrative of an impending recession. About a month ago, the market predicted a policy rate at the end of 2023 that was 33 basis points below its anticipated peak, indicating an easing cycle. However, this gap has now narrowed to just 7 basis points. This repricing has not favored the USD, as it has weakened against all G10 currencies except the JPY. If the market prices out rate cuts due to diminishing recession concerns, the USD would decline rather than strengthen.

The EUR is stronger as an ECB conference gets underway, with President Lagarde warning the ECB will not be able to declare the peak rate soon she restated the strong probability of a rate increase in July, but also acknowledged that the central bank is unlikely to confidently declare that peak rates have been reached in the near future. This observation did not result in an increase in market expectations for a September rate hike, which remains at 40 basis points. However, it did slightly raise year-end rate projections. Last nigth, ECB hawks have been prominent, with Martins Kazaks stating that economic growth has not yet weakened enough to curb inflation. Gediminas Simkus remarked, "I wouldn't be surprised if we continue hiking in September," signaling a modest deviation from the previous guidance of data-dependent decisions beyond July. I will maintain a positive outlook on the EUR and propose a buy EUR-GBP trading idea. Additionally, few economists anticipate that Eurozone core CPI for June will surpass expectations this coming Friday, returning to its previous peak of 5.7% YoY (consensus 5.5%).

GBP-USD is little changed, with some dovish BoE comments and data in June, the UK BRC Shop Price Index, which measures inflation on the high street, showed a slowdown to 8.4% year-on-year, compared to the previous high of 9.0% in May. This deceleration was partly influenced by a decrease in food price inflation, which reached its slowest pace since February. The deceleration of food inflation is an important development to monitor. During a recent speech, Swati Dhingra, a dovish dissenter at the Bank of England (BoE), highlighted that food inflation remains a significant barrier to Consumer Price Index (CPI) aligning with the sharp declines observed in Producer Price Index (PPI). In addition to food prices, Dhingra stated that there are promising indications that CPI inflation should ease. She further emphasized that producer price inflation typically precedes changes in consumer price inflation, making it one of the best leading indicators for long-term price trends in the country. While Dhingra's viewpoint differed from the majority at the recent BoE meeting, it serves as a reminder that not all BoE members adopt a hawkish stance.

The CAD has been the best-performing currency in G10 FX over the last month, and is holding onto the bulk of those gains ahead of CPI today during the overnight session, USD-CAD reached its lowest level since September 2022, and although it has experienced a slight uptick in European trading, the downtrend observed in June remains intact. The upcoming focus for the Canadian dollar will be the release of May CPI data in Canada. HSBC economists anticipate a 0.5% month-on-month increase in price pressures (consensus 0.4%), driven by ongoing upward pressure on mortgage interest costs and a seasonal rise in food prices. If price pressures exceed expectations on the upside, it could solidify the likelihood of a quarter-point interest rate hike at the Bank of Canada's July meeting, which would further strengthen the Canadian dollar through the rates channel. Currently, swap markets are pricing in a 15-basis point increase in rates. However, year-on-year inflation rates for both headline and core levels are projected to decelerate from the levels seen in April as the impact of base effects becomes more pronounced.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.