News & Analysis


Despite the broad decline in the US dollar, the pound continues to underperform relative to the rest of the G10 basket. Yesterday, commentary from Governor Bailey stating that a 50bp hike isn’t “locked in” for August didn’t necessarily help the pound’s fortunes. Recent data from the UK hasn’t helped end the speculation over the Bank’s next move. Similar to yesterday’s labour market data, which highlighted continued employment gains but no signs of mounting wage pressures, today’s CPI report saw headline inflation rise to a new multi-decade high while the core measure notched its second month of declines. In our view, while the MPC may be more sympathetic towards a 50bp move in August due to the risks of inflation expectations rising, we think the consensus will remain for a 25bp hike. Given current positioning in money markets, this would result in a dovish repricing and potentially another downside risk for the pound. Today, Penny Mourdant and Liz Truss will battle it out to be the second name on the Conservative party’s ballot sheet alongside Rishi Sunak.


The single currency surged over a percentage point during yesterday’s session, before closing the day just 0.83% higher against the dollar. Since Friday morning when the parity party was still in full swing, EURUSD has climbed over 2%, with upwards momentum persisting this morning. Yesterday’s rally was largely driven by headlines coming from Reuters, which broke news from ECB “sources” that the Governing Council was actively discussing a 50bp rate hike on Thursday. Although our base case, such a scenario was heavily discounted by sell-side analysts and markets as they thought the ECB would stick to their previous forward guidance of a 25bp hike despite compelling evidence to the contrary. Since the headlines, markets are now pricing a roughly 50% chance that the ECB will raise rates by 50bp, with some notable houses such as Jeffries and ABN Amro changing their calls in favour of a 50bp move. The headlines didn’t stop there, however, as Reuters also broke that President Lagarde was pushing to find a consensus on the anti-fragmentation tool. Despite the abundance of ECB headlines coming through, markets weren’t necessarily distracted by the fact that Russia could withhold gas supplies once the annual maintenance of the Nord Stream 1 pipeline was completed. But, Reuters also had some information for markets on that too. According to officials close to the matter, gas delivery would return to pre-maintenance levels once the pipeline was back online. This marks the delivery of roughly 40% of the pipeline’s capacity, also known as the estimated breakeven amount to prevent economies like Germany from having to implement consumption restrictions. Rumours yesterday have been confirmed by Russian President Putin today, who said Russia is ready to supply Europe with enough gas as needed, with Goldman Sachs estimating flows to return to around 40%. Despite this, the EU is set to propose a voluntary 15% cut in gas usage by member states from next month, owing to limited inventories heading into the winter months. While the latest developments have been music to EUR bulls’ ears, downside risks to EURUSD persist, with the next few days proving pivotal for whether markets return to testing parity in the pair. Today, one of the next hurdles for EUR bulls to clear takes place as Italian Prime Minister Mario Draghi heads to Parliament, potentially with a formal resignation.


Yesterday was day 3 of losses for the broad dollar, which recently touched a 20-year high. The rally in G10 currencies started across the pond in the NZD and AUD in the wee hours of the morning. However, it wasn’t until a few hours later at 6am UK time that the broader euro-driven rally set the decline in the broad dollar into motion. By 9am BST, the greenback’s plunge began to lose steam, before trading sideways until the North American close. The strongest G10 performers against USD today were the Scandies and Antipodes, with NOK (+1.74%), SEK (+1.66%), NZD (+1.30%), and AUD (+1.26%) all posting their strongest rallies in at least a month. Those currencies, considering their high beta to broader market risk, suffered most of the losses during the dollar’s run-up. The dollar’s losses could very well continue given the upside risk in commodity prices, which are suffering from an inability to expand presently tight supply, and the broader trend of lower US rates. Yesterday’s housing data also confirmed the picture from the NAHB survey that the US housing market is cooling: housing starts fell by 2% MoM, while building permits were down 0.6%. This morning, the dollar continues its fall from grace as Treasury yields soften and equity futures trade higher. In terms of the economic calendar, focus remains on the US housing market ahead of Friday’s preliminary PMIs for July. Today, MBA mortgage applications for the week ending July 15th are released at 12:00 BST, before existing home sales data for June is released at 15:00 BST.


The vastly improved risk backdrop saw the Canadian dollar record further gains against the greenback in yesterday’s session. The loonie now sits over 2.5% higher relative to last week’s lows. This morning, CAD bulls are a bit quieter ahead of the North American open. This may be because they await confirmation from the latest CPI report that the Bank of Canada remains on track to hike rates by another large increment at their next policy meeting on September 9th. However, with the Bank already playing catch-up with a 100bp hike last week, and another CPI report for July expected in August ahead of the next BoC’s meeting, the direct impact of today’s CPI data may be limited.



This information has been prepared by Monex Europe Limited, an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Europe Limited or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.