News & Analysis


As mentioned below in the USD section, the pound was one of the better performing G10 currencies against a broadly softer dollar over the past week. Recording gains of 1.7% over the course of the week, the pound now trades over 3.5% above the multi-year low recorded just two weeks ago. Arguably, the pound’s rally could have been larger in magnitude but was capped by a dovish repricing in the SONIA strip. Towards the back-end of last week, as growth fears mounted globally, markets priced out the probability of a 50bp hike by the BoE this week, leaving it a 50-50 decision heading into the weekend. Although the implied rate change has since recovered to 45bps this morning, Thursday’s BoE decision remains a closer call than swap markets are implying in our view. While there is a compelling case for the BoE to keep pace with the global tightening cycle, and thus limit further GBP downside and risk stoking more inflation via the import channel, we believe the macro data since the June meeting hasn’t provided enough evidence for the BoE to firmly shift up a gear and accelerate its hiking cycle. We are therefore looking for a 25bps hike this week, which would likely see some of last week’s GBP rally unwind unless offset by a substantial improvement in market risk conditions. Also this week, events in Westminster will continue to catch the attention of traders as ballot papers are expected to reach the doormats of the 150,000 Tory party members that will likely decide the next UK Prime Minister. On Thursday, contenders Sunak and Truss will go head-to-head in another televised debate on Sky News just hours after the latest BoE decision at 8pm, where front-runner Truss is likely to press Sunak’s latest U-turn on tax cuts after the former Chancellor announced his plans to cut the basic rate of income tax from 20% to 19% in 2024, with further cuts promised such that 16% is hit by 2029. Prior to super Thursday, the data calendar is looking light for the pound, with just final PMI data for July released today for the manufacturing sector and Wednesday for the services sector, while house price data from Nationwide for July is reported tomorrow.


While intraday volatility remains highly elevated in EURUSD and euro crosses, the level of mean reversion in the single currency 2% north of the parity threshold has been noteworthy over the past week. While rates markets and sell-side economists are becoming more sympathetic with our base case for another 50bp hike by the ECB in September, which in conjunction with a dovish repricing in the US rates curve should provide a solid level of support for the euro, upside in the most liquid currency pair is likely to be limited as the region’s growth backdrop remains on a knife-edge given the tentative energy backdrop. As things stand, gas flows via the Nord Stream 1 pipeline are around 20% of capacity – a threshold that if sustained will still require rationing of natural gas heading into the winter months.


The dollar DXY index fell by 0.6% over the course of the past week. The greenback’s losses were largest against the Norwegian krone, largely due to Norway’s position as a natural gas exporter to parts of Europe, and currencies with deep undervaluation, like JPY and GBP. Losses in USDJPY were notable, given the 17% rally year-to-date prior to the yen’s recent retracement. The large part of the dollar’s losses last week occurred after the latest Federal Reserve meeting, which saw Chair Powell endorse June’s fed funds rate projections and signal a slowing in the pace of tightening ahead of September’s meeting. On top of that, growth data out of the US continued to print on the softer side, further reinforcing the likelihood of a slowdown in the tightening cycle towards a lower terminal rate. However, positive beats in the Q2 employment cost index and PCE inflation data for July kept the September meeting alive. We expect this theme of increased speculation over the Fed’s next moves to stay front and centre for global markets given the Fed’s renewed data-dependency. This week, ISM manufacturing and services data will be heavily in scope ahead of Friday’s Nonfarm payrolls release. In the monetary policy space, we expect plenty of Fed headlines over the next five trading days as the Fed’s communications blackout ends, although most of the scheduled events for Fed speakers don’t start until tomorrow. This morning, trading ranges are tight for most G10 currencies except for USDJPY. The pair is trading over half a percent lower this morning on a combination of increased haven demand and disappointing Chinese manufacturing PMIs over the weekend.


The Canadian dollar starts this week trading at a fresh 6-week high after notching another 0.8% rally last week on the back of a dovish repricing in US rates. This morning, with the dollar still trading on the softer side due to milder expectations of the Fed’s tightening cycle, the loonie is extending last week’s momentum in grinding higher. However, risk conditions aren’t better supported across the cross-asset space as major US equity futures trade in the red, while most commodity benchmarks also trade lower. With the data calendar vacant of top-tier releases in Canada ahead of Friday’s labour market data for July, the loonie will likely remain sensitive to proxies of risk appetite in markets. As the best-performing currency against the dollar year-to-date, further upside in CAD ahead of Friday’s data is likely to be limited in lieu of any major macroeconomic developments.

FX Elsewhere

The Australian dollar has started this week 0.25% higher ahead of the European open despite negative signs from China’s property market and manufacturing sectors over the weekend. While this may just be a function of broad USD weakness, expectations that the RBA hikes rates by 50bp, or potentially more given the Bank’s proclivity to exceed market expectations, is likely offering the currency further support. Expectations of a more aggressive interest rate decision by the Board tomorrow at 05:30 BST have been compounded by inflation data for July this morning, which saw headline inflation rise from 4.7% to 5.4% according to the Melbourne Institute.



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