News & Analysis


A light data calendar on Monday meant a quiet start to the week for the dollar. Today, however, price action should begin to pick up as Fed Chair Jerome Powell testifies in front of the Senate Banking and Housing Committee in his Semiannual Monetary Policy Report to Congress, expected at around 15:00 BST. Key for markets will be Powell’s characterization of inflation developments. While June’s FOMC meeting leant hawkish, with the Summary of Economic Projections suggesting just one rate cut this year as a base case, Powell’s more recent appearance at Sintra hinted at growing confidence that inflation is on its way back to target, and the start of policy easing is drawing closer. A repeat of this guidance later today should see markets further align with our projection for two rate cuts this year, with the first coming at the September policy meeting. If we are right, this sets the scene for the greenback to soften modestly in advance of Thursday’s June inflation print.


As expected, headlines in Europe were dominated by the outcome of the French National Assembly elections on Monday. Not expected, however, was the eventual result. National Rally slipped to third spot in terms of seats won, contrary to pre-election polling, while the left-wing NFP coalition surprisingly came out on top after the second-round vote. All told, markets have so far taken a sanguine view of this outcome. With no party able to command an outright majority in the National Assembly, the distribution of risks for markets has narrowed considerably. Even so, we would caution against treating this as a euro positive development just yet. Instead, we think there are three likely scenarios at this juncture. The first is for President Macron’s Ensemble party to form a centrist coalition with the Republicans and Socialists, though this is unlikely to be easy, and would require extracting the latter from their left-wing coalition. Such an outcome should see OAT-Bund spreads narrow back to pre-election norms, implying a roughly 1% rally for EURUSD. The second would see a coalition between Ensemble and NFP. While the market reaction would be determined by concessions made in any negotiation process, given NFP’s expansive fiscal spending demands, we would expect to see a renewed selloff in French bonds triggering further euro weakness. Third is a period of minority government, and likely legislative gridlock. Again, we would likely see markets turning bearish on OATs as these difficulties become apparent, especially heading towards the crucial budget period in September. With all this in mind, the progress of any coalition negotiations is likely to be key for the euro over coming days, with downside risks likely to keep traders from turning constructive on the euro in the short term.


The post-purdah restart of BoE commentary is front and centre for sterling this week. Having not heard from MPC speakers in a month and a half, sterling traders will be eager to understand how policymakers viewed the recent evolution of data, which has broadly landed hotter than expectations. Granted, the June meeting minutes suggested a relaxed view of these outturns by the core of the MPC. But yesterday’s comments from Jonathan Haskel indicated that this is not an opinion shared by all policymakers. Specifically, he noted a preference to “hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably”, strongly suggesting that he will not be voting for a cut next month. This leaves significant focus on BoE Chief Economist Huw Pill, who speaks tomorrow, and is likely to be the swing vote on the MPC in August. In our view, the balance of risks is tilted towards a dovish tone from Pill. Granted, his speech in April was more cautious on the inflation outlook than commentary from Bailey or Ramsden around the same time. But his most recent comments also suggested a growing willingness to lower Bank Rate, specifically hinting that it is “not unreasonable” to think that the Bank could cut rates “through the summer”. If Pill reconfirms this view tomorrow, then accelerated BoE easing expectations should offer a headwind for sterling this week, in line with our call for GBPUSD to ease towards our month end target of 1.26.


Monday saw USDCAD trading in a very narrow 0.15pp range with a blank data calendar and mixed cross asset conditions offering little direction for the pair. Similarly, a lack of domestic data today is likely to keep the focus for loonie traders squarely on the US, where FOMC easing expectations should be in focus given the unwillingness of markets to price in significant divergence between the BoC and the Fed. Considering this, we continue to think the best reflection of loonie fundamentals will be visible on crosses, where slowing inflation and soft growth should see CAD continue to underperform.



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