News & analysis


Having started the week full of positivity, the reality of the macroeconomic environment soon began to set in. This saw the dollar return to the driving seat yesterday, following Treasury yields higher as Fed Governor Bowman said she hasn’t ruled out further rate hikes “should progress on inflation stall or even reverse”. While the higher yield backdrop explained much of the broad dollar move yesterday, we suspect cautious positioning in the greenback ahead of a busy few days in global politics is starting to have an increasingly poignant role. As stated in the EUR section, we expect EURUSD to come under increasing pressure as Sunday’s first round vote draws closer, especially as prospective PMs from either side of the spectrum offered large fiscal pledges in last night’s debate.  Moreover, the first debate between Biden and Trump tomorrow should thrust the US election back into focus for markets. Topics such as trade protectionism and the trajectory of the US deficit will be key in determining the market outcome, as well as who the perceived winner of the debate is. While the election itself is almost five months away, we’d note that traders are already beginning to factor the outcome into certain asset classes, with defensive dollar positions building with Trump’s popularity. Given this backdrop, it’s unsurprising to see the greenback enter the European open in favour again this morning. The only exception to the rule in the G10 is the Australian dollar, which trades four-tenths of a percent higher this morning after May’s inflation data substantially overshot expectations, rising 0.4pp to 4% YoY. The data confirms our bullish view on the RBA and the Aussie dollar, even as activity data out of Australia remains weak. Short GBPAUD and EURAUD positions stand to benefit from any tail risk materialising from the European elections.


In a relatively quiet European session, the single currency retraced much of Monday’s drift higher as traders weighed the upcoming French election risk and some hawkish Fed speak. Yet despite multiple efforts to break lower, the single currency is failing to consolidate below the 1.07 handle, leaving it to fast become a key psychological level. While this threshold is being tested again this morning after GfK’s consumer confidence data shows German consumers closing their wallets even as the Euro’s commences, we doubt there is enough juice in the data calendar to fuel a sustained break lower. That said, we think conditions should support a more sustained break lower into the mid-to-low 1.06 region towards the end of the week, primarily as French election jitters build and fuel further defensive positioning.

On the topic of the election, yesterday saw the major potential candidates for Prime Minister take to the stage for the first televised debate. The 90-minute segment had no decisive winner, with all candidates from the three leading parties in the polls throwing barbs at one another’s fiscal policies. In our view, the main takeaway from the debate was further clarity on National Rally’s taxing plans, with their PM candidate Bardella floating plans to wave income tax for under 30s and reduce the pension age to 60 for those who start work before 20. Unlike previously, the National Rally didn’t caveat this by saying such plans are contingent on the state of the national finances, leaving us to believe that the fiscal slippage in the event of a National Rally may be more significant than markets are pricing in both bonds and the euro.


Sterling flatlined against the dollar while posting gains of two tenths against the euro on Tuesday, with the muted price action once again reflecting the dearth of market moving events in the UK. Today, with the ongoing general election campaign looking unlikely to offer much impetus to the pound again, traders will instead be watching for the release of CBI sales data at 11:00 BST. Expectations are for a modestly softer print after rebound in May, which should signal a further stabilisation in consumer activity. Absent any surprises, this should do little to derail expectations that the UK economy delivered a solid expansion in Q2, suggesting that sterling is likely to spend another day treading water.


USDCAD finished Tuesday’s session unchanged on the day, something of a surprise given that hot CPI data put a sizable dent in the odds of a July rate cut from the BoC. Having been expected to fall to 2.6% YoY in May, headline Canadian price growth rose to 2.9%, while the BoC’s preferred core-median and core trim measures of underlying inflation also rose, from 2.6% YoY to 2.8%, and from 2.8% to 2.9% respectively. The stronger-than-expected rise in prices saw a notable pullback in BoC easing expectations for July. Markets had projected a 60% chance of a rate cut next month prior to yesterday’s data release – those odds now stand at less than 30%. On digging through the details of yesterday’s CPI report, however, we think there are two notable counterpoints to the strong headline numbers. First, all key inflation measures remain comfortably within the BoC’s 1-3% target range. Second, products that better display underlying cyclical pressures within the Canadian economy, such as health & personal care and clothing & footwear, exhibited disinflation on a monthly basis. With this in mind, and considering that the BoC is set to receive one more inflation print before the July meeting, we think it is too early to rule out a July rate cut in Canada. The wider picture still points towards broader disinflation pressures given that both the labour market and growth remain soft, with a negative output gap set to continue weighing on inflation. If this view is confirmed by the remaining releases between now and the BoC’s decision on July 24th, we think policymakers should have still enough evidence to cut rates in spite of yesterday’s overshoot. This is a view seemingly shared by FX markets for now too given the muted reaction yesterday, with the focus for traders now squarely on Friday’s GDP reading, where a soft print likely needed to keep hopes of July easing alive.



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