Market Briefing - Greenback Slides as Fed Bets Fall

The dollar is back on the defensive this morning as inflation fears subside and monetary tightening expectations fall. Implied odds on a 100 basis point move at next week’s Federal Reserve meeting dropped toward 10 percent on Friday after data from the University of Michigan showed consumers now expect prices to rise at an annual rate of 2.8 percent over the next 5-10 years - down from June’s 3.1 percent as a fall in gasoline costs reduced overall anxiety levels. 

Commodity indices are climbing, providing support to the Aussie and Kiwi, and the Canadian dollar is on the ascent, lifted by rising oil prices. Both the Brent and West Texas Intermediate benchmarks are holding at slightly stronger levels. 

The British pound is trying to lift itself off the floor, climbing 0.2 percent overnight after last week’s bruising 1.5 percent loss. The coming days will bring employment, inflation, and retail sales data, but with five contenders vying to replace Boris Johnson at the helm of the Conservative Party, political headlines are likely to garner the most attention in financial markets. Three front-runners have emerged, with some combination of Penny Mordaunt, Rishi Sunak or Liz Truss looking likely to appear on the ballot when members vote for a new prime minister. The results are expected on September 5. 

A light events calendar beckons in the United States this week, with tomorrow’s housing starts and Wednesday’s existing home sales data expected to confirm a broad-based cooling in real estate markets. Federal Reserve officials are now in purdah ahead of next Wednesday’s rate decision, leaving traders without narratives to chew on.

After a months-long preparation campaign, the European Central Bank will almost certainly deliver a 25 basis-point hike on Thursday, and hawkish inflation projections should set the stage for another - perhaps larger - move in September. The Bank will also unveil its long-awaited anti-fragmentation tool, but market expectations are low after a series of leaks suggested policymakers have been unable to agree on what would trigger its use, or on how recipient countries might be monitored.

On the same day, Madame Lagarde may find herself overshadowed if natural gas does not resume flowing through the Nord Stream pipeline from Russia to Germany. The line is scheduled to reopen after annual maintenance, but many fear Vladimir Putin will pre-empt European sanctions by ordering a reduction in supplies. 

The euro is trading about a cent stronger than par, but implied volatility levels are pointing to considerable market uncertainty in the coming days. 

Also on Thursday, the Bank of Japan is likely to keep policy settings - including asset purchases, negative rates, and yield curve control - unchanged, instead lowering growth forecasts and raising inflation projections. Speaking at a Group of Twenty conference in Bali last week, Finance Minister Shunichi Suzuki said, “I’m worried about the rapid slide in the yen, and the speculative moves seen behind it” - but stopped short of using the stronger language that has historically preceded intervention efforts. The yen could come under renewed pressure as traders build “carry trade” positions amid a broader period of calm in global markets. 

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MONDAY

CAD Housing Starts, June

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GBP Claimant Count Rate, June

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WEDNESDAY

GBP Consumer Price Indices, June

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EUR European Central Bank Rate Decision

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FRIDAY

CAD Retail Sales, May

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