Daily Currency Update

USD - US Dollar

The dollar's rise shows no sign of slowing. Yesterday, the DXY soared to its highest position since March, driven by a rise in US yields, while the FX market is also feeling the impact of escalating energy costs. This week, Saudi Arabia confirmed its intention to extend its 1 million barrels per day supply reduction until December, making the crude energy market conditions tighter and pushing Brent's trading price above $90/bl. The US's self-sufficiency in energy and its status as a net exporter solidify the dollar's strength in this high-energy-price environment. The immediate threat to the dollar would possibly arise from a significant shift in growth outlooks. This context underscores the importance of today's release of the ISM services index for August. A notable downturn in this index impacted the dollar significantly last year. However, unless there's an unexpected drop below 50 in today's reading, it's likely the dollar will sustain its recent advances, especially leading up to next week's US August CPI release.

CAD - Canadian Dollar 

USD/CAD printed the highest level since March yesterday, momentarily surpassing the 1.3660 mark from April, propelled by a stronger USD and a general decline in pro-cyclical currencies. We don't anticipate today's Bank of Canada meeting to pivot the direction for the CAD, given the recent economic slowdown and a tempered job market. Market expectations have already tilted towards a dovish stance with a prevailing belief that there will be no change today. This suggests limited downward risk for the CAD from today's status quo, especially since the BoC may want to leave the possibility of future tightening open. Despite the rise of USD/CAD recently, there hasn't been a corresponding shift in the short-term disparity for USD/CAD. Currently, the pair appears overvalued by 2.5% based on immediate fair value estimates. We're leaning towards a pullback to the 1.3460 200-day MA for September.

EUR - Euro 

The term 'stagflation' is increasingly used to describe the Eurozone's economy. This scenario is negative for the growth-sensitive euro, reminiscent of challenges faced during its inception in 1999. Adding to that story is now the supply-driven spike in energy, reviving fears of last summer's negative terms of trade story for the euro. With natural gas prices still very subdued, this energy story will not hit the euro as hard as last year, but it remains unwelcome. The market predicts a 25% chance of the European Central Bank (ECB) increasing rates by 25bp next week. Yet, given the energy dynamics and speculative positioning, EUR/USD seems susceptible, potentially dropping to around the 1.0635/40 range.

GBP - British Pound

GBP is coming under pressure against the strong dollar and marginally outperforming the pressured euro. High wage growth looks to be the primary reason for the market retaining expectations of a further 57bp of Bank of England (BoE) tightening in this cycle – making pivotal next Wednesday's release of the average earnings figures for July. Our base case is one more 25bp hike from the Bank on 21 September and then a prolonged pause. GBP/USD looks more vulnerable to a firm test of 1.2500 psychological support.