Daily Currency Update

USD - US Dollar 

Investors are adopting a cautious stance in anticipation of today's US inflation data, leading to a defensive performance of the USD against major currencies. Global stocks are showing strength, while major bond markets are strong. Commodity markets are experiencing mixed results, leaning slightly towards slight gains. The prevailing sentiment suggests that the market expects positive news from the 8.30ET release. The Consumer Price Index (CPI) is projected to demonstrate a significant decline in headline prices for June. The consensus forecast indicates a drop to 3.1%, with a modest increase of 0.3% in prices during the month. If inflation slows down, possibly reaching a two-digit handle on headline CPI in the coming months, it will reinforce market expectations that the Federal Reserve may have limited or no further adjustments to make to monetary policy after the July meeting. This sentiment would put downward pressure on the USD in general. The US dollar index is currently close to its lowest point of 2023, previously tested in January and April, at 100.82. If the index weakens below this level, it will further contribute to the already strong bearish momentum, potentially leading to a 2-3% decline in the index in the coming months.

CAD - Canadian Dollar

Today's Bank of Canada policy decision is expected to lead to a 25 basis points (bps) increase in interest rates. However, there remains some uncertainty regarding whether policymakers will follow through with this decision. There is substantial evidence supporting the need for a rate hike, including persistent inflation, strong inflation expectations, a robust labor market, high wages, and a consistently strong economy. The majority of the Canadian banks, anticipate a rate hike, but the swaps market suggests only an 18 bps tightening is factored in. Currently, the market has priced in approximately 40 bps of tightening by October, so the Bank's policy outlook will heavily influence the reaction of the Canadian dollar (CAD). If the Bank adopts a dovish tone while raising rates, it could hinder the recent rebound of the CAD and potentially reverse its gains. The Bank would likely aim to avoid this scenario to continue curbing domestic prices. A more likely option is for the Bank to leave the possibility of further tightening open, if necessary. The CAD finished just below 1.3250 in Tuesday's trading session and has made additional progress overnight, testing the 1.32 level. The combination of soft US Consumer Price Index (CPI) data and a somewhat hawkish Bank of Canada rate hike could drive the spot rate towards the 1.31 handle. Observe the USD/CAD trends.

EUR - Euro

The EUR remains strong, although it has retraced from its previous peak as market activity stabilizes in anticipation of the release of US inflation data. The interest rate spreads between the Eurozone and the United States have contracted in the past week, with the 2-year spread reaching –155 basis points. This narrowing has contributed to the Euro's gains. However, for the Euro to experience a significant upward movement and move higher than the 1.11 level, the interest rate spreads will need to narrow even further. The catalyst for such a development may be soft US inflation data.

GBP - British Pound

The GBP is experiencing a decrease in strength compared to its highest point earlier in the trading session, as market participants adjust their positions in anticipation of upcoming data reports from the United States. The Financial Stability Report issued by the Bank of England (BoE) emphasized the significant financial burden faced by households in the ongoing fight against inflation. According to the BoE's estimates, approximately four million households will encounter a substantial rise in mortgage expenses this year, resulting in the typical borrower paying an additional GBP3000. Despite this, it is highly likely that interest rates will continue to rise in the UK as the BoE combats persistent price growth.