Daily Currency Update

USD - US Dollar

The FOMC decision met expectations with a 1/4-point rate hike, and Chairman Powell stressed data dependency for future moves. Market pricing indicates a low probability (20%) of a rate hike at the next meeting, and less than 50% likelihood of a move before year-end, slightly lower than before. Markets lean towards the belief that the Fed might be done with tightening. Attention now turns to the ECB's policy decision, and the US releases Q2 GDP data this morning. The US economy has been holding up well, with consensus estimates of 1.8% growth (down from 2.0% in Q1) and a drop in the core PCE deflator to 4.0% (from 4.9% in Q1). This "goldilocks" scenario poses some risk for the USD. Yesterday, the USD closed defensively and remains weaker this morning against major currencies. The expectation of the Fed rate cycle peak is contributing to this weakness, with markets anticipating further USD depreciation. 

CAD - Canadian Dollar

The CAD has gained slightly against a weaker USD, but its performance is relatively modest compared to other currencies in this session. It tends to lag when the USD is weak and outperforms when the USD strengthens, making it one of the weakest major currencies since the end of June (the DXY declined by a little over 2%). The CAD faces some yield-related pressure due to differences in monetary policy between the Fed and BoC. However, it receives support from a softer USD, increased risk appetite, and somewhat higher commodity prices. The spot rate is currently well below its estimated fair value (1.2967). Nonetheless, there's an expectation that the CAD will likely make progress towards at least reaching the 1.30 mark in the near future. Observe the USD/CAD trends.

EUR - Euro

With a 25bps hike from the ECB already fully priced in, the FX market's reaction will now depend on the communication around the policy outlook. Lagarde might moderate the "more ground to cover" messaging as the rate cycle approaches its likely peak. However, there is a possibility that the door for a little more tightening after the summer will be left open due to persistent core price trends. Market expectations indicate slightly slower rate cuts in Europe compared to the US in the coming quarters, providing some protection to the EUR from negative rate spreads. Currently, the EUR is showing strong demand ahead of the ECB decision, but this can be attributed more to the broader selling of the USD rather than a particularly positive sentiment towards the EUR. Among generally stronger G10 FX currencies, the EUR's performance is considered middling. Despite this, solid gains this week suggest that more strength is anticipated in the future.

GBP - British Pound

The GBP has strengthened slightly, but with a gain of just under 0.5% for the day, it is not particularly noteworthy considering the overall strength of major currencies. There are limited developments in the UK currently. The CBI's retail sales survey indicated a significant decline in activity this month, continuing the recent trend of softness in the series. This data had a slightly negative effect on the GBP earlier, although the spot rate was already pulling back from its highest levels of the day. Notably, the strength of sterling is largely supported by generally high UK interest rates and positive yield spreads compared to US Treasuries.