USD
Friday’s August CPI report delivered the upside surprise we had worried about over recent weeks, an outcome that should be decisive for Wednesday’s Fed decision. Granted, headline inflation matched consensus at 0.4% MoM to leave the annual rate at 3.4%, but core printed 0.3% MoM against expectations of a softer 0.2% print, with supercore price growth of 0.5% on a single-month basis. Now, we have seen some desks arguing for caution post-release, pointing out that a sharp rise in cell phone costs explains all the upside surprise, a point we would ordinarily sympathise with too. But on this occasion, we see the balance of risks tipped toward a rate increase later in the week, for three key reasons. First, even adjusting for higher energy costs, underlying disinflation appears to have stalled. Second, the geopolitical backdrop has deteriorated sharply, pushing oil prices clear above $100 per barrel. Third, recent commentary from Warsh and Waller was widely seen as indicating that 0.3% MoM core inflation would be enough to trigger a rate hike. A failure to follow through on a technicality is unlikely to be well received by markets already harbouring debasement concerns. That certainly seems to be the conclusion of traders, with market-implied odds of a 25bp hike on Wednesday jumping from roughly 70% to around 90%, with the holding above 99 into the weekend, and edging towards 99.50 this morning as flirt with 5%. We expect consolidation ahead of Wednesday. With the move itself largely priced, the dots and Chair Warsh’s press conference are the key risk events.
EUR
The euro proved relatively resilient last week, albeit slipping around a third of a percent on Friday to close near 1.16 as the greenback rallied post-CPI. That followed Thursday’s ECB decision, where the Governing Council delivered a second consecutive 25bp hike to take the deposit rate to 2.50%, with President Lagarde noting policymakers had been surprised by the economy’s resilience and staff projections keeping a December move in play. Even so, we think markets are overpricing the path from here, with swaps discounting more than three further hikes over the coming year — a high bar given the growth headwinds now building from energy. The eurozone’s terms-of-trade exposure to the Hormuz disruption remains the euro’s soft underbelly, with up a further 2% this morning after Saudi Arabia shut its East-West pipeline following drone attacks. With only the German ZEW survey of note domestically tomorrow, should trade off the dollar leg into Wednesday’s FOMC; we see risks tilted modestly lower while oil stays bid.
GBP
Sterling ended last week mixed, easing against a stronger dollar but making gains versus the euro, in both instances directed by external factors rather than domestic fundamentals. This week that should change, with plenty of event risk at home: tomorrow’s jobs report should show a broadly unchanged labour market, Wednesday’s August CPI is expected to put headline inflation back above 3% at around 3.1% YoY given a surge in petrol prices, and Thursday brings the Bank of England. We expect a hold at 3.75% with a 6-3 vote split. With the Fed, ECB and BoJ all tightening around a static BoE, we continue to see the pound as vulnerable this week, particularly if Bailey leans against market pricing of future hikes.
CAD
The loonie underperformed again on Friday, with climbing around 0.3% to just under 1.39 despite posting strong gains as deteriorating risk sentiment and escalating US–Canada trade tensions offset oil support. Washington’s move to ban certain Canadian-origin goods outright, following Ottawa’s 15–50% counter-tariffs on roughly $20bn of US products, keeps the trade channel firmly in focus, while the Bank of Canada’s decision to hold at 2.25% this month came with an explicit warning that inflation risks had risen. That warning gets tested today with August CPI at 13:30 BST, the highlight of an otherwise quiet Monday calendar. Consensus sees headline inflation holding at 3.0% YoY with core measures near 2%, gasoline still up over 20% on the year. With back above $100 on the Hormuz disruption and the Saudi pipeline shutdown, an upside surprise would see markets bring forward BoC hike pricing and should lend the loonie support — though we suspect trade uncertainty will keep any CAD rallies shallow into Wednesday’s FOMC.
This content was originally published by our partners at Monex Canada.
