The dollar stayed under pressure as confirmed that inflation pressure eased in June. Still, with the Gulf situation apparently far from de-escalation, we don’t see much more USD downside potential in the near term. Instead, sterling is emerging as a major outperformer on the back of further positioning adjustments
USD: Losing More Ground
The dollar has remained under pressure, with FX volatility resuming its decline after a short-lived bounce earlier this week. settling at around $85/bl is seemingly not enough to drive inflation expectations much higher, and the USD front-end continues to feel some gravitational pull from soft June data. was also rather muted yesterday: -0.3% MoM for headline, 0.2% MoM for .
At the same time, the two-day testimony by Fed Chair Kevin Warsh and a speech by Chris Waller are warning markets against reading too much into one single inflation print. According to Waller, the disinflationary trend must be visible over a few months to call off hikes. Hardly a guarantee now that oil prices have risen again.
All in all, markets may remain content with one priced in this year. As some other central bank pricing catches up on the upside, the dollar might still be inching lower in most crosses.
US for June are published today, and are expected to grow at 0.2% MoM after four very strong months. The Fed’s Logan and Schmid (both hawks) are scheduled to speak.
EUR: Rally Should Lose Steam
We aren’t convinced this rally has much further to run, barring clear signs of a de-escalation in the Middle East. The rise in (more impactful for the eurozone’s terms of trade than crude) should prevent the euro from building any idiosyncratic narrative at this point.
We expect EUR/USD sellers to emerge around the 1.1500 area, and see a greater chance of rangebound stabilisation at this stage rather than a break higher. The eurozone calendar is empty today, with the ECB entering its pre-meeting quiet period.
GBP: Shorts on the Run
The sterling short squeeze continues. The catalyst for to break below 0.8500 yesterday was reports that Shabana Mahmood would be Andy Burnham’s pick for chancellor when he likely comes to power next week. Mahmood is seen to the right of the Labour Party and a less divisive – and potentially less fiscally expansive – candidate for chancellor than Ed Miliband. outperformed German Bunds by around 5bp yesterday.
The strength of the sterling rally looks more a function of position adjustment rather than a massive re-assessment of the prospects for UK PLC, however. Positioning data from US futures exchanges had recently shown speculators running the shortest sterling positions since 2017. It may be difficult to stand in the way of the sterling rally in the short term, where a sustained break of 0.8470 opens up 0.8400 for EUR/GBP, while could make a run at 1.3600/3650. And next week looks a big one for UK inputs, with Burnham taking the reins and both CPI and jobs data released.
Yet when position-adjustment activity fades and investors return to the UK macro/Bank of England story, EUR/GBP should be able to retest the recent break-out area around 0.8600/8610. That may be a story for much later this month.
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