USD
The dollar shrugged off softer US data yesterday, with the DXY index climbing back above 99.6 as safe-haven demand and rising Treasury yields dominated. The August ISM manufacturing PMI slipped to 54.6 from 55.6, below the 55.2 expected, with the employment sub-index cooling to 51.2, while July JOLTS job openings of 7.27m undershot consensus. Ordinarily, this mix would weigh on the greenback, but fresh US strikes on Iranian targets near the Strait of Hormuz pushed above $90, lifted toward 4.8%, and dragged the S&P 500 down 0.7%, hardly a risk-positive backdrop. Overnight, that theme has continued, with Iran firing ballistic missiles aimed at a US base in Jordan, and drone attacks on Bahrain, leaving the Strait effectively closed to commercial shipping. Looking ahead to the Fed decision later this month, markets now price roughly a two-in-three chance of a hike, with tightening bets building on a combination of Middle East developments and Chair Warsh’s Jackson Hole comments. We continue to think this repricing looks premature and expect rates on hold through year-end, but with energy re-accelerating inflation risks, fading dollar strength ahead of Friday’s payrolls looks brave. Before then, today brings ADP employment and factory orders, with only limited dollar implications.
EUR
The euro traded defensively yesterday, slipping below 1.16, despite data showing eurozone inflation rose to 3.3% in August, with energy prices up 14.3% on the year as the Middle East conflict feeds through. That said, core inflation eased to 2.4%, the lowest since June, and below consensus expectations. Final manufacturing PMIs were also mixed: Germany was revised up to 54.3, but Italy missed badly at 49.6, and Spain fell back into contraction, while German July retail sales slumped. All told, we think this keeps the ECB on track to hike next week, but further policy tightening is far from a done deal, while rate support is doing little for the single currency given the current energy shock is stagflationary for the bloc, and haven flows favour the dollar while the Strait of Hormuz remains shut. We see little on today’s quiet eurozone calendar to change that dynamic, leaving hostage to oil headlines and US yields, with risks skewed towards a test of support in the mid-1.15s.
GBP
Sterling resumed its decline yesterday, with dropping from the 1.36 handle to the low 1.35s as the dollar firmed and sold off alongside global bonds. The now sits at 5.25%, keeping fiscal risk premium in focus ahead of Prime Minister Burnham’s first PMQs today, with attention increasingly on the Budget in October, which we have flagged as the single largest domestic risk to the pound. Yesterday’s data offered little support despite the final August manufacturing PMI being revised up to 51.7 from the 51.5 flash estimate. With no top-tier UK data today, sterling should trade off the broader dollar tone and risk appetite, with risks tilted to the downside while the Strait of Hormuz remains closed and fiscal risks abound.
CAD
The struggled on Tuesday after a strong initial start to the week, with tit-for-tat US-Iran strikes fading as a support, even as oil climbs. Attention now turns to today’s Bank of Canada decision at 14:45 BST, where we expect the policy rate to be held at 2.25% yet again. The case for patience is strong in our view: Q2 GDP surprised at 3.3% annualised against the Bank’s 2.5% projection, but below market expectations, while core inflation appears to be basing near the 2% target, even as the collapse of US-Canada trade talks and the threat of retaliatory tariffs cut in both directions, clouding the growth outlook further. As we see it, guidance will likely matter more than the decision itself. A hold that acknowledges upside inflation risks from energy and tariffs could see markets bring forward hike expectations, supporting the loonie this afternoon; albeit, we think a balanced tone is more likely, keeping above 1.39 for now.
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