USD: US data to spark a recovery in dollar sentiment
With USD sentiment so weak right now, it won’t take much from this week’s data to give it a boost. Given the July 4th holiday, all the action will be around the US jobs report (Fri); an uptick in wage inflation 0.3% MoM (2.6% YoY) should be mildly positive. But we note that any hawkish Fed re-pricing at the front-end of the US rate curve looks limited; markets are only pricing in 25bp (or one rate hike) worth of less Fed tightening by end-2019 relative to mid-March – when ‘Trumpflation’ was arguably at its peak. At best, Fed expectations would return to these levels; any additional narrowing of the gap between markets and the Fed’s ‘dots’ beyond 25bp looks unlikely in the absence of any near-term positive US growth or inflation surprises.
Limited scope for markets to move towards Fed dots
EUR: Risks of ECB playing it cool could keep EUR/USD this side of 1.15
Markets will be hanging onto the words of the ECB this week as speeches by Praet (Tue), Nowotny (Tue) and Weidmann (Thu) – as well as the minutes to the June ECB meeting (Thu) – may give some indication of how comfortable officials are with the recent rise in sovereign bond yields and the EUR. We still think the most prudent approach is to assume that central bankers have learnt from the Fed experience when it comes to exiting unconventional monetary policies. This means limiting the time between letting the QE taper genie out of the bottle and actually following-through with policy normalisation. Risks are now that the ECB plays it cool in July to avoid a pre-emptive market reaction and this could help us stay on this side of 1.15 over the summer months (in line with our forecast).
GBP: UK macro data this month to test the markets’ hawkish BoE resolve
What may have been a subtle attempt by BoE officials to put the question of policy normalisation onto the table has in fact led to markets now pricing in odds of a 2017 rate hike equivalent to a coin toss. We do not believe the Governor's ‘U-turn’ – we use quotation marks because his latest speech effectively sent the same policy signals as those made at Mansion House but just framed differently – justifies anything more than a 50:50 chance of a Nov rate hike. Macro data in July will be the biggest test of this hawkish exuberance; our economists look for this week’s PMI surveys to show signs of a summer slowdown in UK economic activity. Even if the post-Brexit 25bp rate cut is reversed, structural impediments are likely to keep UK interest rates anchored at historically low levels and this points to limited GBP upside from BoE policy. Risk-reward suggests fading any GBP/USD move higher towards the 1.3080/1.3100 key resistance area.
Markets are now pricing in odds of a 2017 BoE rate hike equivalent to a coin toss
AUD: White House tariffs on US steel imports could be toxic for global risk
It could shape up to be an interesting week, with both the RBA meeting (Tue) and threats from the White House over tariffs on US steel imports presenting downside risks to the AUD. We don't expect RBA officials to join in the latest hawkish central bank chorus; the statement is likely to retain the phrase that an “appreciating exchange rate would complicate” the economic recovery, while any small labour market improvements should be offset by more broader structural concerns. A status quo neutral bias may come as a slight AUD disappointment given the noise around a hawkish ‘surprise’. Of greater concern, however, is the spectre of US tariffs on steel imports weighing on commodities and the outlook for Chinese trade. Risk that AUD (and CAD, NZD) longs against JPY unwind.