Bessent taunts the bond markets
Treasury Secretary Bessent’s remarks extended dollar weakness despite rising Middle East tensions and higher oil prices, with markets now focused on Friday’s US CPI report as the key catalyst for Fed expectations.
USD
Comments from the Treasury Secretary overnight are making plenty of waves this morning, helping to extend the recent run of dollar weakness to the benefit of other G10 currencies. Specifically, Bessent remarked that “I am the house now”, and that “you can bet against me if you want”, speaking in relation to recent efforts to strengthen the yen. But seen in the context of his decision to increase long-duration buy-backs, these comments also scan as a direct challenge to bond markets. Certainly, they help put the dollar debasement theme front and centre, and as such, it is unsurprising to see the buck lower this morning. Indeed, Bessent’s speech is weighing on the broad dollar even as Middle East hostilities escalate, lifting Brent back towards $100 per barrel overnight. This dynamic looks set to continue near term, with today's domestic calendar light. Still, as we wrote after August's payrolls beat last week, Friday's CPI should prove decisive: a 0.3% MoM core print would likely cement a 25bp hike.
EUR
The euro spent Tuesday treading water just above 1.16, with July's German trade figures failing to provide any meaningful impulse. And, with no top-tier eurozone data due today, attention now turns squarely to tomorrow's ECB decision. A 25bp deposit rate hike to 2.50% is fully priced and has been our base case since President Lagarde's signal in July, so the reaction should hinge on the updated projections and whether the Governing Council keeps the door open to further tightening, with markets assigning around 80% odds of another move by year-end. In our view, the Council faces an awkward balancing act between energy-driven inflation risks, amplified by the Middle East supply shock now pushing Brent towards triple digits, and accumulating growth headwinds. Even with a hawkish delivery, however, we suspect the euro struggles for direction until Friday's US inflation report resolves the Fed question, despite nudging higher this morning on Bessent’s overnight comments.
GBP
Tuesday saw the pound consolidate after Chancellor Healey's Monday speech, which signalled spending discipline ahead of the autumn budget, passed without incident. That said, the domestic picture continues to soften at the margins: the BRC retail sales monitor showed like-for-like sales growth halving to 0.5% YoY in August, reinforcing our caution on the UK consumer. Indeed, with a similar sentiment echoed by Andrew Bailey and Co. yesterday in parliamentary testimony, it is surprising to see the pound holding up as well as it is. Still, there is nothing top-tier on the UK calendar today, leaving Friday's July GDP release as the week's domestic highlight ahead of the Bank of England's September 17th meeting. In the interim, oil's march towards $100, Middle East headlines, and Treasury Secretary Bessent’s comments will set the tone, biasing sterling to the upside against the dollar, with little direction versus the euro.
CAD
The loonie proved surprisingly resilient on Tuesday, firming around 0.3% to leave USDCAD trading sub-1.38, as markets broadly looked through the implementation of Canadian counter-tariffs, with higher oil and comments from Secretary Bessent instead favouring CAD upside. We would still treat that resilience with some scepticism, however. Last Friday's employment report was unambiguously weak, leaving the BoC’s early September hawkishness looking distinctly dated. As we noted yesterday, we continue to see risks tilted towards USDCAD grinding higher as markets digest this deteriorating domestic backdrop. More immediately, today's calendar is bare, with Friday's US CPI the key directional catalyst for USDCAD into next week's FOMC.