Easing Fed rate hike bets test dollar resilience

USD

The dollar proved relatively resilient on Thursday despite some dovish data surprises. July PPI landed flat on the month against expectations for a 0.2% rise, with the annual rate cooling from 5.5% to 4.7% on lower gasoline costs, while initial jobless claims also edged up to 209k from 199k. Married to soft July jobs figures and CPI published earlier this week, markets now see roughly a 70% probability that the Fed holds in September, extending the unwind of hike bets - a repricing we have long argued for. Still, the DXY remains close to the 100-mark for now, as lingering Middle East risk keeps a defensive bid under the greenback. July retail sales, expected to gain around 0.3% MoM, alongside August University of Michigan survey indicators, headline the data calendar today. Soft prints could well cement a September hold ahead of the weekend, albeit with dollar fortunes still hostage to Middle East developments.

EUR

The euro firmed modestly yesterday as fading dollar momentum did the heavy lifting. Domestic news offered little support: eurozone industrial production was flat in June, underscoring how the energy shock from the ongoing Middle East hostilities continues to weigh on activity. Having held the deposit rate at 2.25% in July, the ECB remains hostage to oil prices, with President Lagarde keeping the door open to a September hike should energy-driven inflation persist. With the eurozone calendar quiet today, the single currency should continue trading on Hormuz headlines and this afternoon's US data, with the pair likely contained in a 1.15–1.16 range absent a decisive geopolitical development in either direction.

GBP

Sterling ended Thursday little changed despite an upside surprise in UK growth data. June GDP expanded 0.3% MoM against expectations for a -0.1% contraction, leaving Q2 growth at 0.4% QoQ and 1.2% YoY, marginally above consensus. The muted FX reaction suggests markets remain focused on the political backdrop. As we flagged when Starmer's exit first came into view, a change of leadership would not by itself resolve the UK's fiscal challenges, and with Prime Minister Burnham now in place, attention is turning to how his spending ambitions square with elevated gilt yields ahead of the autumn budget. With no top-tier UK data today, cable should track US retail sales and broader risk sentiment.

CAD

The loonie eked out marginal gains yesterday, with USDCAD drifting toward 1.39 as a soft US PPI print outweighed another modest slide in crude, leaving WTI to settle around $82 overnight. That decline has accelerated this morning, with the loonie gaining a double boost from the continued pullback in Fed rate hike bets. US developments aside, today brings June manufacturing sales, with wholesale figures expected to confirm solid momentum into quarter-end. Even so, with oil softening on ceasefire optimism, CAD's fortunes today likely hinge more on US retail sales and the resulting dollar reaction than on domestic releases.

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