Higher yields and a stronger dollar into payrolls tomorrow

USD

The dollar closed out the quarter firmer, making gains late on Wednesday despite August PCE, which undershot both our expectations and consensus. Core prices rose just 0.2% MoM, with annual revisions pulling the annual growth rate down to 3.0% against the 3.3% we had pencilled in. That said, we put little weight on the undershoot on this occasion – reflective, we think, of the challenges in modelling the new methodology ahead of time, rather than a meaningful softening. Indeed, the rise in core price growth between July and August hints at building inflationary pressure not visible prior to this latest release. Accompanied by an upward revision to Q2 GDP, this saw Treasury yields resuming their recent climb, with 10-year yields ending the day near 5.3% and leaving the DXY marginally higher around 101.5. Today brings jobless claims at 13:30 BST, and ISM manufacturing at 15:00 BST, where prices paid should stay elevated given the energy shock, alongside a run of Fed speakers. With Iran confirming receipt of a US counterproposal to its seven-day plan while Rubio ordered Tehran's UN delegation home and Trump warned the US would "blow them up or make a deal", we expect the dollar's haven and yield support to hold into tomorrow's payrolls.

EUR

The euro remains a chief casualty of dollar strength, with EURUSD down more than 2% in September. As we flagged yesterday, the single currency continues to take its lead from the dollar and energy markets rather than domestic data. In fact, Wednesday saw German inflation rise to 3.3% against 3.1% expected, Italy printed 4.2% versus 3.8%, and France also surprised to the upside, following Spain's near-5% print earlier in the week. Yet this failed to lift the euro, as Lagarde and Schnabel argued that the jump in global yields will do some of the ECB's tightening for it, trimming October hike pricing to around 7bp. That fits our view after September's hike to 2.50% that December, not October, is the live meeting, and the three further hikes markets price in look excessive. Today is light, with final manufacturing PMIs and eurozone unemployment before Lagarde speaks at 14:30 BST, ahead of tomorrow's flash HICP where consensus looks for a jump to around 3.6-3.7%. French political risk is also starting to garner attention, albeit not to the euro’s benefit. Given that, and little sign of progress in US-Iran talks, we see EURUSD risks skewed towards 1.13 and below.

GBP

Sterling was one of the few currencies to gain against the dollar on Wednesday, with cable up around a quarter of a percent, while GBPEUR pushed above 1.17. Final Q2 GDP was revised up to 0.5% QoQ and 1.4% YoY, beating expectations of 0.4% and 1.2%, and Prime Minister Burnham followed his Liverpool conference speech by telling the BBC that options for the UK-EU relationship run all the way to rejoining. That well-received commentary, plus rising expectations for a Bank Rate hike in September, are all helping to keep sterling supported for now. Today's focus is Mann at 13:00 BST, a hike voter in September, with Pill chairing a panel at 13:30 after Bailey's non-policy remarks at 09:00. That mix suggests sterling's resilience will persist today, though further gains against the dollar look harder ahead of payrolls.

CAD

The loonie underperformed yet again yesterday, with USDCAD closing above the 1.42 level we flagged earlier this week as higher US yields and quarter-end flows outweighed WTI's rally back above $90. Tuesday's flat July GDP print and a modest 0.2% August advance estimate fit our read that domestic momentum is fading, leaving no case for an October move despite Macklem's hawkish rhetoric and markets still leaning towards a first hike by December. Oil offers only mixed support: Brent held just below $100 on the new front-month contract, up around 13% in September, but Gulf crude exports have recovered to near pre-war levels through convoys and pipeline reroutes. Today's calendar is thin, with only September's manufacturing PMI at 14:30 BST, so the loonie will trade on US data and Iran headlines. We see USDCAD holding a 1.41-1.43 range into tomorrow's payrolls, with the 9 October jobs report the next domestic catalyst.

Disclaimer

This information has been prepared by Monex International Markets plc, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.