North America returns to find a softer dollar

USD

Yesterday's US Labour Day holiday made for thin trading, with the DXY largely treading water around the 99 mark after dipping lower early in the session. Overnight, the greenback came under mild pressure again as the yen surged to a six-month high, testing 153 against the buck after Japanese cash earnings data smashed expectations, firming BoJ hike bets and extending the carry unwind we flagged last week. With today's calendar sparse on the US front, we expect consolidation in anticipation of Friday’s CPI release, which now looks pivotal for both the Fed and the dollar.

EUR

The euro spent yesterday's holiday-thinned session going nowhere fast, holding just above 1.16 after Friday's payrolls report knocked the pair off its early-September highs. Monday's eurozone releases did little to shift the dial, consistent with our view that secondary indicators would not move the needle this week. Indeed, this morning's German trade figures have also passed quietly, despite disappointing expectations. All eyes remain on Thursday's ECB decision, where we look for a 25bp hike in the deposit rate to 2.50%, a move effectively pre-signalled by President Lagarde and now close to fully priced. The more interesting element will be the new staff projections and the guidance around them: the Middle East supply shock leaves the Governing Council juggling energy-driven inflation upside against an increasingly visible drag on growth, and Lagarde will be pressed on how much further tightening is warranted. We anticipate little clarity for now, with Friday's US CPI the bigger catalyst.

GBP

Sterling clawed back a little ground yesterday, edging higher against both the dollar and the euro. Notably, Chancellor Healy’s set-piece speech on Monday avoided anything that could upset markets – we think this poses risks down the line as fiscal challenges become clear, but for now, this is a positive for the pound. Overnight data gave little cause for cheer, however, with the BRC retail sales monitor showing like-for-like sales growth halving to 0.5% YoY in August. With the Bank of England not meeting until the 17th and today's calendar otherwise bare, sterling should trade on external drivers, Middle East headlines and Fed pricing most importantly, ahead of Friday's July GDP numbers.

CAD

The loonie enters today's session looking vulnerable in our eyes. Friday's employment report was unambiguously poor — a 41.7k decline against expectations of a 15k rise, and, with wage growth decelerating to 2.0% from 3.0%, the data runs at odds with the BoC’s hawkish tone of last week. Add to that Canadian counter-tariffs that went into force overnight, the economic backdrop facing USDCAD has deteriorated markedly over recent weeks. Yet, USDCAD is testing 1.38 this morning, having already unwound all of Friday’s gains, a move that, to us, looks at odds with fundamentals. We are inclined to think the pair reverses higher later as North America returns after Labor Day. Beyond that, a bare domestic calendar leaves Friday's US CPI as the key directional driver for USDCAD.

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