PCE inflation takes centre stage today

USD

The dollar remains the dominant story. Chair Warsh's first FOMC meeting has materially repriced expectations for US interest rates, lifting the Bloomberg Dollar Spot Index to a seven-month high earlier this week. Today's PCE inflation data is now the key event. A stronger-than-expected reading would reinforce the view that further Fed tightening remains possible and should support the dollar further. A softer print, however, could trigger a correction after three consecutive days of gains.

EUR

EURUSD has recovered above 1.1350 after yesterday's sell-off took the pair close to 1.1300. The rebound has been helped by reports that China is preparing a record euro-denominated sovereign bond issue, supporting the longer-term internationalisation story for the euro. However, the recovery remains fragile. Markets are still adjusting to a more hawkish Federal Reserve, while ECB communication remains mixed. Unless today's PCE disappoints, it will be difficult for EURUSD to regain the 1.1400 area sustainably.

GBP

Sterling continues to trade largely as a dollar story. Markets remain comfortable with the expected UK political transition because fiscal discipline appears likely to be maintained, limiting concerns over gilts for now. Without major UK data today, GBPUSD will largely follow the direction set by US inflation. The focus remains on whether the Fed and the Bank of England continue to diverge in policy expectations.

CAD

The Canadian dollar faces a more difficult backdrop after oil prices erased virtually all of their Middle East risk premium. Brent has fallen back below pre-conflict levels as shipping through the Strait of Hormuz normalises and supply returns to the market. Lower oil prices reduce one of CAD's traditional sources of support, leaving USDCAD increasingly driven by the combination of weaker crude and today's US inflation data.

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