US trade tensions again top of mind
US trade tensions are back in focus, with sanctions and geopolitical developments overshadowing strong economic data and keeping FX markets cautious.
USD
The dollar limped into the weekend, with the DXY index pinned below 99 despite Friday's blockbuster flash PMIs, which saw the US composite index jump to 56.0, well above consensus. The greenback's failure to rally more on strong data speaks to the concerns we highlighted last week after Treasury Secretary Bessent doubled long-end buybacks. Today, attention stays on Bessent, who is due to unveil what he has billed as "economic D-Day" after Tehran threatened over the weekend to halt all Persian Gulf oil exports and revisit its nuclear stance, with Strait of Hormuz traffic still well below normal. Our base case is for minimal dollar impact, though given uncertainties involved, our conviction is low. Today’s event aside, Wednesday's PCE and GDP data, and Chair Warsh's Jackson Hole debut on Friday, are this week's other focal points.
EUR
The euro ended Friday close to flat against the dollar despite a strong set of flash PMIs, with EURUSD once again testing but failing to durably crack resistance around the 1.17 handle. German manufacturing was the standout, rising to 54.1 against expectations of 52.0, helping lift the eurozone composite to a nine-month high and supporting our view that the region's recovery is proving resilient to the energy shock stemming from the Middle East conflict. A modest pullback in crude offers marginal relief against a domestic calendar that is quiet through today, leaving the single currency to trade on sanctions headlines, with tomorrow's German Ifo survey and Thursday's ECB meeting accounts the next domestic tests.
GBP
Sterling also finished Friday little changed. July retail sales disappointed early in the session, falling 0.5% MoM, offset by flash UK PMIs, where services rose to 52.8 against 51.8 expected, and an upside surprise for the US, leaving GBPUSD in the mid-1.36s as last week drew to a close. With no top-tier UK data this week, direction should come from external drivers: today's US sanctions announcement, oil prices, and Jackson Hole. Beneath the surface, we continue to flag the autumn Budget and gilt market sensitivities as the key domestic risk to sterling's recent resilience, with fiscal credibility still the pound's soft underbelly under the Burnham government.
CAD
The loonie is notably softer at the start of the new week after US-Canada trade talks broke down late on Friday. Weekend headlines indicating little prospect of trade negotiations resuming before the midterms, accompanied by softer oil, have only added to upside USDCAD pressure. That momentum is unlikely to be challenged in the near term domestically, with the calendar thin until Friday's GDP release, where markets expect 0.2% MoM growth. Before then, we expect trade headlines and crude to dominate CAD price action.