Will EUR/USD succumb to gravity and give up on 1.17? After yesterday’s slump, driven by dollar strength even as US retail sales disappointed, all eyes are on that specific support area. From a technical point of view, it’s the last hurdle to intermediate support in the low 1.16 before returning to 1.15 (March 2020 high, 50% Fibonacci retracement March 2020 low – 2021 high). Parallel (resistance) levels in the trade-weighted DXY situate at the low-to-mid 93 zone followed by 94.47/65. Both EUR/USD and DXY again came dangerously close already during early dealings but managed to avoid a break for now. The subsequent (technical) trip north (in EUR/USD) is all but convincing though. The dollar is thus pretty resilient going into the Fed meeting minutes later today. The minutes’ importance shouldn’t be underestimated given the looming Jackson Hole symposium and recent Fed speeches. An increasing number of governors over the past few weeks agreed monetary stimulus should be pared back sooner rather than later. We’re keen to find out how big of a voice they had in the last policy meeting and whether or not it resulted in clues with respect to the Fed laying the groundwork for tapering. Judging by both the dollar and USTs markets at least don’t dismiss chances of that happening. USTs underperform the Bund today with the yield curve bear steepening amidst (admittedly mild) risk-off. Yields rise about 1.2 bps at the 10y and 30y tenor. The German curve on the other hand is bull flattening once again. Changes vary from -1.2 bps (5y) to -1.7 bps (30y). Diverging underlying yield dynamics caught our eye though. Real yields plummeted in recent days to below -2% while inflation expectations is creeping to post-pandemic highs of around 1.54%. This compares with broadly stable inflation expectations in the US around 2.33% and a rebound from real yields in August from -1.20% to -1.06%. This suggest the sluggish EUR/USD performance is not only a dollar move but also follows a weak(ish) euro. Peripheral spreads barely budge.
After a close-to-consensus labour report, UK inflation disappointed this morning. The headline figure slowed to 2% y/y vs 2.3% expected while core measures eased from 2.3% to 1.8% (2% was the bar). Sterling isn’t too worried about it though and is, given circumstances, actually doing not that bad today. EUR/GBP declines marginally from 0.852 to 0.851. Friday’s retail sales mark the end of this data-heavy week for the UK.
Canadian inflation rose by 3.7% Y/Y, the fastest rate since 2011, up from 3.1% Y/Y in June. On a monthly basis, the CPI rose 0.6% in July, the highest pace since January this year. Statistics Canada reported that prices rose at a faster degree Y/Y in six of the eight major components in July, with shelter prices contributing the most to the all-items increase. Conversely, prices for clothing and footwear as well as alcoholic beverages, tobacco products and recreational cannabis slowed. The Bank of Canada’s preferred inflation metric (CPI core – trimmed mean Y/Y) accelerated from 2.7% Y/Y to 3.1% Y/Y, outside the BoC’s inflation-control target range of 1% to 3% and warranting the central bank’s gradual reduction of asset purchases. The Canadian dollar briefly tried to rise on the CPI data, but the move lacked dash. USD/CAD trades just north of 1.26.
Czech National Bank governor Rusnok said that latest inflation data do not change anything about the central bank’s monetary policy and the board’s approach to raising interest rates. Czech inflation unexpectedly surged from 2.8% Y/Y to 3.4% Y/Y in July. Rusnok added though that he is among board members who got closer to considering a 50 bps instead of a 25 bps rate hike at the Sept 30 meeting. At the previous two meetings, the CNB delivered consecutive 25 bps rate increases (to 0.75%) though some already considered a 50 bps move in August. CZK is unnerved by the comments, trading just below 25.50.