ECB’s Kazaks suggests it’s too early to signal reduction in purchases

GBP

Sterling was subject to yesterday's swings in the broad US dollar, with GBPUSD rallying up to 0.4% on the day before moderating gains to close out the day just 0.22% higher. Momentum continues to favour the sterling rally, with the currency trading 0.2% higher this morning against the US dollar, ahead of today's final reading of July's PMI's. The focus for the pound firmly sits with tomorrow's Bank of England decision, however, as the vote split in the decision on QE could supply greater clarity over the direction of future policy. In addition to this, markets will be focusing on whether the Bank of England has finalised its review on the sequencing of its exit. That is, whether to lead with tapering the stock of assets on their balance sheet or with hiking interest rates. This will have repercussions for when markets price in rate hikes in fixed income and money market instruments. Ahead of the BoE meeting, we expect sterling to remain in the middle of the G10 pack against the dollar as traders remain neutral on the currency.

EUR

With headlines around the eurozone being sparse, most of the euro's notable price action can be attributed to broader dollar moves. Yesterday was a good example hereof, when moves in US equities and fixed income markets saw the dollar's performance chop and change throughout the session, taking the euro up and down with it. This morning, European Central Bank Governing Council member Martins Kazaks pushed back expectations of a policy normalisation signal from the ECB as he stated in an interview that 'it would be much too early for a decision on whether to extend or phase out purchases'. Given the uncertainty, how much time there is left and the 600bn left in the envelope, there is no need to decide on the future of the pandemic QE programme yet. Kazaks added that, if anything, the time frame, not the pace of support would be affected by the slightly higher inflation target the ECB announced in July. Kazaks' comments suggest that investors waiting for any policy guidance from the ECB in the September meeting will be disappointed, as the outlook is still too uncertain to comment on the future of the asset purchases. For today, focus turns to eurozone retail sales at 10:00 BST.

USD

Price action in the broad dollar was interesting in yesterday's session, with the greenback trading softer throughout most of the morning in European hours as US equity futures traded flat and the 10-year yield flirted with dropping below 1.18%. Haven currencies, such as JPY and CHF, benefitted from the softer US yields, while procyclical currencies rallied as the rise in Covid cases didn't cause a downturn in risk appetite in other markets. However, with US equities breaking lower after the cash open and the 10-year falling below 1.18%, the dollar finally got the message that markets are seeking some sort of shelter across the board. The dollar retraced early losses from thereon in, but US equities closed up on the day, while the 10-year also returned back to its opening price. In limited liquidity conditions, the macro narrative priced across asset classes isn't the clearest on an intraday basis. In this light, market events could have an amplified impact over the coming weeks. Factory orders and final durable goods data were not enough to move the needle for markets despite factory orders coming in at 1.5%, well above the forecasted 1.0%. The reading remains below May's revised print of 2.3%. Final durable goods orders were slightly revised up from 0.8% to 0.9%, but with the Federal Reserve pushing back on policy normalisation expectations in the July meeting, markets seem convinced the first taper QE signal won't occur during Jackson hole in August. Yesterday's comments by Federal Reserve Governor Michelle Bowman only further confirmed this view, when she stated that 'despite the encouraging pace of recent hiring, employment is still far below where it was'. She added that it may take time for some people to re-enter the labour force as 'currently, some people face difficult choices regarding the availability of jobs and changing lines of work.

CAD

Before the bout of USD strength took over in the later part of yesterday's trading session, the Canadian dollar was the one currency in the G10 space that weakened against the greenback as a fall in crude oil prices weighed on the loonie. When the USD strength then came in, this exacerbated the move in USDCAD. The loonie has been hit recently by both the decline in crude and concerns over a slower US economic recovery relative to expectations, while domestic factors still remain supportive. Today, we expect CAD to be driven by broader market dynamics again, with traders focusing on Friday's labour market data out of the US and Canada as the next event to define a more definitive idiosyncratic trend in the Canadian dollar.

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