Today sees the release of the Chicago PMI but the key focus will be on speeches by Fed’s Poole and Yellen. Yellen is known to be more of a dove but if the generally more hawkish Poole comes over as less hawkish, then expect the US yield curve to steepen further, allowing the dollar to lose further ground. The US yield curve has now moved into the positive as US rate expectations for August ease. While the GDP report did show that inflation pressures were high, the slowing economy suggests that the Fed could afford to stop hiking as the economy does the job of bringing inflation back under control.
Also important will be the US July labour market report due out on Friday. After the already moderate 121k June rise, market forecast is for the payrolls to rise by 155k but BNP Paribas analysts expect payrolls to increase by an even slower 115k pace as employment and manufacturing drops fast. The USD seems to have little chance of rallying unless helped by repatriation related flows.
The Middle East remains difficult, but financial markets have lost interest. Unless, oil prices spike up EMK and equities will be pulled higher inspired by declining US rate expectations. The IMF said the USD was overvalued by 15%. Nothing new there. The IMF has been warning against USD overvaluation in several reports over the past year.
IMM position data, per Tuesday 25 July show that non-commercial Yen long positions have increased to 77k (69k) while the market has remained long EUR by 51k.
The AUD will remain supported ahead of Wednesday’s likely RBA rate hike. PM Howard standing in the next election and Treasurer Costello suggesting that he maintains all political functions and supporting Howard’s election campaign has reduced the political risk premium.
Sterling will benefit form rising rate hike expectations. Strong consumer credit and mortgage application data are due today and NatWide July house price index is due tomorrow. BNP Paribas see a 75% chance the MPC hiking rates on Thursday.
Meanwhile, it seems a 100% certain that the ECB will hike on Thursday. Markets are priced adequately. Main emphasis will be placed on the press conference which should clarify whether the ECB has lastingly increased the pace of hiking rates.
