Dollar Dip Continues As Traders Await CPI Release

The US Dollar has come back under selling pressure over the European open on Monday, extending losses seen late last week. The hawkish shift in tone at the ECB meeting last week was seen detracting demand away from USD, despite better data and hawkish Fed commentary. On Friday, The Fed’s Waller said explicitly that a 4% Fed funds rate would be appropriate for the start of 2023, leading the market to price such a level for the first time.

Traders now await tomorrow’s US CPI print which will be all-important given the weaker reading we saw in July. If CPI moderates again, this will likely allow USD to come off further. If a fresh inflationary spike occurs, USD is likely to trade higher again.

Key Factors for Today

- USD falls further despite hawkish Fed commentary as hawkish ECB steals focus
- Risk markets climb, boosted by softer USD
- EUR leading in FX, safe-havens weakest
- GBP sees GDP miss and other soft data
- Metals and oil benefiting from USD drop

Coming Up

- GBP UK NIESR GDP Estimate
- USD US 10-Y Bond auction
- NZD New Zealand FPI M/M

Equities Continue to Rally Amidst USD Weakness

The correction in the Dollar has been welcomed by equities traders with stock markets across the globe enjoying a decent recovery rally. Even the DAX 40, has shrugged off ECB tightening expectations, to trade up by around 4% off last week’s lows. In the US, the moves have been even stronger with the S&P up almost 6% off last week’s lows. With a very light data schedule today, equities movements are likely to remain tied to USD ahead of tomorrow’s US CPI release.

EUR Leading in FX, Safe-havens Weakest

In FX, the fall back in USD has seen the Euro springing into pole position as we kick off the new week. Boosted by last week’s rate hike and firmly hawkish outlook from the ECB, EUR has been attracting plenty of demand. Unless we see a strong uptick in USD this week (US CPI to be the main decider), EUR looks well positioned to stay strong near-term.

With risk markets trading higher, benefiting from the drop in USD, safe havens have been sent lower at the start of the week. Both JPY and CHF have seen very low demand as traders attempt to play the USD correction in higher-yielding currencies such as AUD and CAD.

GBP Hit by Data Weakness

GBP has seen some weakness today in response to a slew of weaker-than-expected data. Monthly GDP was seen at 0.2% vs 0.3% expected. Industrial production and construction output readings were both below forecasts also.

Metals & Oil Rallying on USD Soft-Patch

In the metals and commodities space, weakness in the US Dollar is helping keep prices supported at the start of the week. Both gold and silver have enjoyed a decent recovery off recent lows. Oil prices too have turned sharply higher off last week’s lows. If USD continue to correct this week, we can expect this theme to continue.