Currency markets are back to treading water this morning, with the dollar remaining effectively unchanged against its major rivals as traders brace for another round of inflation prints. Treasury yields are creeping higher, equity futures are setting up for a positive open, and global oil benchmarks are flatlining even as an Iranian attack on Israel comes into closer prospect.
The British pound is trading with a slightly firmer bias after the jobless rate fell unexpectedly, seemingly reducing the impetus for monetary easing from the Bank of England. According to data released by the Office for National Statistics earlier this morning, the unemployment rate fell to 4.2 percent in the three months to June, undershooting the 4.5-percent consensus forecast, but this was somewhat tainted by still-low survey response rates. Annual private sector wage growth—collected under a separate and more accurate survey—cooled to 5.2 percent, decelerating to its slowest pace in two years.
Markets now see the Monetary Policy Committee struggling to achieve consensus on a second consecutive rate cut in September, with traders assigning just one-in-three odds to a move. With last month’s positioning-related adjustment having run its course, and just 42 basis points in easing priced-in before year end—against 68 in the euro area and 100 in the US—we think the currency has room to move higher as it catches up to a narrowing in rate differentials. Tomorrow’s inflation data, which is expected to show price growth remaining slightly above the Bank’s target, could provide the trigger for a short burst of strength.
Japan’s yen is back on the defensive, trading roughly half a percentage point weaker against the dollar as global safe haven demand ebbs and onshore stock markets rebound. The Nikkei index jumped more than 3.5 percent during last night’s session as investors scooped up shares in the most profitable exporters, and appears poised for further gains ahead of parliamentary testimony from Bank of Japan Governor Ueda on August 23. The Diet reportedly plans to summon Ueda to explain the market disruption that unfolded after the central bank’s decision to raise rates on July 31, and he is expected to express a more dovish outlook than was communicated during the press conference following the meeting.
The carry trade could yet suffer another reversal, but we doubt the fundamental transaction economics will shift dramatically in the yen’s favour. With rate differentials likely to remain tilted against the currency for many months, if not years, into the future, onshore investors are powerfully incentivised to seek higher returns elsewhere, and speculators seem likely to return – albeit more cautiously than in recent months. Several major money-centre banks have suggested that the exchange rate could promptly soar toward the 110 mark, but we hold more circumspect views, expecting gains to be capped in the mid-130’s, with a move back through the 150 threshold remaining possible – even if Ueda & Co. turn more hawkish.
This morning’s producer price index report is expected to show pipeline costs continuing to cool in July. The portfolio-management cost category could generate a slight acceleration in the Federal Reserve’s preferred inflation measure – the core personal consumption expenditures index – when it is released later this month, but the feed through to tomorrow’s consumer price index is seen remaining fairly tame.
We don’t have any special insight into where the July consumer price index will print, but markets look unprepared for a shock. After persistently overshooting expectations through much of the post-pandemic period, the inflationary trajectory has become much more predictable, with the difference between consensus forecasts and realised results – captured here in Citi’s Inflation Surprise Index – gradually narrowing over time. This suggests that tomorrow’s data could trigger another round of position adjustment as traders revise expectations for the Fed’s policy trajectory: core prices are seen increasing 0.2 percent on a month-over-month basis, meaning that a sub-0.1 percent outcome could ratify pricing for four (or more) rate cuts in the autumn months, while a print above 0.3 percent could upset the whole apple cart, forcing markets to contemplate a later kick-off to the central bank’s easing cycle.
