USD: Balance of risks tilted to upside
Global risk sentiment continues to be challenged by adverse developments across the world. The US banking earning season has kicked off on the wrong foot, China reported the weakest growth numbers (0.4% YoY, vs 1.2% expected) in more than two years, new Covid variants are boosting infection and hospitalisation numbers globally, Italy is facing a new political crisis and markets keep flirting with the idea of a 100bp Fed hike in July.
With fears of global recession adding pessimism to the overall picture, we struggle to see a material recovery in sentiment for now. European equity futures are showing signs of a rebound this morning, but that seems largely related to hopes that Mario Draghi may stay as Italian Prime Minister. US stocks could continue to feel the strains of multiplying downside risks today.
Equity instability may continue to put a limit to any dollar correction for now, and further upside risks to the greenback may come from a further repricing higher in Fed’s rate expectations. Our view is that there isn’t enough reasoning to back a 100bp move in July, but the Fed’s Chris Waller (a known hawk) suggested that this is not off the table, and we cannot exclude that markets may continue to speculate on such prospect. We’ll hear from another big FOMC hawk, James Bullard, today, as well as from the more moderate Raphael Bostic and normally more dovish Mary Daly.
A number of US data releases will also be in focus today. The University of Michigan indices – and in particular the inflation gauges – will be closely watched, but Empire Manufacturing for July, retail sales, and industrial production for June can also have some market impact.
A stabilisation in the dollar around current levels is possible today, but we continue to highlight: a) limited scope for a correction; b) a balance of risks still tilted to the upside in the near term. Expect more volatility around EUR/USD parity to keep affecting other USD-crosses.