The Morning Update

The USD is steady, oil prices are lower, while equity markets and US yields are mixed reflecting a cautious mood to start the week. Currency and equity markets are sidelined as investors focus on inflation and interest rates after soft price data raised fresh worries about China's economic recovery. China's producer prices fell at their fastest pace in over 7 years in June, while consumer prices were near deflation, adding pressure on policymakers to use more stimulus to revive sluggish demand. US Treasury Secretary Yellen said on the weekend she wouldn't rule out the threat of a US recession, noting that it was "appropriate and normal" for growth to moderate and that inflation remains too high. This week's focus will be on the BOE Governor speech, the key US inflation report, and BoC Interest Rate Decision on Wednesday. China Trade, Eurozone Industrial production, US Initial Jobless claims & PPI Thursday, and US University of Michigan Consumer Sentiment on Friday.

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In other news. Nato Summit; leaders meet in Vilnius to talk about Ukraine, Sweden & Russia. US Treasury Secretary Yellen's China trip yields long meetings, 'cordial' tone, but no consensus. Dutch PM Rutte faces no-confidence vote after collapse of government. African leaders tell Putin to show his 'desire for peace'. US & Germany resist pressure to advance Ukraine's NATO bid. Russia accuses Ukraine and Turkey of flouting the prisoner exchange deal. Canada, BC port strike enters day seven as the union and employers association trade barbs.

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In currency markets. The USD recovers ahead of Wednesday's key US inflation report. CNY weakens after the weaker-than-expected domestic inflation data. AUD & NZD weaken on disappointing China data. NOK strengthens after data showed core inflation continued to rise in June and hit a fresh record. CNY slips 0.2%, while Asian currencies are down 0.15% on average vs USD. Trading currencies are mixed with CHF, ZAR & SEK easing 0.1%, JPY down 0.3%, NZD weakening 0.5%, AUD falling 0.8%, while outliers MXN edges higher 0.25%, and NOK rallying 0.6% vs US$.

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Oil prices ease after disappointing China data increases demand concerns. The CAD slips in early trading after weak China data put pressure on commodity prices as China's growth remains under pressure. This week's key focus for the loonie will be the US inflation report and the BoC interest rate decision on Wednesday. Friday's Canadian stronger-than-expected domestic jobs data has bolstered expectations that the BoC may hike another 0.25% on Wednesday. Today, Fed speakers and BoE Governor Bailey's speech will be in focus.

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EURCAD edges higher to a fresh 2-month high after disappointing China data keeps pressure on the commodity-sensitive Canadian dollar.

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EUR holds above 1.0950 despite weaker Euro data. The Sentix Investor Confidence, which is composed of 36 different indicators and is a survey that shows the market opinion about the current economic situation and the expectations for the next semester came out weaker than expected. Euro edges lower in early trading amid a firm US$ on soft China data, weaker Sentix, and mixed ECB commentary. We expect Euro to be somewhat sidelined as investors focus on Wednesday's key US inflation report and Thursday's Eurozone Industrial production.

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GBPEUR eases in early trading ahead of the BoE Governor's speech today.

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GBP retreats from Friday's 2023 highs vs US$ as dollar demand returns ahead of Wednesday's US inflation report. The rebound in the US yields and mixed market mood after disappointing Chinese data helped revive US dollar demand. On Tuesday focus will be on the UK labor market data, with investors paying close attention to the wage inflation reading. On an annual basis, average earnings excluding bonuses are forecast to rise 7.1% in the 3 months to May. The BoE raised its policy rate by 50bps to 5% in June in response to persistent inflation. Today BoE Governor Bailey's speech will be the primary focus for the pound today.

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