The Morning Update

The USD weakens, oil prices are flat, and equity markets are up, while US yields ease as the risk-on mood improves. The USD sinks to a 15-month low, down 7% y/y after the US inflation rate slid to a two-year low. European equities are in the midst of their longest rising streak since mid-April as concerns over higher interest rates and a potential recession ease. The US two-year yields the more sensitive to imminent policy moves dropped as investors unwound bets that the Fed would raise rates again following an expected hike in July. Today focus shifts to US Initial Jobless claims, Monthly Budget Statement, and the key Producer Price Index to help provide intraday direction to currency markets.

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In other news. China's exports fall the most in 3-year as shipments to the US, EU, and ASEAN are all down double digits, while imports fell for the 4th straight month. Bank of Canada deploying forecast 'fiction', Scotiabank economist says. Wagner fighters start handing over their weapons-FT. Canada, the labor minister intervenes in the BC port worker's strike. Indian PM Modi to join President Macron at Bastille Day parade as India & France times grow. UK estate agents gloomiest since 2009 as mortgage rates bite-FT. PepsiCo said it expects its 2023 organic revenue to rise 10%, compared to the prior forecast of an 8% increase.

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In currency news. China's yuan stalls amid weak trade/export data. THB extends gains despite political uncertainty. GBP hits 15-month high after BoE banks stress test. The USD drops 3% year to date after US inflation levels ease. The CNY is flat, while Asian currencies gain 0.3% on average vs US$. Trading currencies are positive with JPY & MXN up 0.1%, NOK firms 0.35%, CHF & SEK gaining 0.45%, ZAR advancing 0.65%, and AUD & NZD rallying 0.9% vs US$.

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Oil prices hold steady as markets balance demand concerns as China's economy stalls offsetting tightening supply from OPEC. CAD holds near 2-week highs on the combination of the BoC hiking interest rates to 5% on Wednesday and on the back of broader US weakness after US inflation levels fell to 2-year lows increasing expectations the Fed will pause rate hikes beyond July. Intraday markets will be focused on US jobs and the key PPI data to help provide intraday direction.

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EURCAD advances to a fresh two-month high, up 1.3% in July as markets focus on the ECB rate decision next and concern for commodity prices after China's weaker-than-expected trade data.

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EUR extends gains towards 1.1200 amid a weakening US$. Euro breaches 1.1150 trading close to fresh 2023 highs amid an extended US$ weakness after US inflation levels eased and increased speculation that the Fed will pause interest rate hikes beyond July. Euro strength may be capped at 1.1200 after Fed policymaker Kashkari reiterated today that policy rates might need to be higher if inflation proves to be more entrenched than expected. The focus will be on today's US core PPI for any inflationary signs, which could provide fresh support to the USD.

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GBPEUR strengthens after the BoE banks stress test showed UK's largest lenders have enough capital to ride out a potential economic crisis, increasing expectations for more BoE rate hikes.

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GBP rallies above 1.3050 amid ongoing USD selling and anticipation of further BoE rate hikes. The pound extends gains to 15-month highs vs US$ as investors continue to focus on expectations of further BoE interest rate hikes after major UK lenders pass the bank's stress test. Domestically the UK economy shrinks to 0.1%, narrowly avoiding recession as strikes and extra bank holidays in May weighed on growth. The pound remains on a positive trend on expectations of widening interest rates vs its peers as the UK continues to tackle surging domestic inflation levels. Intraday US PPI will be a primary driver of currency market direction today.

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