The Morning Update

The USD extends losses, oil prices are steady, and equity markets are up, while US yields ease ahead of today's US inflation data. The USD drops to near three-month lows, EU equities rise for a fourth day, US futures head higher and US yields dip on expectations that slowing US inflation levels will weaken the case for further Fed rate hikes. The June US CPI is expected to slow to 3.1% from 4% in May, with the Key core inflation rate (ex Food & Energy) expected to ease from 5.3% to 5% in June. If the data comes in as expected markets are pricing in a 92% chance of a 25bps Fed Hike on July 26th, with expectations the Fed will pause rate hikes after that. Alongside the US inflation data, the CAD BoC Interest Rate Decision will be in focus.

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In other news. The G7 to offer Ukraine security 'framework', Zelensky asks NATO allies for more arms. The Bank of England says the UK economy is coping with higher interest rates. Dispute over China's embassy in London strains ties with Britain. North Korea fires suspected ICBM ahead of South Korea, Japan summit. Ban on national digital taxes extended to buy time for OECD deal - FT. Canada, Laurentian Bank starts strategic review, possible sale. UAW president says union prepared to strike Detroit Three.

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In currency news. The USD drops as markets bet on weak US inflation data. China's yuan firms to a 3-week high on the central bank's strong fixing and a weakening USD. Commodity currencies rebound as risk-on sentiment improves on the prospect of a Fed pause. CNY gains 0.3%, while Asian currencies are up 0.2% on average vs US$. Trading currencies are positive with NZD flat, ZAR, AUD, CHF & MXN up 0.1%, SEK gaining 0.25%, while JPY & NOK strengthening 0.5% vs USD.

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Oil prices hold steady stuck between supply concerns and economic uncertainty. The CAD edges towards two-week highs vs US$ on the combination of a weakening USD, stronger commodity prices on improving risk sentiment, and anticipation that the BoC will hike interest rates by 0.25bps to 5% today. Ahead of the BoC rate decision, markets will focus on the US inflation report, if we see any deviation from the expected levels this would be the primary driver for market volatility today. Markets will be focused on the BoC press conference at 11 am for guidance on interest direction for the rest of 2023.

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EURCAD is flat ahead of US CPI & BoC interest rate decision.

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EUR holds above 1.1000 ahead of the US inflation report. Euro continues to trade in positive territory as investors are sidelined ahead of the US inflation report this morning. Improving risk sentiment as investors see the possibility that easing inflation pressure in the US could see the Fed pause interest rate hikes beyond its July meeting. The key focus for investors today will be the US Core CPI which is expected to ease to 5% from 5.3%, which would set the stage for one further hike and then a pause from the Fed.

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GBPEUR eases from near 1-year highs as the pound is sidelined heading into the US inflation report.

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GBP slips below 1.2950 ahead of the US CPI report. The pound slipped from its 15-month highs vs US$ as markets consolidate ahead of the key US inflation report today. BoE Bailey said, "I think there are some interesting pieces of evidence in labor market data, it's a continuation in some cases - if you look at the vacancy to unemployment ratio, for instance - of some signs of the labor market cooling". Credit Suisse commented the GBP is expected to continue to benefit from supportive yield differentials targeting 1.3000 GBP/USD, and .8450 EURGBP in the near term.

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