The Morning Update

The USD strengthens, oil prices steady, and equity markets are up, while US yields ease as risk sentiment improves. The US$ rebounds from 15-month lows, while equity markets extend gains with the DOW posting 7 straight days of gains as global risk sentiment improves. The UK's persistently high inflation levels finally showed signs of cooling, dropping to 7.9% below expectations and offering some relief to the Bank of England. In Europe, its inflation levels edged higher and helped set the stage for a 25bps hike by the ECB next week. Today's focus will be Goldman Sachs, Netflix Inc & Tesla Inc earnings, US Building Permits, Housing Starts & BoE's Ramsden speech to help provide intraday direction to currency markets.

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In other news. Dockers on Canada's west coast reject contract proposals and return to strike. The IMF warns Pakistan may have to restructure debt if goals are not met. "Spain First"; Vox party on brink of sharing power-FT. Kyiv says Russia targets grain infrastructure with strikes on Ukraine's Odesa port. Record heat wave grips China as flood toll rises in South Korea. Tesla lays out steps to building Europe's biggest car plant. Nissan, Renault ready to announce new alliance deal in days. Wildfires burn for the third day in Greece, EU allies send aid. Global power demand growth to rebound in 2024 after slowdown, IEA says.

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In currency markets. The pound weakens after cooler-than-expected inflation data. Russian Rouble slides to 16-month lows vs Euro. JPY weakens on dovish BoJ comments. Commodity currencies remain under pressure from ongoing China weakness. CNY extends losses down 0.5%, Asian currencies fall 0.25% on average vs US$. Trading currencies come under renewed selling pressure as the USD rebounds with JPY & AUD tumbling 0.7%, NZD, ZAR & SEK weakening 0.5%, NOK sliding 0.3%, CHF dipping 0.1%, and MXN is up 0.1% vs US$.

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Oil prices edge slightly higher as it continues to balance between ongoing demand concerns vs persistent supply strains. The CAD slips in early trading, but continues to outperform its peers on improving domestic outlook as annual inflation continues to ease while housing starts jumped 41% in June. Domestically focus shifts to Friday's CAD retail sales for further signs of easing inflation levels. Today's focus will be on US data to help provide intraday direction to the loonie.

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EURCAD holds steady below 4-month highs, but after higher-than-expected Eurozone inflation levels today, we expect to see the ECB hike interest rates next week which should help the Euro maintain its current strengthening momentum.

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EUR continues to straddle 1.1250 as investors balance a firmer USD vs higher-than-expected Eurozone inflation levels. Euro has been surprisingly resilient and highlights investors' patience ahead of the ECB & Fed interest rate decision next week. Domestically Eurozone core inflation quickened more than expected in June to 5.5% vs estimates of 5.4%. Bloomberg economists say "We expect sticky core inflation through summer will dominate the debate and push the ECB to deliver a last hike in September, to a terminal rate of 4%. The small upward revision to the core reading to 5.5% illustrates this tension".

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GBPEUR tumbles as the pound weakens after domestic inflation levels fell below 8% for the first time in over a year, and is the first positive sign that the persistently high UK inflation levels are finally showing signs of cooling.

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GBP tumbles near 1% vs US$ as domestic inflation levels soften. The UK annual CPI fell sharply to 7.9% in June falling from the 31-year-high it recorded in May at 8.7%. The pound weakened sharply on the news as investors scaled back bets on future increases in borrowing costs as CPI retreated to its lowest levels since March 2022, although it remains above the inflation rates in other major economic peers. The BoE is still anticipated to hike interest rates by 50bps on August 3rd, but it does open the window for the BoE to take a less hawkish tone into Q4/23. Intraday US earnings and data will help provide some intraday direction to the pound.

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