Daily Currency Update

USD - US Dollar

The USD weakened yesterday after US S&P Global PMIs showed unexpected declines. The composite index fell to 50.9, with manufacturing entering contraction at 49.9 and services also dropping to 50.9. These figures were surprising especially compared to the eurozone PMIs, which for the first time in 12 months exceeded those of the US. The eurozone showed a stronger service sector despite a weaker manufacturing sector. This challenges the notion of US growth exceptionalism. Upcoming US GDP data will reveal more about the economy's health. Currency markets might react, but major shifts in Fed expectations require changes in inflation, employment, or Fed statements. Key upcoming events affecting the dollar include PCE inflation data, the Fed meeting, and employment data.

CAD - Canadian Dollar

The CAD has pulled back from a two-week high, ending a five-day streak of gains, with its value now hovering around the upper 1.3670s. This retreat is influenced by a decline in crude oil prices, which follows diminished geopolitical tensions and worries about China's economic growth, weakening the CAD. Moreover, anticipation of a potential interest rate reduction by the Bank of Canada, spurred by decreasing inflation and slower economic growth, is placing downward pressure on the CAD, thus benefiting the USD/CAD exchange rate.

EUR - Euro

EUR/USD is consolidating around 1.0700, benefiting from the recent US-eurozone data divergence. However, inflation and employment data remain significant drags, suggesting caution with PMI-driven rallies. Today's focus is on Germany's Ifo surveys, expected to show improvement, though likely with minimal impact on ECB rate decisions. Despite expectations for a 75bp easing by the ECB, with consensus even among typically hawkish members like Joachim Nagel, the EUR/USD is not expected to rise significantly. The 2-year EUR:USD swap rate gap suggests a weaker EUR/USD. Continued strong equities are needed to maintain EUR/USD above 1.0700, given its yield differential.

GBP - British Pound

The pound rose nearly 1% against the dollar yesterday, driven by a weaker USD, positive risk sentiment, strong UK PMIs, and hawkish comments from Bank of England Chief Economist Huw Pill. Despite a dip in manufacturing PMI below 50, the service sector's strong performance (54.9) pushed the composite index to a yearly high. However, an unexpected £12.4bn increase in the UK budget deficit tempers expectations for further tax cuts before the election, posing long-term risks to sterling. The Bank of England's MPC appears divided, with Huw Pill noting continued concerns over inflation. The market has adjusted, slightly reducing expectations for rate cuts, though a 25bp decrease in August is still anticipated.