The Morning Update

The USD is flat, oil prices are steady, equity markets are up, and US yields are mixed ahead of US inflation report. The USD looks set to snap five-weeks of losses, while the euro dropped to a two-week low as inflation cools across the eurozone. Global equity markets are up, with the European markets at record highs, boosted by the prospect of an ECB rate cut in September. Eurozone inflation levels fell to their lowest levels in three years, with levels across the 20 countries slowing to 2.2% from 2.6% from lower energy costs. Investors will be focused on the Core Personal Consumption Expenditures report, the Fed's preferred inflation gauge, which is forecasted at 2.7% in July from 2.6%. If the Core PCE comes in as forecasted, markets are expecting the Fed to cut by 25 basis points on September 18th, with expectations of a 50 bps cut falling to just 34% according to the CME Group's FedWatch Tool. Elsewhere, Bitcoin firmed, hovering below $60k, Iron ore edged higher, up 10% in 10 days, and oil prices remain firm on worsening supply disruptions in Libya. Alongside the Core PCE, investors will be monitoring CAD GDP, US Personal Income, US Personal Spending, Chicago Purchasing Managers Index, and Michigan Consumer Sentiment Index to provide direction to currency markets today.

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In other news. Eurozone inflation falls to 2.2% in August. UK mortgage lending and approvals rise to their highest levels since 2022. Italy weighs a sharp tourist tax rise in future over the impact of visitors. Telegram's financial future in doubt as its chief faces a criminal inquiry. Germany deports Afghans for the first time sine the Taliban's return to power. Libya's central bank governor flees a divided country over fear for his life. China's factory activity seen extending its declines in August. Opioid-related deaths in Alberta decline again in May, dropping 55% from the same time last year. Lululemon cuts guidance, misses sales after botched product launch.

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In currency markets. Euro slips to a two week low, dropping below 1.1100 are looking vulnerable for a retest of 1.1000 with increasing expectations of an ECB rate cut in September. CNY is heading for its stronger performing month in 2024 on higher corporate demand. ZAR hits a new 13-month high on positive signs of an economic turnaround. CNY is up 0.1%, while Asian currencies are flat on average against the USD. Trading currencies are mixed, with JPY, SEK, NOK & CHF down 0.2%, AUD & NZD flat, and ZAR & MXN rallied 0.6% against the USD.

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In commodity markets. Oil and Wheat prices are flat, natural gas, silver & gold prices are down by 0.4%, while copper & soybean prices strengthened by 0.7%.

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CAD holds steady amid mixed commodity prices, a firmer USD, caution ahead of CAD GDP report and the critical US Core PCE report. Domestically, yesterday saw Cad Current Account Q2, the net flow of current transaction into/out of Canada turn bearish with the net outflow increasing to -8.48 billion vs expectations of -5.9Billion. Investors focus on today's CAD GDP which is expected to ease to 1.6% from 1.7% Q2 annualized. The slowing economic data continues to set the stage for another 25 bps easing by the BoC at next weeks meeting, with many pundits now expecting to see the BoC cut a further 3 times beyond September. Intraday, the CAD GDP and US PCE will be the primary driver for the loonie today.

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EURCAD is ending a volatile month of trading flat, after seeing the euro rally to 1.52 and then retreat back to 1.49, as investors exit the euro following falling inflation levels, setting the stage for an ECB rate cut in September.

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EUR continues under selling pressure, retreating below 1.1100 ahead of the US inflation report. Despite strong selling pressure this week, the euro is still on track to have gained 2% against the USD in August. Domestically, we have seen inflation levels across all 20 eurozone countries return to near 2022 levels, with the EU Harmonized Index of Consumer prices y/y dropping to 2.2% in August, while the unemployment level improved slightly to 6.4%. With the eurozone inflation levels nearing the ECB 2% target, speculation has heightened that the ECB will cut rats by 25% in September. Intraday, the US PCE will be the primary drivers for markets today, if we see a higher than expect print, we could see the Euro come under further selling pressure.

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GBPEUR continues to edge higher, wiping out all of August losses and rallying from a low of 1.1600 towards 1.1900 over the last three weeks to finishing in positive territory. The primary driver for the pound has been the expectation that the BoE will keep its domestic rates on hold in September, while the ECB is expected to cut its interest rates as eurozone inflation levels continue to fall.

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GBP is off its weekly highs above 1.3200, but steadies above 1.3150 heading into the crucial US inflation report. The pound has strengthened 2.5% against the USD in August and is up over 4% in the last six months primarily supported by the prospect that the Fed will start to ease it's interest rate policy, with the prospect of up to 1% of cuts before the end of 2024, while the BoE is only expected to cut a further 0.25% in 2024. Soc Gen's chief economist Juckes, said the pound had also benefited from political upheaval in France undermining the Euro. if this perceived risk fades, sterling could weaken "pretty easily". Intraday the US inflation report will be the key driver for the pound.