The Morning Update

The USD is flat, oil prices edge lower, equity markets are up, and US yields ease as markets await the Fed's preferred inflation gauge. The USD index holds steady, while commodity currencies remain under pressure, and the JPY has its strongest week in three months. Equity markets are up, but underlying concerns remain in the tech and auto sectors as investors shift their focus to the PCE inflation report today. Today, the PCE data is expected to show spending and income both grew, while the PCE core inflation is expected to slow to near its 2% target on a three-month annualized basis. Elsewhere, oil prices remain under pressure and are set for their third weekly decline on demand concerns and the prospect of a Gaza cease-fire. Bitcoin rallied by 4%, while Mercedes-Benz Group earnings plummeted 19% in Q2 as sales of electric vehicles dropped and demand in China weakened. Today, the US Core Personal Consumption Expenditures - Price Index is a focus. Personal Income & Spending, Michigan Consumer Sentiment Index, and UoM 5-year Consumer Inflation Expectation.

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In other news. Obama endorses Harris for president as the party unites behind her. Trudeau pledged to slow immigration, but the Bank of Canada has doubts. Rainfall to alleviate wildfire that blazed the Canadian Rockies. Sabotage hits French railways hours before the Olympics opening ceremony. The US arrests Mexican drug lord 'El Mayo' and El Chapo's son in Texas. China veers off the beaten path with consumer stimulus. Under pressure in China, Mercedes trims profit outlook. Russian drones knock out Ukrainian power facilities near Kyiv. Typhoon Gaemi lashes China after pounding Taiwan and the Philippines.

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In currency markets, AUD and NZD are set for their biggest two-week drops in almost two years, while CAD edges off 8-month lows. The Chinese yuan edges off its two-week highs, while Japan urges G20 vigilance against excessive FX fluctuations. CNY weakens by 0.3%, while Asian currencies slip by 0.1% on average against the USD. Trading currencies remain mixed, with JPY & CHF down 0.2%, NZD & SEK firms by 0.15%, AUD & NOK gains by 0.3%, and MXN & ZAR rallying 0.6% against the USD.

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In commodity markets. Oil and soybean prices weakened by 0.45%. Natural Gas prices fell by 0.7%. Gold prices strengthened by 0.8%. Silver prices are flat. Copper prices firmed by 0.25%, and wheat prices gained by 0.4%.

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CAD continues to struggle against its G10 peers following the BoC interest rate cut and Governor Macklem's dovish comments earlier this week. The Loonie is lingering near 8-month lows against the USD as investors are now pricing a roughly 60% chance the BoC will cut again in September, potentially taking domestic rates to 4.25%. Intraday, the primary focus will be on the US Core PCE, the Fed's preferred inflation gauge, which will be seen as a key signal for a Fed decision in September. In Q3, we continue to expect the loonie will remain under pressure with its peers as commodity prices continue to struggle with global growth concerns and the increasing interest rate divergence between CAD and its G7 peers.

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EURCAD has strengthened 2.3% in July, holding near 8-month highs with the increasing prospect of a greater interest rate divergence between the EU & Canada in the 2nd half of 2024.

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EUR continues to straddle 1.0850 as investors await the critical US inflation report. Euro remains in a preferred position with investors who are concerned with the prospect of a Trump victory, which would put pressure on the USD, alongside weakening global growth adding pressure to the commodity currencies. Domestically, investors will be focused on next week's eurozone and German GDP and inflation reports, which will provide guidance for an ECB interest rate decision in September. Intraday, the US PCE results will be the primary driver of direction to currency markets today.

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GBPEUR finds support after a week of declines as investors wait for today's Core PCE report.

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GBP seven-day weakening trend stalls as the pound finds support ahead of the US inflation report. The pound has suffered several days of weakness as investors increasingly expect that the Bank of England will cut interest rates, with bets increasing that the bank may cut as early as its August 1st meeting. "If the BoE does cut interest rates next week, it could be a bit of a setback for GBP, " Said Foley, Rabobank, "I think we are in for a little bit more volatility." Intraday, we expect the pound to find intraday support above 1.2800.