FX daily: Warsh should keep the Dollar supported

The dollar remains well bid and holding onto the gains made since last month's FOMC meeting. Given the absence of forward guidance from the Fed now, there is going to be intense focus on any comments from the new Fed chair, Kevin Warsh. He speaks on a central bank panel today at the ECB's Sintra conference. A focus on price stability can keep the dollar bid.

USD: Warsh's comments should be Dollar supportive

The last time Kevin Warsh spoke to financial markets, the dollar surged. This was at his debut FOMC meeting last month, where a dramatically shortened statement and a central commitment to price stability were read as hawkish by the markets. A hawkish set of Dot Plots clearly helped too. The message coming from that press conference was that the Fed had missed its inflation target five years running and would not let that happen again.

Kevin Warsh will speak in Sintra at 1500CET today, his first remarks since the FOMC meeting. Since then, he has seen another core PCE print at 3.4% YoY and another bumper jobs report. Consumer confidence has surprised on the upside and, despite recent volatility, US equities remain closer to the upper end of recent ranges and are delivering near double-digit year-to-date returns. Given this backdrop, it is hard to see Warsh softening his hawkish tone.

While financial markets already price a sizeable 45bp of Fed tightening by the second quarter of next year, there is still a risk that the tightening is expected earlier. 22bp of tightening is priced for the September meeting and 8bp is priced for the next meeting on 29 July. A pushback against this market pricing would be a big surprise today and instead we suspect his comments present upside risks to the dollar today. Some in the market even think a July hike is possible.

Before Warsh speaks, we will see the ADP employment report for July. Any upside surprise above the +120k area could also prove dollar positive. And later in the day, US ISM manufacturing data should show an ongoing expansion.

DXY has held support at 101.00 and could push back to the 101.70/80 area as the market reacts to rare communication from the new Fed chair.

EUR: ECB will try to hold the line at Sintra

As our team have been discussing this week, we think it is too early for the ECB to abandon its tightening rhetoric – even though a second hike in September could be a policy mistake. The ECB script remains that last month's rate hike was not an insurance move, and it sounds like the ECB wants to talk tough to ride out this inflation hump and ensure that second-round effects do not emerge. That suggests market pricing of one ECB rate hike by early next year can stay in money market curves.

Eurozone data today will be the flash release of June CPI data, where headline and core are both expected to soften slightly.

EUR/USD could make a break back to the 1.1325 lows on Warsh today.

CAD: USMCA review poses risks

In theory, the review of the USMCA trade agreement – the agreement that replaced NAFTA – is due today. Most expect this will be delayed as the US, Canada and Mexico haggle over how to adjust the terms. It seems the US wants to strengthen some of the rules of origin language.

Clearly, any trade renegotiation activity proves a threat to Canada and Mexico. We see downside risks to the Canadian dollar here, also suffering from the strong dollar and a dovish Bank of Canada wanting to look through the inflation spike. Expect USD/CAD to hold above 1.42, with outside risks to 1.45 this month if USMCA discussions go wrong or the dollar overshoots.

CEE: Lower inflation in Poland increases pressure on zloty

Yesterday's June inflation in Poland brought another surprise to the downside, with a decrease from 3.1% to 2.5%, exactly the target of the National Bank of Poland. Although food prices were the main surprise to the downside in May, in June we saw a decrease across the entire basket, but food again remains the main factor. Core inflation is unlikely to have changed much, with our estimate between 3.0-3.1%.

The market has priced out all rate hikes and now dovish numbers support pricing rate cuts with around 10bp priced in the longer term. We still expect some deterioration in inflation towards the end of the year, which should leave the National Bank of Poland policy rate unchanged for a longer period. But in the meantime, we can see pressure on lower market rates which should further undermine the zloty's strength. EUR/PLN tested 4.300 as we expected, but for now this level remains strong resistance. If the NBP indicates openness to a rate cut next week, it could be a signal for EUR/PLN to continue higher.

Elsewhere in the region today we will see PMIs across the board, which have remained resilient since the start of the US-Iran conflict. Global relief could bring some improvement today. In the Czech Republic, mid-year budget figures will be published, which so far indicate an on-track execution this year, and in the middle of the month, MinFin is expected to publish a mid-year update on its funding strategy. Czech government bonds should see significantly lower supply than initially expected due to surprisingly strong demand for retail bonds.

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