Foreign Exchange Commentary

Summary

• Canadian dollar rises marginally as focus shifts to Trump, Zelenskiy meeting.
• U.S. dollar climbs the second day in three today as the Japanese yen and euro currency underperform pears.
• Overall, U.S. dollar was steady overall as volatility seller dominate.
• Euro currency has remained in a $1.16 to $1.1750 range since August 7^th.
• U.S. Treasury yields are   rangebound near 4.32% on the 10-year bond.
• U.K. pound sterling likely to rise if British inflation data exceeds forecasts.
• U.S. July retail sales rose 0.5% month/month; estimate +0.6%.
• San Francisco Fed President Mary Daly stated two interest rate cuts this year is a ‘good projection.’
• U.S. July industrial production falls 0.1% month/month; estimate flat.
• Federal Reserve reverse repo facility use $28.8 billion, lowest since 2021.
• University of Michigan preliminary August consumer sentiment falls to 58.6; estimate 62 last Friday; earlier last week consumer prices were well behaved, however producer prices were much higher than expected.
• Speculative traders cut dollar shorts for fifth week by end of last week: CFTC.

Noteworthy

• U.S. Dollar rangebound last week after no Ukraine breakthrough
• Euro volatility is quiet now, but Jackson Hole may change that

The U.S. dollar digested steady consumer price inflation data; however, markets were surprised by a higher-than-expected reading on wholesale price inflation last week. U.S. retail sales were largely in line with estimates as the U.S. consumer appears resilient.

However, U.S. companies could begin to pass on the cost of tariffs to consumers, increasing concerns about the economy and causing the dollar to weaken, one major bank said in a customer note. Elevated wholesale prices (PPI) (0.9% MoM vs. 0.2% expected) and in-line consumer prices (0.2% MoM vs. 0.2% expected) suggest that firms are eating the costs for the time being.

This would increase inflationary pressures and probably cause consumers to reduce spending, the note continued. “Since U.S. consumers are the main drivers of U.S. growth, this would likely increase concerns about the real economy.”

Given the Federal Reserve faces political pressure to cut interest rates, it is questionable whether the central bank would halt policy easing in this higher inflationary scenario, the note states. Several large, money center banks forecast the euro will rise steadily against the dollar until the end of 2026.

The U.S. dollar rises marginally as investors await the Federal Reserve’s Jackson Hole economic symposium later this week. The U.S. dollar has remained relatively well-behaved as a consequence although many still worry that the U.S. dollar could face a bit more downside.

Fed Chair Jerome Powell will speak Friday at the event and market will be looking for any hints on whether the Fed will resume cutting interest rates in September as widely expected. The U.S. dollar could strengthen near week’s end if Chair Powell suggests in his speech that a September interest rate cut is not as highly expected as priced by markets.

Powell’s Jackson Hole speech has often been used to send important policy signals and last year he said it was time to adjust policy before the Fed cut rates at the next meeting, Deutsche Bank analysts say in a note.

U.K. pound sterling could break above the key $1.36 resistance level if U.K. inflation data on Wednesday exceed expectations, one strategist said in a note. “With private wage growth hovering around 5%, service-sector inflation is expected to remain elevated.” Higher-than-expected inflation would prompt markets to further scale back interest-rate cuts by the Bank of England, the communication stated.

Markets are pricing in just fifteen basis points of rate cuts by year-end, LSEG data show. The Bank of England’s (BOE’s) narrowly approved rate cut earlier this month prompted markets to trim rate-cut bets along with last week’s strong wage growth data and better-than-expected second-quarter economic growth data. Sterling reached a one-month high of $1.3594 on Thursday last week.

Elsewhere, the Russian ruble could weaken over the coming year as a resolution to the Russia-Ukraine conflict looks unlikely, Commerzbank said in a brief. European leaders and Ukraine President Volodymyr Zelensky will meet with President Trump in Washington Monday following Friday’s summit between Trump and Russian President Vladimir Putin. While Friday’s meeting between President Trump and Russian President Putin did not result in a breakthrough, Trump said Putin had accepted that any peace deal would need to include the presence of Western troops in Ukraine. U.S. Secretary of State Rubio said Sunday that a major focus of the Monday talks will be security guarantees

Putin wants a peace treaty that allows Russia to take more Ukrainian territory. “It is difficult to see how this path leads to a solution where some sanctions on Russia will be removed in any foreseeable timeframe,” Ghose says. Russia’s economy will continue to face drags with exports and imports slumping and oil and gas revenue contracting, he says. The dollar rises 0.1% to 80.2000 rubles. 

Finally, the Singapore dollar is steady against its U.S. counterpart in the Asian session and may consolidate for most of this week. The major driver for this week will likely be the greenback’s reaction to Fed Chair Powell’s speech at the Jackson Hole Economic Symposium on Friday, Commonwealth Bank of Australia’s (CBA’s) Global Economic & Markets Research team says in a note. The Japanese yen mostly weakened against other G-10 and Asian currencies in early session trading amid hopes for a possible Russia-Ukraine peace deal. The U.S. dollar index (DXY) is rising and is at 98.17 as of this writing.

The USD could strengthen on Friday if Powell suggests in his speech that a September rate cut is not highly expected as priced by markets, the foreign exchange analyst team added.