Dominant asset drivers to be aware of this week include Global PMIs and the Bank of Canada’s (BoC) rate announcement on Wednesday, the advance estimate for US GDP growth on Thursday and the US PCE Price Index on Friday.

Bank of Canada Widely Expected to Reduce Rates

The BoC is anticipated to reduce its Overnight Policy Rate for a second consecutive meeting on Wednesday, scheduled to make the airwaves at 1:45 pm GMT. Swaps traders are now pricing in 63 basis points of easing for the year, with this week’s meeting pretty much fully priced in at this point (-24 basis points).

Following last week’s Consumer Price Index (CPI) inflation numbers, markets witnessed a dovish rate repricing. Contrary to markets expecting a +2.8% rise, year-on-year CPI inflation rose +2.7% in June, easing from +2.9% in May, and has been comfortably nestling within the BoC’s 1%-3% target range since the beginning of this year. Month-on-month inflation for June fell -0.1%, down from +0.6% in May, marking the first drop since late 2023. The average of the BoC’s two core measures – CPI median and trim – also slowed to +2.75% from +2.8% in May.

Labour data out of Canada also shows signs of softening, with unemployment for June rising to its highest level since the beginning of 2022 at 6.4% and employment change declining by -1,400.

In addition to the rate announcement, traders will receive the rate statement and updated Monetary Policy Report, which is released quarterly and provides an outlook of the central bank’s forecasts for growth and inflation. With the rate cut almost fully priced in at this point, a reduction will not surprise; thus, the market reaction should be limited for a cut. Attention, therefore, will shift to the central bank’s language, particularly regarding future rate reductions this year. Should the BoC strike more of a dovish tone, we can not only expect weakness in the Canadian dollar (CAD), but it may trigger growth fears in the US.

Global PMIs

Wednesday also welcomes the flash S&P Global Purchasing Managers’ Index (PMI) for the eurozone, the UK, and the US.

In Europe, the eurozone PMIs will be out at 8:00 am GMT. Following the European Central Bank leaving all three of its key benchmark rates on hold last week (as well as providing little in the way of updated guidance) and inflationary pressures softening to +2.5% in June from +2.6% in May, any evidence of softness in manufacturing and services activity could strengthen the odds for a rate reduction at September’s meeting, consequently weighing on the euro (EUR). Money markets currently show a 67% probability of a cut priced in for September. Economists’ estimates indicate that the manufacturing PMI will increase to 46.1 in July from June’s reading of 45.8 (estimate high/low between 46.8 and 45.5); for the services PMI, expectations suggest a slight uptick to 53.0 in July from June’s 52.8 print (estimate high/low between 53.5 and 51.5).

Across the Channel in the UK, manufacturing and services PMIs will be released at 8:30 am GMT. Estimates heading into the event indicate that the manufacturing PMI will increase to 51.1 in July from June’s reading of 50.9 (estimate high/low between 51.6 and 50.5); for the services PMI, expectations show an increase to 52.5 in July from June’s 52.1 print (estimate high/low between 53.5 and 51.6). Despite last week’s CPI inflation data holding at the BoE’s inflation target of +2.0% (market consensus: +1.9%), the concern/focus remains on elevated wage growth and services inflation. This week, a broad miss in data would likely weigh on gilts and sterling (GBP) and potentially trigger a dovish rate repricing. As of writing, markets are pricing in a 50% chance that the BoE will step up and cut rates on 1 August.

Stateside, US manufacturing and services PMIs will be released at 1:45 pm GMT. Market forecasts suggest that the manufacturing PMI will increase slightly to 51.7 in July from 51.6 in June (estimate high/low between 52.0 and 51.0); for the services PMI, expectations show a decrease to 54.4 in July from June’s 55.3 (estimate high/low between 55.5 and 53.5). You may recall from June’s release that Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: ‘The early PMI data signal the fastest economic expansion for over two years in June, hinting at an encouragingly robust end to the second quarter while at the same time, inflation pressures have cooled’. Higher-than-expected data this week, therefore, could see investors second-guessing the 60 basis points of easing priced in for this year, which should bolster a bid in the US dollar (USD). At the same time, softer numbers may increase rate cut expectations and send the USD lower. Swaps traders are fully pricing in a 25 basis point rate cut at September’s meeting, with less than a 1% chance of a rate reduction occurring at this month’s meeting. 59 basis points of easing are also priced in for the year.

US Advance GDP Growth Rate

Economic activity is forecast to have accelerated in Q2 2024, with the first estimate for US GDP growth released on Thursday at 12:30 pm GMT. According to early estimates, economists expect growth to have accelerated from an annualised rate of +1.4% in Q1 to +1.8% in Q2 (the estimate range is between a high of +2.6% and a low of +1.2%).

Given that the Atlanta GDPNow forecasting model is slightly higher than the upper estimate range at +2.7% (note that this measure runs with a delay, with the next update due just ahead of the US GDP print on Wednesday) and the New York Fed Staff Nowcast for Q2 2024 running at 2.01%, together with economists indicating a higher reading, an upside print should not surprise. On the other hand, a miss on data this week, particularly one that nears the lower end of the estimate range, will surprise and send the USD meaningfully lower.

US Core PCE Price Index

The US Federal Reserve’s preferred measure of inflation, the personal consumption expenditures price index (PCE) for June, will be released on Friday at 12:30 pm GMT. Ultimately, following a slowdown in consumer price pressures (CPI) in June, the year-on-year PCE for headline and core measures are expected to ease to +2.4% (from +2.6%) and +2.5% (from +2.6%), respectively. The estimate range’s lower end for headline and core is at +2.4%.

The year-on-year headline US CPI rose +3.0% in June, down from May’s reading of +3.3% and was also softer than the median estimate of +3.1%. Excluding energy and food components, June’s so-called year-on-year core inflation data slowed to +3.3%, less than the market’s median estimate and May’s value of +3.4%. Wholesale PPI inflation.

Investors will watch Friday’s PCE print closely for signs of further softening. Further indications of price pressure softening will help strengthen the case for a rate reduction in September, which, as noted above, is fully priced in at the moment. This would also likely direct the buck southbound and weigh on risk appetite.

Earnings This Week

US earnings will claim some of the spotlight this week.

Tuesday welcomes leading tech names, such as Tesla (TSLA) and Google (GOOG), who release Q2 results, along with Coca-Cola (KO) and Texas Instruments (TXN). Wednesday includes earnings results from International Business Machines (IBM) and AT&T (T), followed by Thursday, which sees earnings from AstraZeneca (AZN), and Friday looks at earnings from 3M (MMM).

G10 FX (5-Day Change):

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