Gold is 2025’s best performer. UBS sees more upside
Yesterday’s summit in Washington resulted in a clearer roadmap for peace talks and some openness about security guarantees from the US. But the euro was offered as news flowed, perhaps on the view that the bulk of key territorial negotiations are still ahead of us. US macro developments remain a bigger driver for EUR/USD, which still faces upside risks
USD: Clearer Roadmap for Peace Talks
Yesterday’s summit between President Zelenskyy, European leaders, and President Trump in Washington didn’t deliver huge surprises but confirmed that the US is open to providing security guarantees to Ukraine. Such guarantees could pave the way for Ukrainians to consider Russia’s territorial demands, and expectations are now for Russia and Ukraine to meet directly in the next few weeks, both bilaterally and trilaterally with the US.
Currency markets saw modest volatility as news from Washington emerged, with the US dollar staying bid and the euro offered. This may reflect some marginal disappointment that the summit did not provide a clearer roadmap to a ceasefire.
While the path to peace in Ukraine appears somewhat clearer following last Friday’s and Monday’s summits, markets remain cautious. This is understandable, given that the most challenging negotiations – particularly over territorial issues – are still ahead of us.
US macroeconomic developments remain more important for the dollar, although the calendar is rather light before the Fed’s Jackson Hole Symposium starts on Thursday. In other words, the information that will determine whether Chair Powell delivers a dovish shift is already before us.
Fed funds future pricing for September (-21bp) tells us that markets still believe such a shift is coming – although the big jump in July’s PPI inflation has inevitably added a layer of uncertainty.
We suspect the dollar may lose some support as we approach tomorrow’s FOMC minutes – the risk is more than two members voicing openness to cuts – and Jackson Hole. Today, we’ll keep an eye on housing data for July, as well as a Bloomberg TV interview with dovish Fed dissenter Michelle Bowman. Expect a question on whether she will vote for a 50bp cut in September.
EUR: Lagging, but Can Rise on the Macro (BCBA:BMAm) Story
EUR/CHF briefly traded above 0.945 as markets reopened from the weekend but has since given up all gains and is back at Friday’s 0.941 level. That confirms markets did not see any reasons to price in greater optimism on the peace deal after yesterday’s Washington summit.
The euro softened against most G10 currencies, though higher-beta European currencies such as CEE FX and Scandies held steady, suggesting investors remain broadly constructive on geopolitical de-escalation. Also, this may be an indication that the euro’s correction may well be exacerbated by positioning re-adjustments.
Based on the USD view above, we see some upside risks from here through the rest of the week in EUR/USD. A return above 1.170 remains quite possible before the end of this week.
GBP: Gilts Underperforming Ahead of CPI
Gilts had a poor session yesterday, underperforming Bunds by 5bp on the 10-year. The yield on 30-year inflation-linked bonds reached its highest level since 1998 – surpassing the Liz Truss crisis. Some additional pressure on gilts may be coming from the UK’s Debt Management Office announcing syndicated offerings in October and November, and/or some positioning ahead of Friday’s UK sovereign rating review by Fitch.
Either way, the pound followed bonds lower yesterday, and EUR/GBP has found some support. Tomorrow’s CPI release (0700 BST) is a key event for sterling. We expect both headline and services inflation to accelerate, to 3.7% and 4.8%, respectively.
That should consolidate markets’ recent hawkish repricing in the Sonia curve. Bets on another cut by year-end briefly dropped below 50% yesterday – currently at 14bp. We see upside risks for the pound ahead of tomorrow’s release and a break below 0.860 as increasingly possible.
CAD: July Inflation Should Be Consistent With Easing
Canada releases July inflation today. Expectations are for an acceleration to 0.3% MoM in headline inflation, but a slowdown in inflation in YoY terms to 1.8%. The median and trim core measures are both expected at 3.1%. Prints close to these numbers would probably be consistent with the Bank of Canada resuming its rate cuts: not because inflation is too low now, but because of the lingering significant growth risks.
Market pricing remains too conservative on BoC easing in our view. The CAD OIS curve only embeds 7bp and 15bp of easing for the September and October meetings, respectively.
A rate cut is only fully priced in at the January meeting. We expect pressure on the BoC to cut coming both internally via deteriorating activity and labour market and externally as the Fed resumes cuts in September. We think the next move by the BoC can therefore come as early as October, if not September should data deteriorate.
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