Intel stock extends gains after report of possible U.S. government stake
Today’s Trump-Putin meeting in Alaska could be a turning point for the Ukraine conflict. But that might not deliver the kind of seismic impact on the US dollar that macroeconomic data has of late. After the PPI spike yesterday, there has been some hawkish repricing of Fed expectations, and the balance of risks for the dollar is now more balanced
USD: Data Remains The Biggest Driver
The much-anticipated Trump-Putin meeting in Alaska is scheduled for 20.30 BST/21.30 CET, so any headlines may just be able to impact late US trading, but it’s quite possible that the bulk of the market reaction will only materialise on Monday. President Trump has defined this as a “feel-out” meeting and said there will likely be talks with European allies and Ukraine after this summit. This suggests that while we could see some draft plan for a ceasefire tonight, markets may treat it with some caution.
Trump has also said there is a “25%” chance nothing will be agreed today. That would be the most bullish scenario for the dollar, which could otherwise still come under a bit more pressure from geopolitical risk unwinding. Oil prices remain the key transmission channel to FX.
It is undeniably hard to predict the outcome of today’s summit. But for now, we have not seen a huge impact on the dollar, which we still think will remain primarily driven by the US macro story over geopolitical developments. Yesterday’s sharp rise in PPI (0.9% month-on-month on both headline and core PPI) was a big surprise. PPI has a history of leading CPI, and many components feed into the Fed-preferred core PCE.
Markets are clinging to the September Federal Reserve cut, perhaps as that is seen as making up for July’s hold now that the jobs picture has changed so dramatically. But the December contract was repriced from -64bp to -57bp, and the two-year swap rate rose 5bp. There is a risk that this hawkish repricing has legs, which might offset the negative impact of any Ukraine ceasefire agreement.
On the data side, we’ll watch retail sales figures for July today, which are expected to maintain last month’s 0.6% pace, the Empire Manufacturing index and the University of Michigan economic and inflation surveys. Also on the calendar are TIC flows, which have rather spectacularly defied speculation of a run from Treasuries so far.
EUR: Watching Alaska More Closely
The Trump-Putin meeting and any better clarity on the path ahead in the Ukraine conflict have longer-lasting implications for the euro than for the dollar. How EUR/USD, EUR/CHF and EUR/JPY trade on Monday morning will be a good gauge of how markets have digested any headlines from Alaska. The deterioration in the eurozone’s terms of trade has impacted the long-term euro fair value, and some conviction that energy prices could come structurally lower from here could make markets more comfortable with the euro trading at levels inconsistent with a relatively unattractive implied rate – e.g. above 1.20.
But as discussed above, there is a chance that today might be the first step in the direction of de-escalation, and markets may tread carefully for now. The repricing in Fed cut expectations is hindering the chances of another major leg higher. The next US data releases will determine whether a return to 1.180 is feasible in the near future.
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