The dollar has struggled to assert a clear direction this week, influenced by uncertainty surrounding the US-China trade talks. Reports have emerged indicating that negotiators have reached an agreement on a framework for resuming the flow of sensitive goods, such as rare earths, pending approval from both President Trump and President Xi.
While this development is a step towards de-escalation, it does not signify a major breakthrough, especially given China’s reluctance to commit to reducing its trade deficit. Market sentiment has approached the London summit with skepticism, and although the dollar has remained resilient, it has not capitalized on the momentum from last week’s US-China meeting announcement.
Our models suggest that it is still 3-4% undervalued relative to major G10 currencies. Today’s focus will also be on domestic fiscal developments, particularly the anticipated results from a notable 10-year Treasury auction and CPI data, with core inflation expected to come in below consensus.
This could ease pressure on Treasuries but may negatively impact the dollar, especially as the likelihood of a September rate cut is factored in. There’s a bearish bias on the dollar today due to expectations around core CPI and news that Treasury Secretary Scott Bessent is under consideration to succeed Powell at the Fed.
Bessent’s inclination towards lower rates, aligning with Trump’s views, poses further downside risks for the dollar. Meanwhile, the euro’s recent gains have primarily stemmed from US events.
The ECB maintains a hawkish tone, reinforced by recent comments from officials, with interest rate hikes being priced in for the coming months. The euro is likely to find support around 1.1400 against the dollar.
For the British pound, today’s Spending Review is not expected to significantly impact financial markets. It highlights ongoing challenges in day-to-day spending, foreshadowing potential tax increases later this year.
The Canadian dollar, despite recent strong performance, faces challenges from US trade tariffs and downbeat growth risks. The outlook suggests a potential dovish shift in policy could emerge from the Bank of Canada, making the loonie less attractive in the current market environment.