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The July FOMC minutes signaled clear openness to more tightening, but market pricing did not move a lot. The FX markets seemed more sensitive to that, and the dollar is enjoying some good momentum. Meanwhile, Norges Bank should hike by 25bp today, and this may not even be their last move; we still see NOK gains ahead.
 

USD: Hawkish minutes, reluctant pricing

The minutes of July’s FOMC policy meeting released yesterday showed the majority of members kept seeing upside risks to the inflation outlook and left the door open for more tightening. That mirrors what was previously indicated in the dot plot projections, but we think that the encouraging developments on the disinflation side mean the Fed won’t have to hike again and will instead opt for a long pause before cutting in 2024.

The dollar found some support after the release of the minutes, although the Fed Funds Futures did not move significantly, still pricing in a 30% probability of another Fed hike. The reluctance to price in a greater probability is keeping the dollar’s gains limited.

On the data side, our US economist debriefs yesterday’s set of releases here. Mortgage rates are hitting fresh highs, but that is failing to trigger the kind of house price correction we see elsewhere in the world, as crushed supply keeps prices elevated. Ultimately, Fed rate cuts next year could be the trigger for a real estate price correction should that allow a rebound in supply. On the industrial production side, a strong read for July contradicted the ISM manufacturing index, which had suggested the sector has been contracting for nine consecutive months.

Today, the jobless claims will be watched closely after a surprise jump last week, and the calendar also includes the Philadelphia Fed Business Outlook for August and July’s Leading Index. The dollar is enjoying some modest bullish momentum – also helped by more worrying news from China’s real estate sector - but it may be lacking a clear catalyst to break above 104.00 (DXY) before the end of the week.
 

EUR: Lack of strong support

EUR/USD appears stuck in a relatively low volatility environment, despite feeling some pressure. The swings in the 2-year swap rate differential are not proving dramatically impactful on the pair, but the retightening of the spread from the 140bp area to the 134bp is probably offering a bit of support.

Eurozone data continued to do very little to help a rapid turnaround in the euro’s softish momentum, though. Yesterday, 2Q GDP growth was confirmed at 0.3% QoQ, and employment figures at 0.2% QoQ. With forward-looking indicators pointing at an economic slowdown in key parts of the euro area, a EUR/USD rally later this year (which is still our base case) should rely primarily on a decreasing attractiveness of the dollar rather than on an idiosyncratic EUR boom.

It may be yet another rather quiet day in FX today, and barring a major surprise on the US data side – and considering the eurozone calendar is quite light – EUR/USD should keep hovering around 1.0850/1.0900.
 

GBP: EUR/GBP ready to test the lows

Higher than expected wage and inflation numbers pushed the Sonia curve to pricing-in 6.0% rates for the first time in a month. On the inflation side, our UK economist notes in this article how the surprise pick-up in service inflation was primarily due to rents, a factor that should not meet the Bank of England’s definition of “persistent”.

While a 25bp September hike should be a done deal, we still think a November move is an open question, given indications of abating price pressures in other parts of the economy. Still, the pound is now enjoying a post-repricing strength that looks unlikely to abate rapidly, given the lack of market-moving data and BoE speakers. EUR/GBP looks on track to retest the 0.8505 July lows, also given the lack of strong idiosyncratic defense for the euro.
 

NOK: 25bp by Norges Bank today

We expect Norges Bank to hike by 25bp today, in line with previous guidance. The previous hike was a larger one (50bp), but the trade-weighted strengthening in the krone and some improvements on the inflation side will allow policymakers to hike by a smaller amount today.

Markets are pricing in a peak in Norwegian rates after today’s 25bp hike, but we feel they are underestimating the chances of another hike in September. Much will depend on the krone’s performance: we are positive on NOK in the medium term but cannot exclude some risk-off corrections to generate some “scares” for the central bank and trigger another rate hike.

Anyway, today is an interim meeting with no new rate projections. We cannot exclude Norges Bank will hint at openness to more tightening, and we see upside risks for NOK anyway, given the rather flat market pricing.

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