Talking Points:

- The US Dollar looks to stabilize after the first half of the year brought widespread data underperformance, doubt sown over Fed’s ability to withdraw its extraordinary easing efforts.

- Monday and Tuesday rather quiet in terms of significant events or data; traders will be watching Wednesday through Friday.

- Bank of Canada looks primed to hike rates, but whether or not that’s enough for the Canadian Dollar to continue its rally is another issue entirely.

Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

Miss this week’s webinar? Watch the archive of the FX Week Ahead strategy session for a discussion of the events below.

07/12 Wednesday | 14:00 GMT | CAD Bank of Canada Rate Decision

The Bank of Canada meets midweek in what should be the first major release of the week. The meeting carries significant interest, as rate hike odds have surged quickly over the past month. On June 9, there was less than a 10% chance of a 25-bps rate hike at the upcoming July meeting; two days before the meeting, overnight index swaps are pricing in a 94% chance. During this timeframe, USD/CAD has depreciated by -4.6%. Needless to say, it appears that the rate hike itself is priced in.

Instead, focus should be on the tone in the policy statement. Choppy inflation readings below the BOC’s medium-term target, the slowest wage growth since 1990, and signs of the housing market bubble popping makes it unlikely that the BOC takes a hawkish tone. Without a hint that a second rate hike could come before the end of 2017, the Canadian Dollar could easily take a hit after the policy decision on Wednesday. Currently, OIS are pricing in a 65.5% chance of a second rate hike this year.

Pairs to Watch: CAD/JPY, USD/CAD, Crude Oil

07/12 Wednesday | 14:00 GMT | USD Fed Chair Yellen Testifies in House, Senate

Fed Chair Janet Yellen is making her semi-annual trek to Capitol Hill this week, where she’ll testify in front of both House and Senate panels regarding the state of the US economy. Regardless of the state of Trump fiscal stimulus program, Fed Chair Yellen is likely to retain a relatively hawkish view given signs of sturdy domestic demand, a tightening labor market, and the belief that the mid-year lull in inflation readings is merely transitory. As such, we should look to her commentary to not only reinforce the notion that the Federal Reserve will raise rates again this year; but also that there is potential for the beginning of balance sheet normalization. Currently, Fed funds futures are pricing in March 2018 as the most likely period for the next 25-bps rate hike, so commentary that speaks to the possibility of more tightening this year could prove to be supportive of the US Dollar. Fed Chair Yellen will testify in front of the House on Wednesday and the Senate on Thursday, both at 10 EDT/14 GMT.

Pairs to Watch: EUR/USD, USD/JPY, DXY Index, Gold

07/13 Thursday | 08:30 GMT | GBP Bank of England Credit Conditions & Bank Liabilities Surveys

This quarterly survey of bank and building society lenders helps the Bank of England understand trends and developments in credit conditions. Lenders are asked about the preceding and the proceeding three months. The survey covers secured and unsecured lending to households; and lending to non-financial corporations, small businesses, and to non-bank financial firms. Given the weak stretch of economic data the UK is going through – the UK Citi Economic Surprise Index is at its lowest level of the year, and lowest since June 2016 – it seems likely that the BOE’s latest update on credit conditions could be more downbeat than its previous assessment in April. Any new concerns about the state of the UK economy could put a scare into the British Pound, which has seen short positions in the futures market drop by -74% since their all-time high back in March (in other words, short GBP is a much less crowded trade now than it was just over three months ago).

Pairs to Watch: EUR/GBP, GBP/JPY, GBP/USD

07/14 Friday | 12:30 GMT | USD Advance Retail Sales & Consumer Price Index (JUN)

Consumption is the most important part of the US economy, generating nearly 70% of the headline GDP figure. The best monthly insight we have into consumption trends in the US might arguably be the Advance Retail Sales report. In June, consumption increased slightly, according to a Bloomberg News survey, with the headline Advance Retail Sales set to increase by +0.1% (m/m). The Retail Sales Control Group, the input used to calculate GDP, is due in at +0.3% from 0.0% (m/m). Investors continue to wait and see if the strongest confidence readings since 2000 translate into real economic activity.

According to a Bloomberg News survey, US consumer prices were barely higher on a monthly-basis in June, due in at +0.1% from -0.1% (m/m) and +1.7% from +1.9% (y/y). The core readings should be similar, at +0.2% from +0.1% (m/m), and at +1.7% unch (y/y). These figures aggregately have pulled back from the Fed’s +2.0% medium-term target, and represent the biggest obstacle to the Fed following through on its plan to raise rates one more time before the year is over. Any impact on the US Dollar will be vis-à-vis the glide path pricing channel.

Pairs to Watch: EUR/USD, USD/JPY, DXY Index, Gold

Read more: Webinar: FX Week Ahead: Big Week Ahead for US Dollar with Yellen Testimony, CPI

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com.

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