There were undeniable signs of an economic slowdown in the US last week. Weekly jobless claims continue to tick up, albeit from an extremely low level. Higher mortgage rates continue to drive a housing slowdown, though housing starts remain historically high. Most worrisome in our view was the drop in the PMIs to levels consistent with outright contraction.

This week, Wednesday, the FOMC will announce their rate decision which the market has already priced in at 75bps but keep an eye on the data which could surprise us with a full 1%.

EUR: The ECB surprised markets with a 50 basis point rate hike, an event to which we had assigned a 50% probability. The initial positive reaction of the currency faded away somewhat as markets still don’t feel they didn’t receive enough details about the ECB’s new anti-fragmentation tool. On a side note, it did away with forward guidance, part of a much needed move away from relying on its thoroughly inadequate forecasting capacity, on which we have commented often.

This uncertainty, combined with negative surprises in the PMI activity numbers, which suggest that the Eurozone economy is stagnant, capped the euro gains against the dollar and kept it hovering not far from parity. All eyes will now be on Friday’s flash CPI numbers, which are expected to show that core inflation has not yet peaked in the Eurozone.

GBP: Macroeconomic news out of the UK took a clear turn for the better last week. Activity surveys surprised to the upside and remain consistent with steady growth. The labor market continued to generate jobs at a healthy clip in May. Finally, while headline inflation remains sky high, core inflation has now declined for two consecutive months. Sterling did not react much, moving mostly with the Euro against the dollar, but this positive news-flow could set the stage for a rally in the next few weeks, especially as valuation remains supportive of the Pound.

CAD: The Canadian dollar strengthened against the US dollar last week, due largely to the pause in the dollar’s rally following last week’s poor US economic data and the hawkish tightening stance adopted by the Bank of Canada.

Data published last week showed that Canada’s inflation rate rose less than expected to 8.1% in June, although it still reached its highest level since 1983. On a monthly basis, consumer prices rose by 0.7%, below expectations of a 0.9% increase, and easing on the 1.4% jump a month earlier. The fact that inflation remains at very high levels should put pressure on the BoC to continue raising interest rates, although we see effectively no chance that they’ll hike in 100 basis point increments at upcoming meetings, as they did earlier this month.

Together with the May GDP data out on Friday, we think that oil prices and market sentiment will be the main drivers of the Canadian dollar this week.

CNY: The Chinese yuan ended last week little changed against the US dollar, which can be viewed as disappointing considering the broad weakness of the latter. In fact, the trade-weighted RMB CFETS index turned lower, shedding a little more than 1% during the week. Investor sentiment towards China continues to be challenged by covid fears, as the number of new infections hovers around a two-month high. Recently, however, it seems that the property crisis had a similar, if not a stronger, effect on sentiment. A mortgage boycott has added to the strain on the sector that has been under pressure for many months, facing declining property prices and slowing buying. The issue is gathering the attention of Chinese authorities, with the country preparing a sizable real estate fund to help the developers, according to media reports.

Last week’s economic calendar was largely empty. As expected, the loan prime rates were left unchanged. Going forward we’ll continue to focus on pandemic developments and keep an eye on the real estate sector. We’re also waiting for China’s July PMI numbers, with the official readings set for release on Sunday.