Fed week opens with the dollar unable to lead; yen speculators turn bullish

Markets have priced a September Fed rate hike and the dollar still cannot lead our basket, while speculators turn bullish on the yen and Canada's CPI data looms.

Major currency movements

• The dollar firmed into Friday on expectations of a September rate hike, after August inflation ran hot enough to lift implied odds above 85% — Governor Waller had made his hold conditional on that data showing further progress, and it did not. The freshest read this morning goes the other way: ActionForex is already writing that expectations are beginning to shift against the dollar.
• Citi analysts suggest EUR/USD could re-test the 1.17 level after the Fed decision.
• Speculators have turned bullish on the yen for the first time since February, and the currency closed out its first two-week winning streak since May on Friday. The Bank of Japan meets on Friday with its policy rate forecast to rise to 1.25% from 1.00% — which is what that positioning is arguing about.
• On an intraday basis, the Swiss franc ranks as the strongest major currency today — a basket reading, not a call on any pair. It also answers the tell our weekly wrap left for this week: the dollar did not top the basket on a single session last week, and it has not taken it on the first session of Fed week either. By that test, the story driving this market is still energy.

Canadian dollar under pressure

• The Canadian dollar is the weakest major currency today ahead of CPI at 12:30 UTC — a full crossing of our table from Friday, when it led the same reading. ActionForex indicates Canada's August inflation likely held at 3%.
• According to the WSJ, Carney is exploring Canada's potential as an associate member of the EU.
• New Zealand's services sector expanded for a third consecutive month, with the PSI rising to 51.2.

Oil keeps the inflation story alive

• ActionForex reports projectiles hit Saudi Arabia's East-West oil pipeline system, helping push West Texas Intermediate above $100 a barrel on Friday, and as high as $104. The American benchmark had been below $93.50 on Thursday morning, so it closed in two sessions the gap with Brent it had held open all week. Brent itself has run from around $88 to $108 in a month. This is the supply shock sitting underneath the rate-hike repricing.

Market sentiment and key events

• Our proprietary gauges show the MRS at 64 and the CTS at 76, both unchanged from Friday. The FSI reads 58 (Neutral). We are not calling that a fall from the 69 of a week ago: the retail-positioning input behind a fifth of the index changed provider on 10 September, so readings either side of that date are not comparable, and the earlier ones were running on a feed that had stopped updating on the 6th.

Key events today

• CAD CPI m/m (High impact, 12:30 UTC): forecast -0.1%, previous 0.5%
• CAD Median CPI y/y (High impact, 12:30 UTC): forecast 2.0%, previous 2.0%
• CAD Trimmed CPI y/y (High impact, 12:30 UTC): forecast 1.9%, previous 1.9%
• EUR ECB President Lagarde Speaks (15:15 UTC), four days after the ECB raised its main refinancing rate to 2.65%

Beyond today, three central banks decide this week: the Federal Reserve on Wednesday at 18:00 UTC, with the funds rate forecast at 4.00% from 3.75% alongside new projections and a press conference; the Bank of England on Thursday at 11:00 UTC, expected to hold at 3.75%; and the Bank of Japan on Friday at 02:30 UTC.