FOREX: Greenback Relief Rally Extends, Analysts Believe It Won’t Last

There was a decent pullback in the Atlanta Fed's Q3 GDPNow estimate today to 2.26% from 2.55% in the Aug 15 update. This comes entirely on the back of a shift in the expectation for residential investment growth in the quarter: now seen at -5.9% Q/Q SAAR, vs 1.1% in the prior estimate (and -4.6% in Q1).

• That equates to a 0.24pp subtraction from GDP from residential investment in the quarter, vs +0.04pp in the prior est.
• This reflects a big miss in today's building permits data (-2.8% in July vs -0.5% expected), and is reflective of weakness in a housing sector that increasingly looks like it will continue to be a drag on growth through year-end.

• GBPUSD has consolidated around the 1.35 mark on Tuesday amid gilts paring some of yesterday's weakness. A technical bull cycle remains intact, keeping sights on 1.3636, the 76.4% retracement of the bear leg between Jul 1 and Aug 1 ahead of tomorrow's UK CPI release.
• MPC focus is on headline CPI, which is expected to rise from June; from the previews that we have read the median expectation is for a 3.7% Y/Y. Energy prices could also gather some interest as we think they might come in higher than the median analyst expectation - for our full preview see here.
• Market expectations have swayed away from a November BoE cut recently following a flurry of better-than-expected data since the last meeting. However, December should remain well in play for now, with Governor Bailey, arguably the median voter, speaking Saturday on a panel in Jackson Hole.
• Danske meanwhile "increasingly see domestic factors and the relative growth outlook between the UK and the euro area as becoming GBP negatives", resulting in an EURGBP call "towards 0.89" on a 6 to 12-month horizon.
• ING mentioned yesterday they see "some sticky UK inflation for July looks unlikely to alter the market's view of the BoE", which "should keep GBP/USD bid this week, where a break of 1.3585/3600 could see 1.3680/3700 by the end of the week".
• Société Générale flagged (also yesterday) that sterling is the G10 currency which Asia market participants appear to be the least confident in.

• EUR/USD: $1.1550(E915mln), $1.1600(E854mln), $1.1660-75(E1.4bln)
• USD/JPY: Y147.25-35($982mln), Y148.00-10($1.5bln)
• USD/CAD: C$1.3800($1.1bln), C$1.3835-55($872mln)
• USD/CNY: Cny7.1050($500mln)