EU Midday Digest - 29 Jul 2026

Eurozone merchandise trade surplus expands to C$4.2 bn in May, bolstering the euro at 1.1395.

Overnight & European Session

Asian equity futures slipped modestly on mixed earnings cues, while the European market opened higher on a firmer euro and a rally in commodities. The EUR/USD pair traded at 1.1395, up 0.22% (per the market snapshot), supported by a widening merchandise‑trade surplus that lifted foreign‑currency inflows. Brent crude rose 4.64% to US$ 87.99, reflecting renewed Middle‑East risk premiums, and gold gained 1.34% to US$ 4,090 as investors chased safe‑haven assets. In the rates arena, the Bank of Canada kept its overnight rate unchanged at 2.25% and the ECB’s wage tracker showed a steady 2.7% annualised growth, both signalling limited near‑term policy moves. The only notable divergence was the Turkish lira, which steadied around 19.8 TRY/USD despite a 15.00% policy rate, while European currencies broadly appreciated.

Key Themes Today

• ECB wage outlook: The ECB’s wage tracker released on 29 July 2026 recorded a 2.7% annualised increase in Q1 2027, virtually unchanged from the 2.6‑2.8% range in the prior three quarters. The press release notes the figure is “in line with the medium‑term wage growth target of 2‑3%” and that “no upward pressure is evident in the latest negotiations.” With wage growth anchored, the ECB’s current policy rate is viewed as close to neutral, reducing the probability of further tightening. Fixed‑income investors can therefore maintain a neutral‑to‑slightly‑bullish bias on sovereign bonds, while equity markets may continue to price a soft‑landing narrative. (Source: ECB press releases, speeches and transcripts)
• Bank of Canada policy certainty: The Bank of Canada’s 29 July 2026 press release announced a transparent 2027 policy‑rate calendar and left the overnight rate at 2.25% (Bank Rate 2.50%, Deposit Rate 2.20%). The spread between the Bank Rate and deposit rate underscores a modest tightening bias, suggesting any future hike would likely be 25 bps. This “steady‑state” yield‑curve environment favours carry trades in Canadian government bonds and limits upside for short‑duration equities, though a tail‑risk overlay on CAN 10‑year bonds is advised given the “monitoring inflation developments” language. (Source: Bank of Canada press releases)
• Canadian price dynamics and policy implications: Statistics Canada reported that the Industrial Product Price Index fell 1.4% MoM in June 2026 while still up 12.4% YoY, and the Raw Materials Price Index dropped 6.9% MoM after a 20.7% YoY gain. The headline CPI decelerated to 2.8% YoY, down from 3.2% in May, with a –0.1% MoM change. These data points suggest easing cost pressures for manufacturers and a cooling inflation trend, reinforcing the Bank of Canada’s decision to hold rates steady. The combination of falling raw‑material prices and a modest CPI slowdown creates a backdrop for a monetary‑policy pause, which could lower short‑term bond yields and support risk‑on equity positioning. (Source: Statistics Canada – Prices)
• Contrasting views on near‑term rate moves: Bloomberg’s markets commentary expects a Federal Reserve rate hike, with market pricing around a 25‑bps increase and heightened volatility ahead of the decision. By contrast, the BIS paper “AI and the global economy” warns that AI‑driven, debt‑financed investment is reshaping equity markets and could generate inflationary pressures that are not captured by traditional rate‑sensitivity metrics. Bloomberg’s view implies a short‑term tightening surprise, while the BIS analysis suggests that underlying structural forces may keep inflation elevated, potentially prompting a more hawkish stance than the market currently anticipates. Investors should therefore weigh both the immediate Fed‑hike probability and the longer‑run AI‑induced inflation risk when positioning across rates‑sensitive assets. (Sources: Bloomberg – Markets; BIS – Publications)
• Turkish inflation‑driven risk premium: The TCMB’s July 29 2026 press release highlighted a “dual‑driver” inflation regime, with June 2026 CPI rising 0.9% MoM and a 12‑month acceleration of 3.2 pp. The policy rate remains at 15.00% for the next two meetings, while the lira‑USD forward spread narrowed to 1,200 bps. A revision to the Balance of Payments shows net financial inflows falling from US$ 12.8 bn to US$ 10.3 bn (a 19.5% contraction). These factors point to heightened upside risk for the lira and potential tightening if inflation persists, suggesting a cautious stance on Turkish‑currency exposure and a preference for short‑duration sovereigns. (Source: TCMB – Press Releases)

What to Watch

Key intraday catalysts include the ECB’s policy meeting later this week (no consensus level identified) – a break above the 1.1450 resistance on the euro could signal a more hawkish tilt, while a dip below 1.1300 would reinforce dovish expectations. In North America, the Bank of Canada’s next rate decision (scheduled for September) will be guided by the upcoming June 2026 Employment Insurance data release on August 19; a higher‑than‑expected claim count could revive concerns about labour‑market slack and keep the CAD under pressure. US markets will watch the Fed’s decision, with the 10‑year Treasury at 4.35% serving as a benchmark; a clean 25‑bps hike would push yields higher and test the 4.40% resistance. Corporate earnings to monitor are Procter & Gamble (PG) and Visa (V), both slated for late‑July releases – a PG beat could lift consumer‑staples, while a Visa miss may reignite worries about discretionary spending. The open question remains: will the ECB’s wage data and the Turkish inflation surge together push central banks toward earlier tightening than markets currently price in?