Below is a summary of the news likely to affect exchange rates this week:
> For the USD, CPI rates will be key.
> For the GBP, the focus will fall on GDP and employment data.
> For the CAD, all eyes will be on the BoC’s interest rate decision.
> New Zealand’s RBNZ interest rate decision to influence the NZD.
Looking back at last week’s currency trends:
See below for a brief overview of last week’s currency movements in our top 3 most popular currency pairs.
Market expectations for a hawkish Bank of England (BoE) have supported the pound. Megan Greene, a new member of the BoE’s monetary policy committee, indicated that rates may remain higher even if inflation decreases, reinforcing the view of a more hawkish stance. Markets anticipate a 50 basis points rate hike in the BoE’s early August meeting, with further interest rate increases to follow.
European Central Bank (ECB) officials have also expressed hawkish views, which have supported expectations for possible rate hikes after the summer. In terms of economic activity, we note that the manufacturing sector has contracted, especially in Germany. Eurozone’s producer price index (PPI) showed a contraction in prices in May, but it was less sharp than in April. Retail sales in the Eurozone failed to grow in May, with a year-on-year contraction in the growth rate.
As for financial releases, we note Eurozone’s Sentix index for July on Monday and highlight Tuesday’s UK employment data for May. On Tuesday we also get from Germany the ZEW indicators for July. On Thursday another key release is the UK’s GDP and manufacturing output for May. Also, on Thursday we have the Eurozone’s industrial output for May.
Expected GBP/EUR Volatility:
UK employment data, GDP and manufacturing output could move the pound. In terms of monetary policy, the BoE is expected to remain hawkish which will provide support to the pound.
The US dollar has been weighed down last week as inflationary pressures eased according to the Core and headline PCE price indexes for May that showed growth rates slowing down.
The minutes from the FOMC’s June meeting provided insights into the Federal Reserve’s plans. While there was a discussion about raising rates in June, the decision was made to postpone it in order to evaluate the overall impact of previous tightening measures. The minutes reaffirmed the Fed’s hawkish stance and indicated that their path of raising rates is not yet finished, which supported the US dollar. On Wednesday we highlight the US CPI rates for June. On Thursday, we note the release of the weekly initial jobless claims figure and the PPI rates for June. On Friday, we get the preliminary University of Michigan consumer sentiment for July.
Expected GBP/USD Volatility:
June’s US CPI rates and the employment report will influence the Fed’s interest rate decision on the 26th of July. If the CPI rates accelerate and the employment report shows that the jobs market remains tight, then the Fed may continue its tightening path, which will help strengthen the dollar.
The US dollar (USD) came under selling pressure with the initial reaction to the mixed jobs data on Friday. The Nonfarm Payrolls showed that the US economy created 209K jobs in June, while the Unemployment Rate fell to 3.6%. Average Hourly Earnings rose 0.4% MoM and 4.4% from a year earlier. Participation Rate remained at 62.6%.
The euro managed to regain some gains and advanced to fresh multi-day highs on Friday. Germany’s industrial production was lower than expected and contracted 0.2% MoM in May. Italy’s retail sales expanded 0.7% in May compared to the previous month.
Recent robust economic indicators in the US confirming that the labour market remains strong and the economy resilient, have solidified expectations of a 0.25% interest rate hike by the Fed at its upcoming July meeting.
Meanwhile, within the ECB, Vice President Luis De Guindos emphasised the importance of core inflation in shaping future ECB policy decisions and mentioned the uncertainty surrounding interest rates in September.
Expected EUR/USD Volatility:
With limited releases out of the Eurozone, the euro may be influenced by other fundamentals, including any commentary by ECB officials. US inflation rates will also be key and would provide insights into the Fed’s potential rate hike at its next meeting late July.
Canadian Dollar (CAD)
The BoC’s interest rate decision is the key release for the CAD in the coming week, and the market expects a 25 basis points rate hike. There is also a smaller possibility of the bank remaining on hold following the significant slowdown in May’s headline and Core CPI rates. If the BoC decides to hold rates, the CAD may weaken, but a potential rate hike and a hawkish statement, could support the CAD.
On Monday we get Canada’s building permits for May, while on Friday we note manufacturing sales for May.
New Zealand Dollar (NZD)
On Wednesday, we have the New Zealand’s RBNZ interest rate decision. Investors are optimistic that the Reserve Bank of New Zealand (RBNZ) will maintain the current interest rate of 5.50% in the upcoming week, considering the country’s economy has already entered a recession. According to a Reuters poll, it is expected that the RBNZ will keep interest rates unchanged at 5.50% during the upcoming week’s meeting and for the remainder of the year. This decision would mark the conclusion of the RBNZ’s 20-month-long cycle of interest rate hikes. The Kiwi may face challenges due to China’s economic struggles and the potential for increased tensions in the US-China trade conflict, which could limit any gains for the NZD.
Japanese Yen (JPY)
Japanese officials’ warnings about a possible market intervention and various statements are an attempt to provide support to the JPY. As always, the Bank of Japan (BoJ) remains dovish.
If BoJ policymakers make any further dovish comments, then the JPY may weaken further. The better-than-expected Tankan indexes for the second quarter showed that the Japanese economy is in the process of recovering.
In terms of economic data, we note Japan’s current account balance for May on Monday and Japan’s corporate goods prices for June on Wednesday.