Below is a summary of the news likely to affect exchange rates this week:
> For the USD, the Fed’s interest rate decision on Wednesday could move the greenback.
> ECB expected to hike rates on Thursday and support the EUR.
> Bank of Japan’s interest rate decision on Friday to influence the yen.
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.
The UK and US governments have announced a partnership to encourage economic security at a White House press conference on Thursday. The Atlantic Declaration which falls short of a full trade deal includes guarantees on reducing trade barriers, closer defence industry ties and a data protection deal and increases co-operation on AI.
In terms of monetary policy, markets expect another rate hike at the bank’s next meeting which will boost the pound. However, as inflation rates ease more, the BoE may end the rate hike cycle earlier than expected, so the market could lower expectations regarding the BoE. This will in turn weaken Sterling.
In terms of releases, we note Germany’s ZEW indicators for June due out on Tuesday.
Expected GBP/EUR Volatility:
For next week, we highlight two UK releases which could influence the pound: April’s employment data on Tuesday and GDP rates on Wednesday. Higher earnings and positive UK employment would put more pressure on the BoE.
All eyes will be on the Fed on Wednesday when it will announce its interest rate decision. The market anticipates that the Fed won’t hike rates in June, but things may change ahead of Wednesday’s meeting as on Tuesday the release of the US CPI rates for May will be influential. If core and headline CPI rates drop suggesting that inflation has eased, then market expectations for the bank to remain on hold will increase. On the other hand, if inflation persists then a possible rate hike may be back on the table and boost the USD.
If the bank remains on hold, then we don’t expect the USD to react much. A 25-basis points rate hike will likely support the greenback. If the bank maintains a hawkish tone with the potential of further rate hikes ahead, then the USD will strengthen, while a dovish tone will weaken the greenback.
We would like to draw attention to a few economic releases: US PPI rates for May will be due out on Wednesday. On Thursday we note the release of US retail sales for May and on Friday, the Preliminary US University of Michigan consumer sentiment for June.
Expected GBP/USD Volatility:
If the Fed hikes rates or strikes a hawkish tone indicating further rate hikes ahead, then the USD will strengthen. Fed Chairman Jerome Powell’s press conference following the Fed’s interest rate decision could also sway market sentiment.
EUR/USD reached its highest level in two weeks on Thursday. The main event in the coming week will be the ECB’s interest rate decision on Thursday, with the bank expected to hike rates by 25 basis points. The markets anticipate another 25-basis points rate hike in the ECB’s July meeting, before making a pause.
The Preliminary Eurozone HICP rate for May dropped which means that the central bank may not feel so much pressure to proceed with another rate increase. The drop of the Sentix index below zero suggests that there is wider pessimism about the Eurozone.
Expected EUR/USD Volatility:
If the ECB delivers a 25 basis points (bps) rate hike, is hawkish and indicates that there will be another rate hike, then the euro will strengthen. The euro could weaken if at the press conference ECB President Christine Lagarde is hesitant or less hawkish.
Swiss Franc (CHF)
The positive risk sentiment has undermined the safe-haven CHF. Swiss National Bank (SNB) Chairman Thomas J. Jordan emphasized the significance of achieving price stability by addressing Swiss inflation levels. He cautioned against the notion of waiting for inflation to escalate before considering interest rate hikes. It is noteworthy that the SNB has already taken measures to increase interest rates to 1.50%, a decision that investors should take into account.
On Thursday (15 June), we note the release of Producer and Import Prices (MoM) for May, and SECO Economic Forecasts.
Australian Dollar (AUD)
The AUD strengthened after the RBA surprised markets by delivering a 25-basis points rate hike on Tuesday.
GDP rate for Q1 has slowed down, suggesting that the Australian economy grew less than expected. An escalation of tensions between the US and China could weaken the AUD. Weak data from China has increased worries about China’s economic recovery.
For the coming week, we emphasise Australia’s employment data for May due out on Thursday. On Thursday, we also draw attention to China’s urban investment, industrial output and retail sales.
Japanese Yen (JPY)
The highlight for the coming week will be the BoJ’s interest rate decision on Friday. The market expects the bank to remain on hold at -0.10% and maintain a dovish tone which could weaken the JPY.
All household spending growth rate for April has contracted indicating a weakening of demand. Q1’s GDP rate (YoY) rose, showing that the economy grew more than expected, which could lend support to the yen.
On Monday, Japan’s Corporate goods prices for May, and on Thursday, Japan’s machinery orders for April and trade data for May will be of interest.