Below is a summary of the news likely to affect exchange rates this week:
> The USD will be sensitive to the Federal Reserve’s (Fed) interest rate hike on Wednesday.
> For the EUR, European Central Bank (ECB) interest rate decision to influence on Thursday.
> For the AUD, CPI rates will be closely watched.
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.
UK inflation has started cooling down due to the Bank of England’s policy tightening and a decline in the Producer Price Index (PPI) which have pushed price pressures down.
Consumer spending remains resilient and could offset the impact of June’s soft Consumer Price Index (CPI) data and solidify the possibility of a 50 bps rate hike from the Bank of England.
Investors are uncertain about the pace the Bank of England will hike interest rates on the 3rd of August. Market participants were expecting that BoE Governor Andrew Bailey would raise interest rates by 50 basis points (bps) but as June’s inflation has eased significantly, many investors are now expecting a 25 bps rate hike.
In the Eurozone, data released on Thursday showed that consumer sentiment improved moderately in July. The German Producer Price Index dropped 0.3% in June, with the annual rate falling from 1% to 0.1%. Next week, the European Central Bank is expected to raise rates by 25 basis points, while a 25 bps hike in September is also possible. Comments by ECB President Christine Lagarde will be key.
In terms of economic data, on Monday, we get Preliminary PMI figures for July from the UK, France, Germany and the Eurozone. On Tuesday we get Germany’s Ifo indicators for July and the UK’s CBI trends for industrial orders. On Thursday, we note Germany’s Gfk Consumer sentiment for August and the UK’s CBI distributive trades for July. Finally, on Friday, we have from France the Preliminary GDP rate for Q2 and from Germany the Preliminary HICP rates for July.
Expected GBP/EUR Volatility:
ECB interest rate hike and commentary could also move the euro. If the bank maintains its hawkish tone, then the euro will strengthen, but if the bank indicates that its terminal rate is near the end, then the euro could weaken.
The GBP/USD pair rebounded quickly on Friday as consumer spending growth expanded strongly in June despite high inflation. Monthly Retail Sales for June were up by 0.7% instead of the expected 0.2% expansion. Annual consumer spending data shrank by 1.0% against the expectation of -1.5%.
Despite the soft inflation data for June, increased retail demand means that higher consumer spending could allow firms to raise their prices at factory gates again. Also, strong consumer spending could raise hopes of another 50-basis-point (bp) interest rate hike by the UK central bank.
Last Thursday, the weekly data published by the US Department of Labour showed that Initial Jobless claims totalled 228,000 in the week ending 15 July, which was the lowest reading since mid-May. The Philadelphia Federal Reserve Manufacturing Survey came in at -13. Existing sales from June also showed a contraction of 3.3% MoM in June compared to a 0.2% prior gain.
The Federal Reserve (Fed) is expected to raise interest rates by 25 basis points (bps) next week, but after the latest report there is now a possibility of an additional rate hike before the end of the year which has provided support to the greenback.
In terms of economic data, on Monday we get from the US the Preliminary PMI figures for July. On Tuesday, we have US consumer confidence for July. On Thursday, we want to draw attention to the preliminary GDP advance rate for Q2, June’s durable goods orders and weekly initial jobless claims figure. On Friday, also from the US, we note June’s consumption rate, as well as Core PCE price index for June and Final University of Michigan consumer sentiment for July.
Expected GBP/USD Volatility:
On Monday, at 08:30 GMT, investors will shift their focus onto the UK S&P Manufacturing & Services PMI for June. If the numbers show a further slowdown of economic
activity in the UK, the pound could fall.
The key US economic releases, such as the GDP rate for Q2, could also influence the dollar, especially if they show a slowdown of economic activity.
Investors are also keenly awaiting the interest rate decision by the Federal Reserve (Fed), which will be announced on 26 July. According to the CME FedWatch tool, interest rates could be hiked by 25 bps to 5.25-5.50%.
On Friday, a stronger US dollar pushed EUR/USD lower, with the pair suffering its third consecutive daily decline and its first worst week in a month. Despite the decline, the pair’s trend shows that it could still rise.
In the US, the labour market remains tight. Philly Fed rose marginally, while existing Home Sales dropped to 4.16 million (annual rate).
Market participants have now turned their attention toward next week’s Federal Reserve (Fed) and European Central Bank (ECB) meetings.
Expected EUR/USD Volatility:
The Federal Reserve (Fed) is expected to raise interest rates by 25 basis points (bps) next week, and perhaps once more before the end of the year.
A 25bps rate hike by the ECB is also expected in its meeting this week.
New Zealand Dollar (NZD)
The New Zealand dollar remained subdued due to the sour market sentiment, and gloomy headlines about China, printing a six-day losing streak. The Kiwi started last week weaker after mixed Chinese data. The disappointing Chinese GDP print released last Monday added to worries about a global economic downturn and limited any optimism in the markets. If market risk sentiment softens further, it will exert some pressure on the risk-sensitive New Zealand dollar.
On Monday we get New Zealand’s trade data for June.
Australian Dollar (AUD)
Australia’s employment data for June surpassed expectations.
RBA’s July meeting minutes indicates that there may be more rate hikes down the line to manage inflationary pressures. RBA Governor Lowe will be replaced by RBA Deputy Governor Michelle Bullock from mid-September.
The AUD benefited from measures taken by the People’s Bank of China to support the Yuan.
China’s GDP rates disappointed and weakened the AUD.
On Monday, we get Preliminary PMI figures for July.
On Wednesday, we get the important CPI rates for Q2. If they accelerate the bank could be under pressure to deliver another rate hike. Also, on Friday, we get final retail sales for June.
Japanese Yen (JPY)
Japan’s trading balance improved in June, indicating that the economy is recovering.
Inflationary pressures in Japan eased in June, with BoJ Governor Ueda saying that more time is needed till they reach the 2% inflation target. The BoJ’s upcoming meeting will be closely watched, and the market expects the central bank to keep interest rates at -0.10. The yen could weaken if the bank maintains a dovish tone. On Monday, we get Preliminary PMI figures for July. On Friday we have Tokyo CPI rates for July.