Below is a summary of the news likely to affect exchange rates this week:
> For the USD, comments from Fed officials will provide support.
> For the EUR, contraction of economic activity to weigh on the currency.
> Canada’s CPI rates to move the CAD.
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 BoE surprised markets when it hiked interest rates by 50 basis points to 5.00%. The market expects further rate hikes to bring the bank rate up to 6.25% in 2024. The bank is anticipated to maintain its hawkish tone and provide support for the pound. There are concerns that further tightening by the BoE may negatively affect the economic outlook and stall growth. This was the case for the UK’s preliminary manufacturing PMI figure for June, which dropped, showing how activity in the sector contracted further.
The euro remained supported due to the ECB’s hawkishness. The monetary policy tightening has however affected economic activity in the manufacturing sector and especially that of Germany, which contracted again creating further concerns about the Eurozone economy.
On Monday, traders’ attention will turn towards Germany’s Ifo indicators for June and the UK’s CBI distributive trades indicator for the same month. On Tuesday, UK nationwide house prices for June will be due out. On Wednesday we get Germany’s forward looking GfK consumer sentiment indicator for July, and on Thursday the Eurozone’s economic sentiment for June and Germany’s preliminary HICP rate for June. On Friday, UK’s GDP rate for Q1, France’s and the Eurozone’s preliminary HICP rate for June will also draw attention.
Expected GBP/EUR Volatility:
ECB hawkish commentary may provide support to the euro. The release of the preliminary HICP rates for June from Germany, France and the Eurozone will be key, and if the rates slow down further then the euro could weaken while pressure on the bank may ease.
The USD strengthened due to a hawkish Fed and comments by Fed Chairman Powell who said during his testimony before Congress on Wednesday that there will be further rate hikes ahead. FOMC policymakers also expect to raise interest rates further by the end of the year.
Tensions between the US and China have intensified especially after US President Biden called Chinese leader Xi a “dictator”.
Concerns for the economic outlook of the US continue, and investors will closely watch the coming week’s releases of the final GDP rate for Q1 on Wednesday, and Mays’ Core PCE price index and May’s Consumption rate on Friday. We would also like to draw attention to a few other economic releases from the US: On Tuesday, we get US durable goods orders for May and the US consumer confidence indicator for June. On Thursday we note the US weekly initial jobless claims figure. Finally, on Friday we note the final University of Michigan consumer sentiment for June.
Expected GBP/USD Volatility:
If the Fed maintains its hawkishness, we may see the USD strengthening. The greenback may get further support, if tensions between the US and China intensify. Additionally, concerns about a global economic slowdown could also lend support to the safe-haven currency.
The euro has risen a little bit on Friday and the EUR/USD picked up from its earlier lows on Friday. Disappointing data has weakened the euro and reignited concerns about a potential recession in the region, but the EUR/USD managed to regain some balance. The euro’s decline was deepened by disappointing numbers from the advanced Manufacturing and Services Purchasing Managers’ Indices (PMIs) in France, Germany and the Eurozone for June. The USD gained strength due to the gloomy market mood and hawkish comments by Federal Reserve officials, including Chief Jerome Powell.
Expected EUR/USD Volatility:
Upcoming Fed comments may reinforce the view of extra hikes in the near future and support the USD.
Canadian Dollar (CAD)
The BoC has remained hawkish following the acceleration of the retail sales growth rate for April and a tight Canadian employment market. The market expects another rate hike in July which will support the CAD.
On Tuesday, we get Canada’s CPI rates for May and on Friday we note the release of Canada’s GDP rate for April. If Canada’s CPI rates accelerate, then the CAD will strengthen, and the central bank would become more hawkish. Positive market mood will also provide support for the CAD, while a gloomy mood could weigh it down.
Swedish Krona (SEK)
SEK is expected to remain week in the medium term due to relative monetary policy, a disappointing global growth outlook and domestic obstacles from the housing market.
On Thursday, we get Riksbank’s interest rate decision. Riksbank is anticipated to warn about the recent Krona weakness, but policymakers may not want to make any promises of delivering another rate hike in September. Officials are now focused on boosting the currency and minimising damage to the real estate market.
Japanese Yen (JPY)
The JPY may get support if market mood worsens. The BoJ is expected to continue to be dovish and maintain its ultra-loose monetary policy to support the Japanese economy, especially given the slowdown of the country’s CPI rates for May. This may relieve pressure on the bank to make any changes to its dovish position and could weigh on the yen.
On Friday we note the release of Tokyo’s CPI rates for June and preliminary industrial output for May.