Below is a summary of the news likely to affect exchange rates this week:
> For the USD, hawkish commentary by Fed policymakers to influence.
> GBP will find support on the prospects of further rate hikes and a hawkish BoE.
> The EUR could weaken if ECB becomes more dovish as inflation eases.
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.
With persistent inflation, British households are still struggling with the cost-of-living crisis. While headline CPI rate has slowed down, it remains higher than in the Eurozone and the US. With inflation remaining elevated, markets expect the bank to continue hiking rates with the Bank Rate to peak at 5.5%.
The ECB’s monetary policy tightening seems to be working as inflation has started to ease in France, Germany and the Eurozone, which has also weakened the euro. As it stands, the market expects two more 25 basis-point rate hikes by the bank.
In terms of economic data, on Monday investors will turn their attention towards the Eurozone’s forward-looking Sentix index for June and on Tuesday, Germany’s industrial orders for April. On Wednesday, we get Germany’s industrial output for April and UK Halifax House prices for May. On Thursday, the Eurozone’s GDP rate for Q1 will be of interest.
Expected GBP/EUR Volatility:
If the BoE remains hawkish, then the pound will find support. The euro could weaken if ECB policymakers become more dovish due to inflation easing off.
The debt ceiling deal has been approved by the House of Representatives and the Senate and has helped to improve market sentiment.
However, there are concerns about the US economy after the ISM manufacturing PMI figure remained below 50, suggesting that economic activity in the manufacturing sector has contracted.
In terms of Fed monetary policy, the market expects another rate hike in July and then rate cuts in September and after.
On Monday, we note US factory orders for April and the ISM non-manufacturing PMI number for May. On Thursday we have the US weekly initial jobless claims figure.
Expected GBP/USD Volatility:
If Fed policymakers remain hawkish then the USD will remain supported.
On Thursday, the US dollar was weaker due to dovish Fed expectations. Philadelphia Federal Reserve Bank President Patrick Harker repeated his belief that it is time for the central bank to “hit the stop button” for at least one meeting.
On Friday, following the release of the Nonfarm Payrolls by the US Bureau of Labour Statistics (BLS) the USD rose. Nonfarm Payrolls rose 339,000 in May, surpassing market expectations of 190,000. The Unemployment Rate rose to 3.7%, while the Labour Force Participation rate remained at 62.6%. Annual wage inflation fell to 4.3% from 4.4%.
Expected EUR/USD Volatility:
If there is a strong possibility of one more 25 basis points (bps) rate hike, then the USD could strengthen and push the EUR/USD lower. On the other hand, expectations for more rate hikes by the ECB will support the pair.
Canadian Dollar (CAD)
Canada’s GDP rates have risen, lending support to the Loonie. The Loonie will find further support if oil prices increase.
On Wednesday, we highlight the BoC’s interest rate decision. The bank is expected to remain on hold at 4.5%. The market anticipates another 25 basis points rate hike in the July meeting before pausing.
On Wednesday, we note trade data for April and on Friday Canada’s employment data for May. If Canada’s employment market tightens further, then the CAD will strengthen.
Australian Dollar (AUD)
The AUD could weaken if China’s economic recovery slows down, as the two countries are close trade partners. If there are more signs that economic activity in China is shrinking, then the Aussie will weaken.
On Wednesday, we note the release of Australia’s GDP rate for Q1 and China’s trade data for May. On Thursday, trade data for April will also draw attention.
On Tuesday, we highlight the RBA’s interest rate decision. The bank is expected to remain on hold but a hawkish rhetoric or even a surprise rate hike will strengthen the Aussie.
Turkish Lira (TRY)
Over the past week, the Turkish lira has weakened as Erdogan’s re-election increased market expectations for an extension of his unconventional economic policies. With high inflation, net FX reserves falling below zero and no potential of raising rates, the lira will struggle.
On the positive side, Turkey’s GDP rate has risen sharply beyond expectations. Additionally, according to media reports, Mehmet Simsek could become the next Finance Minister, suggesting a return to orthodox economic policies, which will help strengthen the lira.