FX outlook – USD, EUR, GBP, CAD, AUD, NZD
Despite starting the week very strong, the US dollar saw most of its gains cut back due to recent economic indicators suggesting the Fed could skip September’s rate hike. It is understood the Federal Reserve will consider another rate hike at its next policy meeting if the labor market and inflation digits fail to respond to its tight monetary policy that has been implemented since March 2022.
Leading up to the NFP event, some economic indicators reported earlier continued to show stability in the US economy. Though missing estimates, the ISM Manufacturing PMI (46.4 vs 46.0) and ISM Manufacturing Prices (42.6 vs 41.8) came out better than the previous month with the number of job openings remaining a little unchanged at around 9.6 million. Another strong ADP figure (324k) once again failed to act as a reliable signal of the headline figure, which fell to 187k. The weaker payrolls figure was offset by a 0.1% decline in unemployment, while average hourly earnings ticked 0.1% higher to 0.4%.
This week, rate pause sentiments could continue to push the US dollar lower in anticipation of the CPI and unemployment claims report scheduled for Thursday. There is a strong chance that we see US inflation head higher, as base effects see a July 2022 figure of 0% replaced. Thus, markets will face up to the fact that we could see the downward trajectory of inflation stopped in its tracks for the time being. That could bring dollar strength, but it comes down to the question of how well-positioned markets are for what seems to be a predictable rise in US CPI.
The Euro looked to shake off the impact of the dovish ECB as optimism around the economy picked up. The ECB raised rates by 25bps at its July meeting but failed to give a clear signal on its future policy path causing a drop for the Euro.
Reviewing the performance of the Euro in the previous week, the currency managed to cut back some of its losses as the eurozone reported growth despite a quiet week. The latest PMI reports told two different tales with the manufacturing sector showing contraction while the service sector indicating a slowdown. The economy witnessed a rebound in the last quarter with the latest GDP reading showing a 0.3% expansion, beating the forecast at 0.2% and improving from the Last quarter’s report of -0.1%. Core inflation remained stable at 5.5% while headline inflation dropped to 5.3% from 5.5%.
With less impactful economic indicators for the Euro this week, its strength and weakness will be determined by the outcome of the US inflation report. Currently, the Euro will capitalize on any Dollar slip-ups as far as key economic indicators continue to play into the path of the Federal Reserve.
The Canadian dollar slid further after the last jobs report from Canada showed the labor market is responding to the BOC’s monetary policy approach, reducing bets of another rate hike from the central bank.
The Canadian economy lost about 6.4k jobs in July, missing the market forecast of 24k and a far distance from the previous month’s reading at 59.9k. We can recall that the BOC took interest rates higher by another quarter in July and stated that it will remain committed to bringing inflation down to its 2% target. With the labor market already showing signs of loosening up, it will be too hasty to conclude that the BOC will divert from its monetary policy approach as it will need to look upon more economic data and observe the monetary policy activities of its counterparts.
With very little to take out of the calendar on strong economic indicators that could spark volatility for the CAD, the country’s major export Crude oil could give support to the currency as its price is currently threatening to move above a 5-month price ceiling with supply cuts from OPEC and an uptick in demand being the major driver of its price.
The pound has been treading water over recent weeks, with the sharp decline in inflation announced in July seeing some of the heat taken out of the currency. Nonetheless, inflation remains a critical issue for the Bank of England to address, with the lofty rate of 7.9% for headline CPI well above their peers. That recent decline in headline inflation did have a tangible impact upon thinking at Threadneedle street, with the pace of tightening shifted back down to 25-basis points last week.
The relative stability seen for the pound is a reflection of the market knowledge that a near-term slowdown in the pace of interest hikes does not necessarily eradicate the for further tightening as we move forward. The BoE prediction that CPI will hit 5% by October simply highlights how far behind the curve the UK remains. That could bring further upside for the pound given the potential for additional tightening.
Looking forward, Friday brings a focus on UK economic strength, with GDP data covering both June and the second quarter. Both are forecast to come in at a somewhat underwhelming 0.1%, although this does at least maintain a theme of growth in a year that had been predicted to bring a UK recession. Also watch out for industrial and manufacturing production data, with both readings expected to move back into expansion after a May contraction.
The Australian dollar has been hit hard over the course of the past week, with the surprise decision to keep rates steady at 4.10% sparking a sell-off for the Aussie dollar. From the perspective of the RBA, this decision reflected a declining inflation rate and weakening demand throughout the Australian economy. As such, markets are looking for a single further hike in November, taking the terminal rate to 4.35%. That is a shift from previous expectations that rates would ultimately top out at 4.6%.
Nonetheless, inflation remains the key driver of sentiment here, with any significant uptick in price pressures likely to influence expectations from the RBA going forward. Things have steadied over recent trading days, with the Australian dollar regaining some of the lost ground. Nonetheless, there remains a significant risk that this recent recovery phase is a mere short-term retracement period before the sellers come back into play once more.
Looking ahead, this week has little to get excited about, with the economic calendar largely devoid of any notable market-moving releases out of Australia. However, consumer inflation expectations data from the Melbourne Institute will be one particular highlight. Coming off the back of two consecutive 5.2% readings, any move lower would be notable as it puts inflation expectations back onto a downward trajectory.
The close correlation between AUD and NZD saw the New Zealand dollar hit hard in response to the RBA’s decision to keep rates steady last week. However, the two countries have very different monetary policy standings, with the RBNZ having already moved early to drive rates up to a lofty 5.5%. With that in mind, the unexpected jump in New Zealand unemployment to 3.6% (from 3.4%) further curtails expectations of additional tightening. Markets continue to price another hike before year-end, but any additional weakness in the economic data will likely play a key role in market expectations for New Zealand interest rates.
Looking forward, it is a relatively quiet week in terms of economic data from New Zealand. The one event of note comes in the form of the quarterly inflation expectations figure. Markets are looking for a figure around 2.5% following the Q2 reading of 2.79%. A figure below 2.5% could put further pressure on NZD, while a higher reading would likely see the currency lifted.
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