FX outlook – USD, EUR, GBP, CAD, AUD, NZD
Table of Content
The US dollar finished the previous week strong against other major currencies spurred by strong economic growth which means a recession could be avoided despite aggressive tightening by the Fed. The latest quarterly GDP report indicated the economy expanded by about 2.4%, beating estimates with inflation gradually easing off. Also, unemployment claims dropped from the previous month as the labor market continues to yield to the Fed’s expectations. The US dollar index made a sharp recovery from its post-FOMC decline, ending the week with +0.61% gain
Earlier, the Federal Reserve members met for the July conference and raised interest rates as expected by 25bps. However, analysts were concerned about the future policy path, if the central bank was going to continue with rate hikes or take a pause. The Fed Chair, Jerome Powell made it clear that the central bank will be data-dependent (Jobs data, CPI) going forward as they remain cautious of making premature decisions. With growth looking healthy, and inflation likely to tick higher over the coming months, there is little reason to expect a major reversal in tone from the Fed.
This shifts attention to the upcoming jobs and inflation report with the former set to be reported this week Friday. Markets are looking for the jobs numbers to show stability, with a payrolls figure of 200k (from 209k), and the unemployment rate unchanged at 3.6%. However, it is the average earnings figure which will be keenly watched, with forecasts signalling a tick lower to 0.3% for the month (from 0.4%). The ability to drive down wage growth will be key in lowering inflation pressures. With the US inflation report due next week, markets are keen to utilise any economic reading to gauge whether price pressures will remain an issue or fade away. With the dollar holding a key role as a haven, any further weakening inflation pressures would likely be reflected in significant USD downside.
The Euro suffered heavily, dropping about -0.97% in value after the ECB president Christine Lagarde failed to boost the currency that has already been struck by slow economic activity as highlighted by the latest eurozone PMI readings. The business activity around the German and French economies contracted in the month of July as recession worries kicked in. The Euro lost over -0.80% in value against the USD and CAD as the bears swung in.
Despite the ECB raising rates at its policy meeting, a shadow hung over the economic projections about the economy. The ECB raised rates by a quarter taking its refinancing rates to 4.25% which was expected as policy members indicated there was a need for the July hike at its last meeting. However, the ECB President failed to give a clear signal if the central bank was going to either continue hiking or take pause when it meets in September. Christine Lagarde indicated the ECB will monitor inflation data before its next meeting as this will determine whether it will maintain its restrictive monetary policy or skip it. Unfortunately, the decline in today’s CPI reading was minimal, with the core figure failing to budge at 5.5%. For Lagarde, she is stuck between the need to drive down inflation, and pressure from the Germans to help halt the economic squeeze.
Looking ahead, the euro will be looking for guidance on the economic picture, with PMI surveys on Tuesday and Thursday, German factory orders, Italian industrial production, and eurozone retail sales on Friday. The question for traders is whether the ECB will continue to push rates higher despite expectations that the region will gradually feel the squeeze of their actions.
The pound has experienced a somewhat mixed week just gone, with Thursday’s losses swiftly regained on Friday. Part of that came through a risk-off move thanks to improved US economic data that brought expectations of a higher for longer approach from the Fed. However, UK data doesn’t look as rosy, with the latest purchasing managers survey (PMI) heading sharply lower. Whether that will be enough to shift the Bank of England off its tightening path is another question, with CPI still at the lofty heights of 7.9%.
This week sees the Bank of England rate decision bring UK inflation back into focus, with question marks over whether the recent PMI and CPI figures will force the MPC to take a more cautious approach. Or perhaps the Bank of England will opt to make a statement 50-basis point hike, hammering home their desire to force down inflation. Ultimately, a strong pound is beneficial for the BoE, given that it lowers the cost of imports and dampens inflationary pressures.
Whether we do see the Bank of England raise rates by 50-basis points or not is only half the story, with the pound likely to be highly sensitive to any commentary over future tightening. The fact that the UK has the highest rate of inflation out of the major economies will not be lost on the BoE, and thus there is a strong chance that we see a hawkish tone that could bring further sterling strength.
The Canadian dollar recorded another good week as it rode on the back of rising crude prices despite having a quiet week. The commodity currency benefitted from the rise in oil prices as they appreciated on-demand optimism and a strong US economic data release.
The Canadian economy has remained one of the most resilient so far despite the Bank of Canada keeping up with interest rates with its counterparts. The Bank of Canada (BOC) raised interest rates by 25bps taking it to 5% its highest level in 22 years as it left the door open to more rate hikes. The central bank diverted from its approach of a rate pause this year after inflation remained stubborn amidst strong economic growth. The Canadian economy continues to see consumer activity increase despite price pressure with expectations of economic growth by 1% in the second half of the year.
This week, the jobs report from Canada will spark market volatility for the Loonie and it is expected we worsening employment change (15k) and unemployment rate (5.5%) figures. The direction of travel for the Canadian jobs market could help influence CAD pricing given the potential for the BoC to ease off their tightening path in the event that the economy starts to suffer.
The Australian dollar has been in for a tough ride over the course of the past week, with the currency losing ground against many of the major currencies. With Australian inflation coming in significantly below market expectations, there is a feeling that the RBA will soon take their foot off the gas after a prolonged period of monetary tightening. The quarterly CPI reading of 0.8% annualises to 3.6%, which is respectable compared with European levels. Meanwhile, the quarterly PPI figure of 0.5% points towards a potential annual figure of 2% in factory prices.
There are also economic concerns for the RBA to consider, with Australian retail sales (-0.8%) and Chinese manufacturing PMI (49.2) both signalling potential weakness in the growth story. The RBA rate decision due tomorrow should provide a major source of volatility for the AUD, with markets expecting another 25-basis point hike despite the latest inflation and growth data.
Could that mean a surprise decision to keep rates steady? Bloomberg surveyed 26 economists, with 15 expecting a hike and the remaining 11 looking for the RBA to keep rates steady. That split means we are likely to see AUD volatility in either case. While the outlook typically provides a significant driver within any such meeting, this meeting is notable as it represents the penultimate meeting for outgoing RBA Governor Philip Lowe. As such, comments from Lowe are less important than those from his successor, Michele Bullock.
The New Zealand dollar has kicked off the week on the front-foot, with the currency currently outperforming in the wake of a somewhat underwhelming week just gone. A general lack of data has seen the New Zealand trade balance release provide the one significant release to focus upon. With the trade surplus deteriorating significantly, it looks likely that we will soon see the country fall back into deficit once again. It is notable that the balance of trade has deteriorated significantly over recent years, with Chinese economic struggles likely to be a significant reason for the deeper and longer trade deficits in New Zealand.
Today’s Chinese PMI surveys brought both an improvement in the manufacturing picture, and decline in services sector growth. From a New Zealand perspective, there will be hope that the Chinese embark on a fresh round of stimulus measures in a bid to drive up demand. While Australia relies on Chinese manufacturing, New Zealand exports are more heavily geared towards Chinese consumer spending habits. Thus, any Chinese efforts to boost consumer activity should similarly help drive up demand for New Zealand products and their currency. The week ahead sees a focus on jobs data due out on Tuesday, with the unemployment rate expected to move higher once more. The steady increase in New Zealand unemployment could push the RBNZ to take a more cautious approach to bringing down inflation, and thus weakness in the jobs market could lead to NZD declines.
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