Below is a summary of the news likely to affect exchange rates this week:
> The USD could weaken if expectations for the Fed to turn dovish increase.
> For the GBP, all eyes will be on CPI rates.
> Australian employment data to move the AUD.
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 UK’s labour market data missed estimates last week but with firms offering high salaries, wage pressures have remained elevated. Higher disposable income would boost inflationary pressures and could hurt the economic outlook. Despite BoE Governor Andrew Bailey having raised interest rates to 5%, price pressures in the UK economy haven’t shown any signs of softening, as labour shortages and higher food inflation helped to increase inflation.
The BoE is set to raise interest rates further and money markets anticipate interest rates to peak around 6.5%. The central bank’s next interest rate decision will be on the 3rd of August.
The Eurozone outlook remains worrying, as Germany’s ZEW indicators for July disappointed markets suggesting that conditions have deteriorated. The Eurozone’s industrial output growth rate for May also slowed down. In terms of monetary policy, the ECB remains hawkish with the market expecting 2 more rate hikes in July and September.
As for financial releases, we note the key release for the UK, the Consumer Price Index (CPI) data, which will be due out on Wednesday at 06:00 GMT.
On Thursday, we note the Eurozone’s Preliminary Consumer Confidence for July and, on Friday,
UK Retail Sales for June.
Expected GBP/EUR Volatility:
Investors will keep an eye on the UK’s inflation data as higher inflation could trigger fears of recession.
Expectations for more aggressive BoE rate hikes will support the GBP/EUR.
ECB policymakers’ dovish comments about inflation easing and that the rate hiking cycle is coming to an end, may weigh on the euro.
After a 5-day losing streak last week, the USD attempted a recovery on Friday. The market mood is positive as inflation in the United States has softened significantly. US soft CPI and Producer Price Index (PPI) report for June has raised expectations for one more interest rate hike from the Federal Reserve (Fed).
The US economy is in a disinflation process, but Fed policymakers have not turned dovish. Fed Governor Christopher Waller is still confident that two more interest rate hikes are necessary this year to bring down inflation to 2%.
In terms of economic data, on Tuesday we get US Retail Sales growth rates for June and Industrial Production growth rate for June. On Thursday, we note US Weekly Initial Jobless Claims figure
and July’s Philly Fed Business Index.
Expected GBP/USD Volatility:
The greenback could weaken if expectations for the Fed to turn dovish increase.
The pound will remain supported and could rise further on expectations of more interest rate hikes by the Bank of England and if market mood continues to be positive.
The EUR/USD climbed to its highest level since February 2022 on Friday. The USD remained weak due to expectations that the Federal Reserve will soon end its policy-tightening cycle. Investors believe that the US central bank will keep rates steady for the rest of the year after the 25 bps rate hike in July.
On the other hand, the minutes of June’s European Central Bank (ECB) meeting showed that policymakers intent to continue with rate hikes beyond July in order to bring inflation back to target. In its June economic projections, the ECB anticipated that inflation would stay above its 2% target until the end of 2025. This hawkish outlook continues to provide support to the EUR/USD pair.
Expected EUR/USD Volatility:
Hawkish ECB outlook and commentary will provide support to the euro, while dovish Fed expectations could weigh on the dollar.
Canadian Dollar (CAD)
The BoC hiked rates by 25 basis points last Wednesday, with BoC Governor Macklem laying emphasis on persistent inflationary pressures in the Canadian economy. Canada’s employment data has shown that the employment market remains tight, with the employment change rising to 59.9k and supporting the Loonie. Unemployment rate, though, rose to 5.4%. May’s building permits growth rate accelerated, despite BoC’s monetary policy.
On Tuesday, we highlight the release of Canada’s CPI rates for June.
Australian Dollar (AUD)
The cheerful market mood supported the Aussie. However, concerns about the Chinese economy, the contraction of Chinese exports and further deterioration, could weigh on the AUD. In terms of monetary policy, the release of the RBA’s July meeting minutes on Tuesday will be closely watched. The market anticipates another rate hike after a pause in the August meeting.
On Monday, we get China’s Urban Investment growth rate for June, Industrial Output growth rate for June, Retail Sales growth rate for June, and GDP rates for Q2. From Australia, we highlight Thursday’s release of Employment data for June.
Turkish Lira (TRY)
On Thursday, markets will also focus on Turkey’s CBT interest rate decision. The bank hiked rates in its last meeting, raising them to 15%, but disappointed expectations and weakened the TRY. Market participants will be cautious ahead of the decision and if market expectations for another rate hike are not met, then the Lira could drop sharply.