Below is a summary of the news likely to affect exchange rates this week:
> For the USD, we note Chairman Jerome Powell’s testimony before Congress on Thursday.
> GBP to be influenced by Bank of England’s interest rate decision on Thursday.
> Canada’s retail sales 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 key event in the coming week will be the BoE’s interest rate decision on Thursday. The bank is expected to hike rates by 25 basis points, while there is a small possibility of a 50-basis points rate hike. The market anticipates further rate hikes before the end of the year, with inflation remaining elevated. Ahead of the BoE’s interest rate decision, we would like to note the release of inflation rates for June which could impact expectations for further rate hikes by the central bank. The UK employment market remained tight for April, which could give more room to the bank to further tighten its monetary policy. April’s GDP rate rose, indicating faster growth.
The EUR was supported last week after the ECB hiked rates by 25 basis points and signalled further rate rises are coming. There are concerns about the Eurozone economy, with the German economy currently being in a technical recession, while Germany’s manufacturing sector could also slow down.
In the coming week, we highlight the release of the UK’s CPI rates for May and the CBI trends for industrial orders for June, both due out on Wednesday. On Thursday, we get the Eurozone’s preliminary consumer confidence for June. On Friday, we emphasise the release of the preliminary June PMI figures for France, Germany, the Eurozone and the UK.
Expected GBP/EUR Volatility:
We anticipate the bank to deliver a 25-basis points rate hike and maintain a hawkish tone. If not, then the pound could weaken.
The ECB’s hawkish outlook and any signals for further tightening to bring Eurozone inflation to its 2% target may provide support to the euro.
The USD has weakened last week, despite getting some support from the Fed’s interest rate decision. The bank remained on hold as expected but indicated it will proceed with two more rate hikes before the end of the year. The Fed’s economic projections are optimistic suggesting the US economy will avoid a recession in 2023 and 2024. Analysts, however, remain concerned about the economic outlook as data regarding production and demand indicated a slowdown of economic activity.
We would also like to draw attention to a couple economic releases from the US: On Thursday we get the US weekly initial jobless claims figure and on Friday preliminary June PMI figures.
Expected GBP/USD Volatility:
The Fed’s hawkish tone may continue and provide support for the greenback and investors will closely watch Fed Chairman Jerome Powell’s testimony next week for clues about the bank’s intentions.
GBP/USD’s solid rally on Friday is expected to continue as risk appetite remains strong.
The ECB rate hike last week may have given the euro a good boost, but moving higher than that may require more than a hawkish central bank as the growth outlook needs to improve.
Expected EUR/USD Volatility:
Expectations for the Fed to hike interest rates again in July could support the USD but possible rate cuts for the US central bank next year will push the EUR/USD higher.
Canadian Dollar (CAD)
The market expects the BoC to hike rates again in its July meeting, which will provide support to the Loonie. Disappointing employment data for May suggests the employment market is not as tight, while the House Starts number dropped, and manufacturing sales growth rate softened, revealing some cracks in the Canadian economy.
If market sentiment turns negative and investors avoid risk, then the CAD could fall, but if market mood improves then the Loonie will strengthen. In terms of economic releases, we highlight producer prices for May on Monday and April’s retail sales on Wednesday.
Australian Dollar (AUD)
In terms of monetary policy, the market expects the bank to remain hawkish and hike rates again in the August meeting before pausing again. The employment market for May was tight with the employment change figure reaching almost to 76k, which has supported the hawkishness of the bank. While consumer confidence has improved, business dropped.
Due to the close ties with China, and the sensitivity of the AUD to China’s economic data we would like to highlight market concerns about the Chinese economy. May’s Chinese industrial output growth rate, urban investment and retail sales growth rates all slowed down. The weak Chinese data could weigh on the Aussie. On Friday, we note the release of the preliminary June PMI figures for Australia.
Turkish Lira (TRY)
Turkish President Erdogan appointed finance executive Hafize Gaye Erkan as the new Governor of CBRT in an attempt to reverse the course of previous rate cuts and fight high inflation. The appointment has helped the lira stabilise against the USD.
News of a blast in a Turkish factory in Ankara and the seizing of $1 billion of fake Turkish money in Istanbul have weighed on the TRY.
On Thursday, we get the CBT’s interest rate decision, and the bank is expected to remain on hold at 8.5%. Ms Erkan promises to follow a more orthodox approach in monetary policy and while the markets are not connived yet, a potential rate hike could change public perception.