Forex Major Currencies Outlook (June 13 – June 17)

USD 

World bank has downgraded the global GDP for 2022 to 2.9% from 4.1% in January. Conflict in Ukraine and China lockdowns are hurting growth and with rampant inflation case for stagflation rises. According to their estimates avoiding recession will be very hard for some economies. If many of the downside risks come to fruition, global growth could see a drop of 2.1% in 2022 and 1.5% in 2023. 

Inflation in May continued to rise. Headline CPI came in at 8.6% y/y vs 8.3% y/y in April and 1% m/m vs 0.7% m/m as expected. Core CPI rose 6% y/y, it was lower than 6.2% y/y the previous month, but still higher than 5.9% y/y as expected with a 0.6% m/m increase. Markets are now pricing three rate hikes of 50bp (June – July – September) with around 40% chance of a 25bp hike in November. USD has surged across the markets as investors now see rate at around 3% by the end of the year. The yield on a 10y Treasury started the week at 2.964% and quickly climbed above 3% and hovered around that level for the entire week. 

This week we will have Fed meeting as well as retail sales data. A 50bp rate hike is fully priced in for both June and July meetings. We will get a new hawkish dot plot. 

Important news for USD: 

Wednesday:

• Fed Interest Rate Decision
• Retail Sales 

EUR 

ECB has left the key rates unchanged as was widely expected. APP purchases are announced to end on July 1 and first interest rate hike will be a 25bp rate hike at July meeting with further rate hike coming in September. If the economic conditions require the Governing Council is prepared to hike by higher amount in September. Statement shows that inflation pressures broadened and intensified. They will stay elevated for some time which lead to upward revision in inflation projections. Inflation is now seen at 6.8% in 2022, 3.5% in 2023 and 2.1% in 2024. Core inflation is seen at 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024. Projections for GDP growth are seen at 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. The outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up when compared to projections made in March. New projections show risks of stagflation increasing. 

During the press conference ECB President Lagarde stated that decision on rates was unanimous. She added that fighting inflation was the main focus of the meeting. Additionally, she remarked that new instruments can be deployed in the future in order to tackle fragmentation in the Eurozone bond market. Fragmentation refers to the fact that borrowing costs in so-called peripheral countries (Italy, Greece and other highly-indebted countries) are rising faster than in the core countries (Germany, France, the Netherlands). ECB policymaker Villeroy stated that “neutral rate” is within a 1-2% range and that ECB may be forced to go over that level. 

Final Q1 GDP reading saw number revised up to 0.6% q/q vs 0.3% q/q in the second estimate and 5.4% y/y vs 5.1% y/y in the previous estimate. Digging into the details we can see the net exports were the biggest contributors while both private and government spending were drags. With net exports being a very fickle category and after the eruption of Ukraine – Russia conflict we can see them being a drag on Q2 GDP and unless private consumption and government expenditure improve we can see a negative print. 

GBP 

Final services reading improve considerably to 53.4 from 51.8 as preliminary reported which gave a boost to the pound. S&P Global notes that: “May data illustrate a worrying combination of slower growth and higher prices across the UK service sector.” However, the reading is still the lowest since February of 2021 and pound could not sustain gains made on the announcement. Prime Minister Boris Johnson survived a no-confidence vote, however it showed that a large amount of MPs were for his resignation (211-148). He made an announcement following the vote that there will be no snap election called. 

This week we will have GDP for the month of April, employment data and finally BOE meeting. BOE is expected to deliver a 25bp rate hike but the language of the statement will be scrutinized for any ideas of how much more they can raise interest rates without plunging economy into deep recession. 

Important news for GBP: 

Monday:

• GDP

Tuesday:

• Claimant Count Change
• Unemployment Rate

Thursday:

• BOE Interest Rate Decision 

AUD 

RBA gave us a hawkish surprise and raised rates by 50bp to 0.85%. Expectations were for a 25bp to 40bp rate increase. Inflation has increased significantly and is expected to continue rising in the coming months before falling into 2-3% range in 2023. The statement showed that “the resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.” The statement ends with: “The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.” We will see further rate hikes in the coming months, however next inflation data point (Q2 CPI) will be available on July 27. We may see “only” 25bp rate hike at July meeting and then a 50bp at August, after inflation data is published. 

Caixin PMI data for the month of May showed services improve to 41.4 from 36.2 in April, but expectations were for a rise to 47.3. Lockdowns have taken a heavy toll on services industry in China and the reading shows it. There was a continuation of a downtrend in employment sub-index. Composite rose to 42.2 from 37.2 the previous month. Once the restrictions are lifted the readings will move into the expansion territory (above 50). Trade Balance data for the month of May showed a huge jump in trade surplus as restrictions eased. The number came in at $78.76bn vs $57bn as expected and up from $51.12bn in April. Exports jumped 16.9% y/y due to increase in factory operations and improving logistical conditions while imports rose 4.1% y/y on the back of improving domestic demand. Inflation in May came in unchanged at 2.1% y/y while PPI came in at 6.4% y/y vs 8% y/y. 

This week we will have employment data from Australia and production and retail sales data from China. 

Important news for AUD: 

Wednesday:

• Industrial Production (China)
• Retail Sales (China)

Thursday:

• Employment Change
• Unemployment Rate 

NZD 

GDT auction showed a 1.5% increase in GDT price index. This breaks a streak of 5 auctions with declining dairy prices. Butter and butter milk prices showed the biggest increase. This data input will help improve terms of trade for Q2. RBNZ has put forth their plan for selling government bonds accumulated during QE program. It will start on July 1 and bonds will be sold in order of maturity to the total amount of NZD5bn per year. 

CAD 

We had another stellar employment report from Canada. Employment change in May came in at 39.8k vs 30k as expected. The unemployment rate slipped to 5.1% and is now at the lowest level on record. This was achieved with participation rate staying the same at 65.3%. Average wages rose 3.9% y/y vs 3.4% y/y in April. All of the jobs created were full-time (135.4k) while part-time jobs dropped (-95.8k). Service producing jobs rose by 81k while goods producing jobs decreased by 41k. The labor market is getting tighter and there is nothing in this report that will deter BOC from the rate hike path. 

BOC has flagged high housing prices over the past few years as leading to increasing vulnerability but stated that it is still too early to say that recent decrease in housing activity is the start of a substantial correction. Governor Macklem said that some moderation in housing would be healthy as housing market has been unsustainably strong. He reiterated that bank’s top priority is to bring back inflation to the target, that economy needs higher rates and that they will likely need to go above neutral rates of 2-3% in order to achieve their goal. 

JPY 

Average wages in April rose by 1.7% y/y but when factoring in inflation real wages were negative at -1.2% y/y. Household spending dropped -1.7% y/y which indicates a very slow start to Q2. Falling wages in real terms cannot bode well for consumer confidence and that is reflected in drops in spending. Final GDP reading showed that economy contracted by less than preliminary reported as it came in at -0.1% q/q and -0.5% y/y. Private consumption came in at 0.1% vs 0% as preliminary reported while business investment dropped -0.7% vs 0.5% in preliminary reading. Government spending increased by 0.5% while net demand was still still a drag on the reading as imports were higher than exports. 

This week we will have a BOJ meeting. No changes in rate are expected but comments on rising inflation and weakness of yen will be of importance. 

Important news for JPY: 

Friday:

• BOJ Interest Rate Decision 

CHF 

SNB published Swiss foreign exchange reserves for the month of May and they totalled CHF925.4bn vs CHF926.1bn the previous month. Seasonally adjusted unemployment rate in April came in at 2.2%, unchanged from previous two months showing the incredible tightness of Swiss labor market. 

This week we will have a SNB meeting. Markets see the probability of a rate hike around 70% but we do not see them acting before ECB. We will see how closely SNB decides to follow ECB and if they also plan to raise rates in July. 

Important news for CHF: 

Thursday:

• SNB Interest Rate Decision

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}