Forex Major Currencies Outlook (Aug 15 – Aug 19)

USD 

July CPI came in at 8.5% y/y vs 8.7% y/y as expected and down from 9.1% y/y in June. Monthly reading was flat thus giving Fed the first data point needed to consider slowing down their hike path. We still consider that it is too early for major changes in policy as this is the first time that inflation did not increase y/y since August of last year. Core CPI was unchanged at 5.9% y/y while markets were expecting a 6.1% y/y print. A huge drop in gasoline and energy prices was the main culprit for lower than expected reading, followed by apparel, airfares and education. On the other hand, food prices increased. Investors were quick to sell USD and dollar lost over 100 pips against majority of the majors in a short time period after the news was released. Chances of a 75bp rate hike in September have dropped massively after the report. Be mindful that we will still have August NFP and August CPI reading before September 21 Fed meeting. San Francisco Fed President Mary Daly said that a 50bp rate hike is her base case for the September meeting, however she did not rule out a 75 bp hike, claiming that she was open to it. According to her, the Fed funds rate should be at 3.4% by the year-end. 

The yield on a 10y Treasury started the week at 2.8% and fell toward 2.7% post CPI report and then surged to 2.9% toward the end of the week. Spread between 2y and 10y Treasuries went as low as -47bp. FedWatchTool saw the probability of a 50bp rate hike at 33.5% and probability of a 75bp rate hike at 66.5% reverse after the CPI report so now there is a 53.5% chance of a 50bp rate hike and 46.5% chance of a 75bp rate hike in September. 

This week we will have consumption data as well as FOMC minutes from the July meeting. 

Important news for USD: 

Wednesday:

• Retail Sales
• FOMC Minutes 

EUR 

Final readings of July inflation showed no changes to German and French CPI readings. They came in at very high 7.5% y/y and 6.1% y/y respectively. Natural gas prices have spike at the end of the week to over €200 as concerns about its availability over the winter mounted. Germany will be looking to fire up coal power plants going into the winter. With EU imposing ban on import of Russian coal they will be turning to the US and Australia for coal imports. Industrial production for June, a very late data, came in at 0.7% m/m vs 0.2% m/m as expected. May reading was revised to 2.1% m/m from 0.8% m/m and these readings helped lift Q2 GDP. However, with both backlog of orders and new orders dropping we see dark times ahead for European industry. 

GBP 

Preliminary Q2 GDP reading saw economy contract by -0.1% q/q vs -0.2% q/q as expected with services falling 0.4% q/q. Household consumption was down -0.2% while positive contribution from net trade, exports up 2.4% q/q and imports down -1.5% q/q, managed to keep GDP from falling deeper. Yearly figure printed 2.9% y/y, better than 2.8% y/y as expected, but still down from 8.7% y/y in Q1. June GDP came in at -0.6% m/m vs -1.3% m/m as expected with all categories posting declines, even construction output fell -1.4% m/m which is a first negative reading in eight months. 

This week we will have employment and inflation data. 

Important news for GBP: 

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI 

AUD 

Trade balance from China for the month of July continued to improve. Surplus widened to $101.26bn with exports rising 18% y/y. Imports have improved from June reading (2.3% y/y vs 1% y/y), however it was at a slower pace than 3.7% y/y as expected. Questions about the health of domestic demand are mounting and pose problems for all other exporting countries. When looking at the composition of imports we can see that imports from Russia rose 49.3% y/y to $10bn as geopolitical tensions bring two countries closer. Exports to Russia grew 22.2% y/y to $6.77bn. 

Inflation in China in July rose but not as fast as expected. The number came in at 2.7% y/y vs 2.9% y/y as expected, up from 2.5% y/y in June. PPI, on the other hand, posted a 4.2% y/y reading vs 6.1% y/y the previous month. It was a staggering -1.3% m/m drop and it represents ninth consecutive month of falls in PPI. China’s PPI prices are influencing export prices of its products and consequently input prices for other major economies that import Chinese products. A drop in PPI will help ease inflation pressures around the globe. 

This week we will have employment from Australia as well as industrial production and consumption data from China. 

Important news for AUD: 

Monday:

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

Thursday:

• Employment Change
• Unemployment Rate 

NZD 

RBNZ published its Survey of expectations and it showed inflation expectations at 4.86% for one year out and 3.07% for 2 year out. Survey sees Official Cash Rate at 3% for Q3. GDP growth is seen at 1.49% in 2022 and 1.89% in 2023. Long-term inflation expectations remain anchored close to the midpoint of the RBNZ’s target band range of 1–3%. We should see a 50bp rate hike next week. 

This week we will have RBNZ meeting. Almost all forecasts are for a 50bp rate hike which will lift the rate to 3%. We may see bank turning a bit dovish in the statement as they back up from front-loading of rates and move to more data dependent approach. 

Important news for NZD: 

Wednesday:

• RBNZ Interest Rate Decision 

CAD 

Loonie has had a great week against the USD, falling even before the CPI reading and then continuing lower post-report for the total gain of over 200 pips. Oil prices have rebounded from $88 to $95 and then settled below $93 at the end of the week. The recovery in oil prices helped CAD gain against the USD and GBP. 

This week we will have inflation data. 

Important news for CAD: 

Tuesday:

• CPI 

JPY 

PPI data for the month of July came in at 0.4% m/m as expected and 8.6% y/y vs 8.4% y/y as expected. The reading was 9.2% y/y the previous month so some easing of the price pressures is seen but the number is still very elevated when looking at the historic data. Additionally, there is a very lose connection between PPI and CPI data in Japan. 

This week we will have a preliminary Q2 GDP reading. 

Important news for JPY: 

Monday:

• GDP 

CHF 

SNB total sight deposits for the week ending August 5 came in at CHF749.6bn vs CHF747.1bn the previous week. Seasonally adjusted unemployment rate in July remained unchanged at 2.2% for the sixth consecutive month.

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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.}