Forex Major Currencies Outlook (July 25 – July 29)

USD 

Housing starts in June came in at 1559m vs 1580m as expected. Building permits came in at 1685m vs 1695m as expected. Both numbers missed the expectations, however May housing starts were revised up to 1591m which paints the report in brighter light. Member of the Fed’s Board of Governors Weller stated that if housing data comes “materially stronger than expected” then he would lean toward a 100bp rate hike. After this report we can safely assume that 75bp rate hike is the way to go next week. Atlanta Fed GDPNow forecast for Q2 has slipped to -1.6% after the report. 

The yield on a 10y Treasury started the week at 2.92% and hovered around the 3% level before ending the week below it. Spread between 2y and 10y Treasuries went as low as -23bp during the week. The main reason for inversion is Fed’s aggressive hiking stance which pushes yields on 2y Treasuries up while markets see growth issues in the future, buy 10y Treasuries and push yields on them down. FedWatchTool sees the probability of a 75bp rate hike at 72.7% while probability of a 100bp rate hike is at 27.3%. 

This week we will have a Fed meeting, second reading of Q2 GDP as well as PCE inflation data. Markets are seeing a 75bp rate hike. 

Important news for USD: 

Wednesday:

• Fed Interest Rate Decision

Thursday:

• GDP

Friday:

• PCE

EUR

We had a leak on Tuesday morning that ECB is considering a 50bp at July meeting. The leak was similar to the one that occurred before Fed July meeting. Markets have propelled EUR and it quickly gained over 100 pips against the dollar. The when it was time to announce the rate there was a delay and finally ECB delivered a 50bp rate hike taking its rate out of the negative territory and putting it at 0%. The rate hike represents frontloading and further normalization of interest rates will be appropriate. A new instrument called Transmission Protection Instrument (TPI) has been introduced. It’s main purpose is to secure the effective transmission of monetary policy. It will be mainly used to tackle fragmentation risks. EURUSD rallied on the news and rose almost to the 1.03 level.

At the press conference ECB President Lagarde stated that inflation is expected to remain undesirably high for some time with price pressures spreading across increasing number of sectors. She added that weak EUR is adding fuel to the inflation fire. Wages are showing signs of gradual pick up. All members of Governing Council voted for a 50bp rate hike and prior guidance on September rate hikes no longer applies as members will now be data dependent. ECB will accelerate rate hikes, but will not go higher than previously expected, there will be no changes to the final level. The EUR tanked heavily on this statement and fell to the levels seen before the rate hike announcement.

Preliminary July Consumer confidence in Eurzone dropped to -27 from -23.6 the previous month. Italian Prime Minister and former ECB President Mario Draghi has resigned. Italian politics is in a mess. Spread between Italian 10y bonds and German 10y bonds widened to over 200bp. New elections most likely to be called on September 25. As things stand at the moment centre-right parties have the clearest path to victory. There was a resumption of gas flow through the Nord Stream 1 pipeline at 40% of pipeline’s capacity. Additional maintenance is scheduled for July 26 and that one should see the flow of gas drop to 20% of pipeline’s capacity.

Preliminary PMI data for the month of July started to show cracks appearing in the Eurozone. Manufacturing fell into contraction territory for Eurozone (49.6) as a whole as well as for Germany (49.2) and France (49.6). Services managed to stay afloat with 50.6 for the Eurozone and healthy 52.1 for France while Germany plunged to 49.2. Composite for the Eurozone and Germany fell below the 50 level (49.4 and 48 respectively) while France managed to remain in expansion territory. High energy prices and uncertainty surrounding gas coupled with ongoing supply chain issues and tighter monetary policy led to drops in new orders and output and pushes Eurozone toward recession. A small consolation is the drop in inflation pressures as seen in input and selling prices. With a bleak outlook for the months ahead window for ECB to raise rates is narrowing fast which may help to explain why they went for a 50bp rate hike.

This week we will have a second reading of Q2 GDP and preliminary CPI data for July.

Important news for EUR:

Friday:

• GDP
• CPI

GBP

The employment report for June showed claimant count change come in at -20k while employment change for the past 3 months to May rose 296k. The unemployment rate for May remained unchanged 3.8% while average weekly earnings ex bonus ticked up to 4.3% from 4.2% the previous month. The labor market remains tight and BOE is now fully focused on inflation levels.

CPI data for the month of June showed yet another increase with headline number coming in at 9.4% y/y vs 9.3% y/y as expected and up from 9.1% y/y the previous month. This represents a ninth consecutive month of rising inflation and with 0.8% m/m reading inflation will undoubtedly reach BOE’s double digit projection. Energy and food had biggest price increases with petroleum surging almost 10% m/m. Core reading declined for the second straight month and came in at 5.8% y/y as expected, down from 5.9% y/y in May, Nevertheless, this report should cement a 50bp rate hike at August meeting.

Voting for the new Prime Minister entered its final stage. There are two candidates remaining Rishi Sunak who won 137 votes and Liz Truss who won 113 votes. Head-to-head poll puts Truss as a new Prime Minister but candidates now have seven weeks to convince party members to vote for them. Truss voted for Brexit while Sunak voted to remain in the EU which could pose a problem for him in the upcoming vote.

Preliminary July PMI data fared much better than its European counterparts. All three readings beat expectations, however they all came in lower than in June. Manufacturing is at 52.2, services at 53.3 while composite is at 52.8. Digging deeper into the data signs of future slowdown are becoming more and more evident with new orders and output growth slowing down. Inflation pressures are cooling of which is a huge positive for the country where rising cost-of-living are dangerously affecting consumers and businesses.

AUD

Meeting minutes from July showed that further steps are necessary to normalize monetary conditions as well as the size and timing of future rate hikes will depend on incoming data and board’s view on inflation and labor as well as risks to the outlook. There was a consideration of both 25bp and a 50bp rate increases and board members opted for the latter one as it sends a stronger message. Members stated that current cash rate is well below the lower range of estimates for the nominal neutral rate. Inflation expectations are well anchored for the long-term while current inflation is expected to peak at around year-end. Governor Lowe stated in his speech that additional rate hikes are necessary to rein in inflation, which will go to 6% or 7%. Neutral rate is currently considered to be at around 2.5% and rate hikes will reach it at some point.

This week we will have Q2 inflation data.

Important news for AUD:

Wednesday:

• CPI

NZD

Inflation data for Q2 came in at 1.7% q/q vs 1.5% q/q as expected and 7.3% y/y vs 7.1% y/y as expected. Yearly figure represents the highest reading in last 32 years. RBNZ’s core inflation measure came in at 4.8% y/y up from upwardly revised 4.6% y/y in Q1. The bank targets core inflation in 1-3% range so the reading means rate hikes will continue unobstructed. GDT auction saw prices drop by 5%. This is the third consecutive drop in dairy prices and eighth of the last nine auctions saw falling prices.

CAD

June inflation data surprised to the downside as it came in at 8.1% y/y vs 8.4% y/y as expected but still higher than 7.7% y/y in May and highest in last almost 40 years. Gasoline prices started to come down in June and the real drop will be seen in July so there is a possibility of a lower reading July. This will in turn prompt BOC to slow down the pace of rate hikes. Core readings saw median unchanged at 4.9% y/y while common jumped to 4.6% y/y from 3.9% in May. Trim ticked up to 5.5% from 5.4% the previous month. When speaking in an interview Governor Macklem stated that inflation will most likely remain above 7% for the entire year of 2022. He added that BOC is deliberately front-loading rate hikes in order to get ahead of inflationary pressures.

JPY

Another BOJ meting and again no change to the rate or monetary policy as expected. The upper limit on 10y JGB is left at 0.25% and the bank offered to buy them every business day in order to maintain that level. Rates are expected to remain at “present or lower” levels for some time and the bank will not refrain for further monetary easing if need arises. New projections see CPI at 2.3% for 2022 vs 1.9% as seen in April, 2023 will print 1.4% and 2024 1.3%. BOJ quarterly report showed that corporate profits to remain high as a whole thanks in part to weak yen. Wage pressures and inflation expectations are both seen rising. Governor Kuroda reiterated bank’s willingness to ease if necessary adding that central banks target stability and not exchange rates.

National inflation data for the month of June saw headline number tick down to 2.4% y/y from 2.5% y/y in May, but both ex energy component and ex energy, fresh food ticked up and came in at 2.2% y/y and 1% y/y respectively. Core readings are at levels not seen since 2016. Preliminary July PMI data showed manufacturing declining for the fourth straight month and coming in at 52.2 vs 52.7 in June. Services broke a nice run of four consecutive rising months and plunged to 51.2 from 54 the previous month. All of this dragged composite down to 50.6 from 53 the previous month. A small consolation is that all numbers are above the 50 level.

CHF

SNB total sight deposits for the week ending July 15 came in at CHF745.4bn vs CHF745bn the previous week. SNB is standing on the sidelines and lets market dictate Swissy strength as they see fit.

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