Written by Convera’s Market Insights team
Powell heads to Capitol Hill
George Vessey – Lead FX Strategist
The US dollar’s safe haven appeal didn’t last long in the wake of the surprise left-wing alliance in the French second-round legislative elections. Instead, the focus pivots to the macro and monetary policy outlook amid signs of a cooling US economy and more room for Federal Reserve (Fed) rate cuts. The US dollar index is slumped near 3-week lows with US yields near 2-month lows as Fed Chair Jerome Powell will likely face conflicting pressures from lawmakers in his semiannual testimony to Congress.
US Treasuries remained suppressed at the start of the week and the dollar on the back foot after Friday’s June employment report showed a cooling labour market and we expect this trend to continue as the year goes on, underlying hopes for two Fed rate cuts this year. The ECB and BoE are also expected to cut rates by 50 basis points this year, making monetary policy a net-neutral factor on the surface for both EUR/USD and GBP/USD. Although inflation is more likely to be sticky in the US, the Fed also has more room to cut interest rates, particularly relative to the ECB. Therefore, the real divergence could come next year as expectations for 2024 policy rates have converged.
As well as the important US inflation report due later this week, Fed Chair Jerome Powell’s testimony to Congress (Tuesday-Wednesday) will be a key event to watch. with Democrats pressuring him to cut policy rates and Republicans questioning the Fed’s ability to control inflation. We think any surprise communication could lean more towards the dovish side given the latest economic developments, thus keeping dollar demand soft.
Euro shrugs off French election snafu
Ruta Prieskienyte – Lead FX Strategist
EUR/USD remained steady at $1.084 after dipping as low as $1.08 as investors moved past the initial shock of the France’s election results, where a leftist alliance unexpectedly took the lead, resulting in a hung parliament. Despite displaying early signs of resilience, the French CAC 40 ended the day in red, largely in line with the global equities’ performance, as France now faces a period of tough negotiations and uncertainty while trying to form a government. The OAT-Bund 10-year spreads further narrowed to 62bps, a fresh 3-week low, as ultimately this outcome is seen as more favorable compared to the potential of a right-wing government.
On the data front, German trade surplus in May rose to €24.9 billion, a 4-month high, despite falling demand for both imports and exports. Exports shrank 3.6% m/m to a five-month low while imports declined by 6.6% m/m, also to a five-month low. Elsewhere, the ECB’s Knot became yet another GC member to endorse the current market expectations for rates in 2024 (40-42bps). As the ECB rate cut expectations are likely to remain stable throughout coming weeks, with a potential for an additional easing priced in for Sep24, this suggests that the Fed’s actions will be a major driver for EUR/USD going forward. Consequentially, the attention now shifts to the US CPI report due on Thursday.
The Euro index, which tracks the performance of EUR versus a basket of 9 leading global currencies, ended the day marginally lower due to a prudent market mood. EUR/GBP declined for the second consecutive day, as the political stress continued to weigh on the common currency. Despite the ongoing French induced turmoil, further advances may soon be capped as the pair is sitting just below its 200-month SMA at €1.1870, a key moving average that it has been unable to break through since Brexit.
Sterling retraces after retail sales miss
George Vessey – Lead FX Strategist
GBP/USD bumped into resistance once again at its 200-week moving average at $1.2848 and has slipped back towards $1.2800 following data earlier this morning revealing British consumers reined in spending in June, likely due to wet weather again as we saw in April. The figures point to another weak month for retail sales in official data that’s due out next week.
Figures from the British Retail Consortium showed retail sales in the UK fell 0.5% on a like-for-like basis in June 2024 from a year ago, reversing from a 0.4% rise in May and missing market expectations for a 0.2% gain as bad weather dampened consumption. The latest figure also indicated lacklustre economic growth that the new Labour government promised to tackle immediately. In other date out this week, a survey of job recruiters showed companies are boosting pay offers for new jobs at the fastest pace since October, an indication of lingering inflationary pressure that may concern the Bank of England (BoE). The BoE’s six week pre-election purdah is now over and upcoming speeches from policymakers will be crucial for market pricing given the recent gap in communication plus the finely balanced August MPC decision (currently 16 basis points are priced in by markets).
From a positioning standpoint, CFTC data shows speculative traders have held their long GBP position through the UK election, contrasting with EUR, whereby investors are currently short. Rate differentials based on 1-year swap spreads suggest gains in GBP/EUR may be overextended, but due to ongoing political risks in Europe, the short-term outlook for sterling versus euro looks more favourable for now.
GBP/USD up 1% since last week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: July 08-12
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
