Written by Convera’s Market Insights team
US data dump and Fed loom
George Vessey – Lead FX Strategist
Global risk aversion gripped markets last week as investors continued to sell some of this year’s top tech stocks amid Japanese yen outperformance. The Nasdaq and USD/JPY were down 9% and 4.5% from their peaks reached three weeks ago. Cyclical G10 currencies (Scandies, Antipodeans, CAD) experienced substantial underperformance, yet this was by no means a clear USD bid situation, with the safe haven Swiss franc also in high demand.
A number of softer data releases in recent months have fuelled concerns about an abrupt US slowdown and a more dovish Federal Reserve (Fed). Combined with cross-asset rotations, this has pressured the dollar. However, US data firmed up notably in the last couple of weeks and this Wednesday the Fed should only hint at, rather than pre-commit to, a September cut, even as the market is pricing in fully such an outcome (along with over 2 cuts this year). Moreover, weakening global growth momentum, protectionism/tariff risks and more US fiscal stimulus is constructive for the dollar, whilst the US currency also exhibits seasonal strength in Q3, which could limit any potential losses.
Going forward though, if the macro backdrop continues to point towards a US economic slowdown and Fed easing, the US dollar’s high growth and yield appeal should naturally diminish Besides the Fed meeting, the JOLTS survey (Tue), ECI index (Wed), July Manufacturing ISM (Thur) and the July employment report (Fri) are all in focus this week.
A hawkish BoE cut?
George Vessey – Lead FX Strategist
The UK yield curve is disinverted for the first time since May 2023 and is poised to steepen further as traders are betting that the Bank of England (BoE) will soon begin cutting interest rates and that further reductions will follow at a regular basis in the coming year or so. Sterling has been at the mercy of wider market sentiment lately, falling under $1.29 against the US dollar last week, but all eyes will on the tone of the BoE meeting this Thursday to determine whether the pound can attempt another run at $1.30.
Whether the BoE cuts or not this week is still seen as a coin toss. Bets on a rate cut rose sharply after policymakers indicated at the June meeting that the decision to hold rates then was “finely balanced”, with two members voting for a cut. Since then, a new government runs the country and the latest PMI readings showed cost pressures are moderating, driven by slowing output prices in the services industry where much of the stickiness in consumer inflation is currently seen. Despite small upside misses in both services inflation and private sector wages, along with resilient surveys, we think markets may be underestimating the probability of a cut this Thursday. This leaves the pound vulnerable to downside risk in the shorter-term.
However, the stronger UK economic recovery and improving consumer confidence as well as the UK’s willingness to re-engage with the EU are all positive influences for the pound, which is why our longer-term outlook remains bullish GBP.
Seasonality may soon turn against euro
Ruta Prieskienyte – Lead FX Strategist
The Euro Index closed the penultimate week of July lower for the first time in a month, exclusively driven by a flight to safe-haven currencies. Specifically, EUR/USD pulled back for the second consecutive week as the domestic macroeconomic backdrop in the Eurozone became increasingly less supportive, while the US economy continued to outperform expectations.
On the macro front, Eurozone economic momentum stalled at the start of Q3. Consumer confidence remains strong, with last week’s flash Eurozone consumer confidence indicator rising to an over two-year high. However, businesses do not share the same sentiment. The Ifo Business Climate indicator for Germany declined for a third consecutive month, touching the lowest level since February 2024. More worryingly, the flash HCOB Eurozone Composite PMI declined to a five-month low in July, missing expectations yet again. Output in Germany decreased for the first time in four months, despite hosting the Euros, while France posted a third consecutive monthly reduction in business activity.
The highlight of this week is the Eurozone CPI print due on Wednesday, with a German preview on Tuesday. The former is expected to have stagnated at 2.5% YoY in July. We have flagged the risks of reflation in summer, which are starting to play out. The ECB should look past the next CPI print and focus on the medium-term inflation projections.
Moving on to this week’s tactical FX view, despite last week’s retreat, EUR/USD is still up 1.3% month-to-date, but this might be the cap for near-term gains. The previously supportive seasonality trends weaken in August and are set to turn negative in September, potentially leading to an overall negative performance for the third quarter. On the policy side, the few voices emerging from the Governing Council of the ECB endorse the current ECB pricing, indicating that attention and control of the trajectory firmly rest with the Fed.
A massive 4% range in JPY crosses
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: July 29-August 02
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.
