Currency Outlook | August 2023
The below key drivers are likely to impact investor risk sentiment and FX markets in August:
EUR Euro
ECB President Lagarde suggested there could be future hikes or “perhaps a pause”. The euro’s future is uncertain, but this adds weight to predictions that central banks’ tightening cycles could be reaching their peak.
The European Central Bank (ECB) followed the Federal Reserve (Fed) by hiking interest rates by 25 bps, bringing their deposit rate to 3.75%. ECB President, Christine Lagarde, told Le Figaro newspaper, “there could be a further hike of the policy rate or perhaps a pause”, but “a pause, whenever it occurs, in September or later, would not necessarily be definitive.” She also reiterated that future decisions will be data-dependent.
The euro dipped after the ECB rate hike. The EURUSD currency pair fell from a daily high of US$1.1150 to US$1.0992 following the announcement. The pair continued to trade downwards for the remainder of the day, finishing with a daily low of US$1.0966. Similarly, EURGBP traded down from ￡0.8594 to a low of ￡0.8544, post ECB hike.
ECB policymaker, Madis Muller said on Friday, “rate hikes to date are clearly having an effect” and fellow policymaker, Bostjan Vasle, stated that “the September meeting could bring a hike or a pause”. The ECB’s hiking cycle is uncertain moving forward.
Currently, markets are forecasting roughly a 50% chance of a hike in September. Economists at Barclays believe that the ECB has now reached its peak rate and no more hikes are to come.
Credit Agricole economists believe the EURUSD pair could trade between US$1.09 and US$1.12 for the “foreseeable future”. As both the Fed and the ECB reach their peak rates there isn’t an obvious direction for the pair to trade.
Range:
GBP Sterling
UK inflation is still high, but the BoE hiking rates by 25bps instead of a potential 50bps could signal a future trend of lower hikes. Some economists are predicting GBPUSD strength in the coming months.
The GBPUSD currency pair (nicknamed ‘Cable’) trended upwards for July. The pair started near US$1.2700 before trading up to a monthly high of US$1.3142. The pair then quickly fell below the psychological level of US$1.30 and has struggled to regain it.
Last Thursday, the Bank of England (BoE) hiked by 25 bps to bring the base rate to 5.25%. BoE Governor, Andrew Bailey, stated in his speech that he didn’t “think there was a case for a 50-basis point rate rise today”.
The language from the monetary policy committee suggests they expect to reach the BoE’s terminal rate soon. Many economists still forecast another 25-bps hike in September and November, bringing a peak rate of 5.75% to the market. However, expectations of a November hike have moved slightly lower.
UK inflation expectations have fallen in YouGov’s latest poll. 1-year ahead inflation is now expected at 4.3% vs. 5.0% in June, and 5–10-year head inflation at 3.2% vs. 3.3% in June. The survey shows that inflation could be starting to come under control but is likely to persist over the BoE’s 2% target rate for a while to come.
Citi Bank analysts think the European Central Bank (ECB) is likely to keep interest rates higher, for a longer period than the BoE. With a more hawkish ECB and the UK facing a potential recession, analysts foresee EURGBP climbing upwards over the coming months, unless data provides further guidance.
According to economists at Scotiabank, GBPUSD may reach the US$1.40 level by the end of 2024. They cite the Sterling’s recovery of more than three-quarters of its devastating drop in 2022 from the infamous budget, as a reason. They believe that GBP will be supported moving forward.
Range:
AUD Australian dollar
AUD struggled with China’s economic stagnation continues to hamper key Aussie exports. A rebound for USD has added pressure. Experts hope for the Fed to end its monetary tightening cycle.
The Australian dollar enjoyed a positive start to July, maintaining supports above US$0.66 before surging toward monthly highs at US$0.6890, after US inflation data printed softer than anticipated. Sustained easing in US price pressures had investors calling for an end to the Federal Reserve’s (Fed) tightening cycle, elevating demand for the AUD and prompting a broad-based USD sell-off.
The Reserve Bank of Australia (RBA) left rates on hold for a 2nd consecutive month, maintaining a tightening bias, forcing markets to pare back expectations for peak interest rates. With just one more rate hike now priced in, analysts expect this tightening cycle will end with interest rates at 4.3%-4.4%, down from the 4.5%-4.6% expected in mid-July.
With AUD rates on the back foot, elevated concerns surrounding European and Chinese growth outlook conspired to dampen demand for risk. The promise of extensive and wide-reaching Chinese economic stimulus simply hasn’t materialised, driving extended Yuan weakness that continues to spill over and stifle demand for the AUD.
Finally, with the USD recouping the months’ early losses, hopes the Fed may be able to nurse a softer-than-anticipated economic downturn was realised through the end of July and early August, as a string of macro data sets showed a softening but also a remarkable resilience to the Fed’s aggressive tightening cycle.
Looking ahead, the AUD is likely to face near-term headwinds. While China has lifted sanctions on Australian barley imports, there is pessimism that wine and other key exports will see their tariffs lifted. With the Fed not meeting until September and China unlikely to introduce stimulus outside the targeted programs, supporting consumption and the beleaguered property market, we expect the AUD will track between US$0.6480 and US$0.6890.?
NZD New Zealand dollar
NZD had a positive start to July but could see headwinds in August. RBNZ is expected to hold rates again, but stubbornly sticky local inflation and continued Chinese economic weakness could be problematic.
The New Zealand dollar enjoyed a positive start to July, maintaining supports above US$0.6150 before surging toward monthly highs above US$0.64, thanks to softer-than-expected US inflation data. Sustained easing in US price pressures had investors calling for an end to the Fed’s tightening cycle, elevating demand for the NZD and prompting a broad-based USD sell-off.
The Reserve Bank of New Zealand (RBNZ) doubled down on its commitment to ending the tightening cycle, leaving rates on hold and hinting the Overnight Cash Rate has peaked at 5.5%.
While inflation pressures remain stubbornly sticky, the NZ economy is mired in recession, meaning the RBNZ is faced with the unenviable task of attempting to guide the economy through a period of stagflation. With a lacklustre domestic economic outlook already capping NZD gains, elevated concerns surrounding the European and Chinese growth outlook further dampen NZD demand. The promise of extensive and wide-reaching Chinese economic stimulus simply hasn’t materialized (to date), driving extended Yuan weakness that continues to spill over and stifle demand for the NZD.
USA’s softer-than-anticipated economic downturn lifted hopes through the end of July and early August, but while data is showing a softening, there’s still remarkable resilience to the Fed’s aggressive tightening cycle.
Looking ahead, the NZD is likely to face near-term headwinds and could break above US$0.64, depending on an end to the Fed’s tightening cycle and an improvement in the China outlook.
With the Fed not meeting until September and China unlikely to introduce stimulus outside the targeted programs, supporting consumption and the beleaguered property market, we expect the NZD will track between US$0.60 and US$0.64.?
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USD United States dollar
Fed Chair, Jerome Powell, no longer expects a recession, and says future hikes will be “based on data”. There’s no official word, but experts are already pricing-in cuts from January 2024.
The Federal Reserve (Fed) hiked by 25 bps in July, with many believing it will be the final hike from the central bank. However, Barclays economists foresee one final 25 bps hike in September.
Following the Fed’s hike, Federal Reserve Chair, Jerome Powell, stated that he no longer expects a US recession and that the September meeting decision will be based on data. He also said the Fed would judge cuts “a full year from now”. However, according to Bloomberg, markets are pricing in cuts from as early as January 2024.
The Fed’s hike caused a drop in USD’s value and an increase in commodity currency values. This was mainly due to the Fed’s softer tone and their expected soft-landing of the US economy. The DXY index fell after the Federal Open Market Committee (FOMC) decision but fully recouped the loss by the weekend.
Overall, the DXY lost out in July. The Dollar Index started the month around US$103 and reached a high on the 6th of US$103.57, before falling to a monthly low of below 100 at US$99.57.
US GDP grew more than expected in Q2, helped by a rebound in investment in the business sector. This has led to NAB updating their GDP forecast for 2023 to 1.9% (up from 1.6%).
JPY Japanese dollar
The Bank of Japan caught experts off-guard by shifting its stance on yield curve control policy, causing USDJPY to dip to 138.07 before rebounding to 141. Tokyo’s CPI data shows core inflation is still rising.
As expected, the Bank of Japan (BoJ) left its policy rate unchanged in July. However, it surprised the market by shifting its stance on yield curve control policy, keeping the 10-yr limit at 0.5% but allowing a flexible range to +/- 1.0%. This decision sent the USDJPY currency pair down to an intraday low of 138.07 before the pair traded back up to the 141 level by the weekend.
On a side note, Tokyo’s July Consumer Pricing Index (CPI) climbed up to 3.2% from a previous 3.1%, and the inflation, excluding fresh food & energy, rose to 4% from a previous 3.8%.
CAD Canadian dollar
The CAD could see more fluctuation in August as the USD struggles to gain ground and local inflation is “more persistent than anticipated”. US and Canadian jobs data will hopefully provide a clear trajectory.
The Bank of Canada (BoC) raised interest rates by 25 bps in July, bringing their policy rate to 5%. It seems that the central bank is still concerned about the inflation pressure when they said that the “underlying price pressure appears to be more persistent than anticipated”. The CAD rallied after the hike to the 76 cents level but finished that week lower at 75 cents level.
USDCAD started July around 1.3250, before reaching a high of 1.3387 and then retreating to a monthly low of 1.3093. From there, the pair regained the 1.32 handle at the start of a new week and traded sideways for the remainder of July. Oil prices edging past $80 has halted USD’s attempts to trend upwards and so eyes turn now to the upcoming US and Canadian jobs data.
Scotiabank economists believe USDCAD may trend lower towards 1.30 by the year-end, as reaching the peak in global central bank tightening cycles will spur on risk appetites in the coming months.
SGD Singapore dollar
The SGD had a strong month, spurred on by cooling inflation pressures in both the US and locally. August should see continued strength as the Federal Reserve hints at a softer future monetary stance.
July was a good month for the Singapore dollar and its strength mainly came from the relieved yield pressure as the inflation kept cooling in the US. Although it did dip a bit in the second half of the month, the local dollar rallied 1.8% against the US dollar in July.
On the data front, it was worth noting that Singapore’s Q2 advance GDP (seasonally adjusted) has bounced back to 0.7% from the previous 0.4% while the inflation cooled down in Jun – headline inflation June year-over-year fell to 4.5% from 5.1% prior and the core inflation year-over-year lowered to 4.2 from 4.7%. Both point to a good direction for its local economy to recover as well as maintain a lower inflation rate.
In August, it is likely to see SGD remain on the front foot as potential pressure from the US yields will be even less after Fed signaled a softer stance in terms of its future monetary policy in its July meeting.
HKD Hong Kong dollar
If the Fed continues its softer monetary policy stance, we could see continued HKD strength through August, and possible easing for the local economy after the latest HIBOR increase.
The Hong Kong dollar kept pushing the USDHKD pair to the downside in July, off the back of the local dollar strength and USD weakness – the USD fell by 0.5% against the HKD, down from 7.8371 to 7.7984.
The Hong Kong Monetary Authority (HKMA) increased its base rate by 25bps on July 27, in response to the Fed’s 25bps hike the day prior, bringing the base rate to a 16-year high at 5.75%. However, the local rates had already been at an elevated level before the HKMA hike.
The overnight Hong Kong Interbank Offered Rate (HIBOR) was trading above 4% for almost the full month in July and reached a high of 5.5953 on July 31, while the US equivalent rate was hovering over at 5.3% level for the whole month.
In August, it is highly likely the HKD will keep its current strength if the Fed continues its soft stance and the HK yields are kept at an elevated level.
Has the US pulled off an economic soft landing? Read the article.
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Citizen of the world ?? CEO/founder at Global Chamber?... creating connections that simplify growth and generate more investment, exports and impact for members across 525 chapters (everywhere).
1 年Well done, thank you.
Master of Finance at Kaplan Australia
1 年Thank you for your valuable information and opinion on movements in interest rates which influence the exchange rate on currencies