Foreign Exchange Report - 25.07.2022

The U.S. Dollar held firm on Monday as trader focus was on a rate hike later this week. It rose slightly against most major currencies in Asian trading, at $1.0208 on the Euro and stabilised losses from late last week to buy 136.26 Japanese Yen. Markets have priced in a 75-basis-point rate rise at the Federal Reserve’s two-day meeting this week, and there’s around a 9% chance of a 100-basis point hike, Reuters reports. “Market reaction will turn on how hawkish Chair (Jerome)Powell sounds with his determination to reduce inflation in the face of slowing growth,” stated National Australia Bank currency strategist Rodrigo Catril. The Dollar index stood at 106.650 on Monday, just under a 20-year high recorded in the middle of the month at 109.290.

Elsewhere, tensions are high in Europe as growth is reliant on Russian gas. According to Societe Generale strategist Kit Juckes, the continent’s most optimistic outcome is dependent on energy security. “That still leaves the Euro, to all intents and purposes, unbuyable for the time being. And) probably for the rest of this year, given that the leverage gas supplies afford the Russian President is at its greatest in the winter.” The Euro to Dollar rate rallied last week and may further reverse July’s losses this week, reports Pound Sterling Live. The single currency received a boost on Friday following data indicating U.S. services activity could have declined faster than in the manufacturing sector in Europe this month. This resulted in the Euro-Dollar rate surpassing the 1.02 mark before the weekend. “In view of recession risks, Italy’s collapsed government and a very strong USD, the ECB has a lot of cards stacked against it,” said Jane Foley, head of FX strategy at Rabobank,?following the European Central Bank rate hike last week. “We have revised down our EUR/USD forecasts and see risk that the exchange rate could drop as low as 0.95 over the summer months. We expect broad-based USD strength to ebb early next year allowing EUR/USD to recover to the 1.05 area on a 6-month view,” she went on to add.?

Moreover, the Pound fell on Monday, despite markets eyeing a 60% chance the Bank of England will raise rates by 50 basis points next week. At the time of writing Sterling was down 0.2% at $1.1988. Last week the Pound dipped to 1.1650 against the Euro after the ECB rate rise. Yet it made a rapid recovery when the Euro’s rally diminished as President Christine Lagarde defined the rate hike as frontloading. “At our upcoming meetings, further normalisation of interest rates will be appropriate. The frontloading today of the exit from negative interest rates allows us to make a transition to a meeting-by-meeting approach to our interest rate decisions,” said President Lagarde.

In addition, the Australian and New Zealand Dollars fell from month-highs on Monday, each by 0.3% in Asian trading. The Aussie stood at $0.6907 at the time of writing, whilst the New Zealand Dollar was trading at $0.6235.

Interested in finding out how we can help you get the most from your funds? Drop me a message to schedule your complimentary financial?review.