Overview of Last Weeks Currency Markets and what to Expect this Week.

After 19 days of fantastic sport the 2024 Paris Olympics concluded with a spectacular closing ceremony at the Stade de France on August 11. Showing great unity we saw the parade of athletes and the handover of the Olympic flag to Los Angeles, the host of the 2028 Games. The event was both a celebration of the athletes' achievements and a reflection on the Olympic spirit. We now look forward to the Premier League starting and test Cricket.

British Pound

Sterling had a tumultuous week, stabilizing at $1.2754 against the dollar by Friday after four consecutive weeks of decline. The pound was heavily influenced by expectations of future interest rate cuts from the Bank of England, exacerbated by global economic uncertainty and soft U.S. jobs data. Sterling briefly fell to a more than five-week low of $1.2666 before recovering.

The pound's recent fall has been triggered by volatile trading across global markets after soft U.S. jobs data last week raised fears of an economic downturn and bigger interest rate cuts from the Federal Reserve.

The currency was already near a one-month low last week when the BoE cut rates for the first time since 2020 in a 5-4 vote that took borrowing costs down to 5%.

Money markets show traders are pricing in further rate cuts of 42 basis points from the BoE by the end of this year, compared to 46 bps a week ago and 56 bps priced in at the peak of the market turmoil on Monday.

Against the euro, sterling firmed for a third consecutive session to 85.59 pence. Euro/sterling touched a more than three month high of 86.25 pence at one point on Thursday.

U.S. Dollar

The U.S. dollar experienced significant volatility, hitting a one-week high against major currencies before retreating. This fluctuation was largely influenced by mixed U.S. economic data, particularly regarding employment. Early in the week, weaker-than-expected payroll figures raised concerns about economic slowdown, but these fears were somewhat alleviated by a drop in jobless claims later in the week.

The dollar index, which measures the currency against a basket of six others, saw a three-day gain before ending the week down by 0.136% at 103.14.

The odds of the Fed cutting interest rates by 50 basis points at its next policy meeting on Sept. 17-18 fell to 52%, from 69% a day earlier, with a 25-basis point cut now seen as having a 49% probability, according to the CME Group's FedWatch Tool.

The euro was flat at $1.0919, but little changed compared with a week ago. On Monday, it rose as high as $1.1009 for the first time since Jan. 2. Against the Swiss franc, it eased 0.18% to 0.865 franc but still on track for a weekly advance.

Japanese Yen

The yen was one of the most active currencies last week, initially strengthening as investors sought safe-haven assets amidst market turmoil. The yen reached its strongest level since January 2nd, hitting 141.675 per dollar on Monday. However, it weakened later in the week, finishing down 0.39% at 146.675 yen per dollar, though still marking its first weekly gain in six weeks.

Swiss Franc

Similar to the yen, the Swiss franc experienced fluctuations due to its safe-haven status. It hovered near one-week lows as global stock markets rebounded slightly, and U.S. Treasury yields dipped. Against the dollar, the franc eased by 0.18% to 0.865 franc, but still managed to secure a weekly gain.

Euro

The euro remained relatively stable, trading flat at $1.0919 by the end of the week. Although it reached as high as $1.1009 earlier in the week, it saw little overall movement compared to the previous week.

The euro had a relatively strong week against the British pound, driven by economic concerns in the UK and mixed data from the Eurozone. The EUR/GBP pair started the week around 0.856 and saw upward momentum, peaking at a more than three-month high of approximately 0.8625 on Thursday. By the end of the week, the euro remained firm against the pound.

Australian and New Zealand Dollars

Both the Australian and New Zealand dollars faced downward pressure, with the Aussie slipping 0.29% to $0.657. The New Zealand dollar hit a three-week high of $0.6035 before retreating to $0.5998.

What were last week’s underlying factors

Interest Rate Expectations: Shifts in expectations for future interest rate cuts, particularly by the Federal Reserve and the Bank of England, played a crucial role in currency movements. The likelihood of a 50-basis point cut by the Fed in September decreased after stronger-than-expected U.S. jobless claims data.

Market Volatility: Global markets were unsettled by conflicting economic signals, particularly concerning U.S. employment, leading to sharp movements in safe-haven currencies like the yen and franc early in the week.

Global Markets Overview

The U.S. stock market had a volatile week, reacting to mixed economic data. The Dow Jones Industrial Average ended the week with marginal gains, while the S&P 500 and NASDAQ both saw increases of around 0.5%. The markets were primarily driven by U.S. employment data, with a stronger-than-expected report on jobless claims calming fears of an economic downturn.

European Stocks: European markets also experienced fluctuations, influenced by global economic concerns and specific regional issues. The pan-European STOXX 600 index ended the week with modest gains, although the market was unsettled by weak economic data from Germany, particularly in manufacturing.

Asian equities had a mixed performance, with Japan's Nikkei 225 index recovering some losses by the end of the week, thanks to a weaker yen boosting export-oriented stocks. In contrast, China's markets remained under pressure due to ongoing concerns about economic slowdown and the property market crisis.

Crude oil prices saw gains last week, with Brent crude rising above $90 per barrel. The increase was driven by expectations of tighter supply, as Saudi Arabia and Russia extended voluntary production cuts. However, concerns about global demand, particularly from China, capped the price rise.

Gold prices were relatively stable, ending the week near $1,920 per ounce. The metal's performance was supported by safe-haven demand amid market volatility, although a stronger dollar and rising U.S. Treasury yields limited its upside.

U.S. Treasury yields dipped slightly towards the end of the week, reflecting investor caution following the mixed economic signals. The 10-year yield remained close to 4.25%, as traders balanced concerns about future Fed rate cuts with the risk of a potential economic downturn.

European bond markets mirrored the movements in the U.S., with yields adjusting to the latest economic data and ECB commentary. Germany's 10-year Bund yield fell as investors sought safer assets amidst economic uncertainty.

Financial Markets and Currencies: The Week Ahead

The dollar is likely to remain influenced by upcoming U.S. economic data, particularly the Consumer Price Index and Producer Price Index reports. Any signs of persistent inflation could bolster the dollar as it would support expectations for tighter monetary policy by the Federal Reserve. Additionally, retail sales and industrial production data will be closely watched. A strong showing could further strengthen the dollar, while weaker results might see it decline.

The euro will be influenced by economic sentiment data from Germany and broader Eurozone economic indicators. If data points to continued economic weakness in the region, particularly in manufacturing, the euro could face downward pressure. The European Central Bank remains cautious about tightening, so any indication of slowing inflation could also weigh on the euro.

Sterling will be guided by a slew of UK economic releases, including inflation data, GDP growth rates, and unemployment figures. Given the Bank of England’s recent dovish stance, weaker-than-expected data could increase the likelihood of further rate cuts, putting additional pressure on the pound.

The yen will continue to be driven by global risk sentiment and U.S. Treasury yields. If U.S. yields rise, the yen might weaken, but any further signs of economic weakness globally could prompt safe haven flows back into the yen.

Australian Dollar and New Zealand Dollar currencies will be influenced by domestic economic data, including business and consumer confidence indices in Australia and retail sales in New Zealand. With China being a major trading partner, any news regarding Chinese economic policy or data releases will also impact these currencies.

Economic Data Releases

The focus in the United States will be on the CPI and PPI reports, and speeches by Federal Reserve officials. Additionally, key data releases will include retail sales, Michigan consumer confidence, export and import prices, housing starts, building permits, and industrial production. In the United Kingdom, it will be a busy week with the release of data on unemployment, inflation, GDP growth rates, industrial production, and retail sales.

China will report on new yuan loans, the house price index, retail sales, and the unemployment rate.

Meanwhile, Q2 GDP growth rates will be announced for Japan, the Netherlands, Poland, and Thailand. Interest rate decisions are expected from New Zealand, the Philippines, and Norway, while India will release its inflation rate and industrial production data. In Australia, the NAB Business Confidence and Westpac Consumer Confidence will be released, and Germany will update its ZEW Economic Sentiment Index.

Geopolitical Developments

Geopolitical events last week had a significant impact on global markets, driving investor behaviour towards safe-haven assets and contributing to volatility in equities, commodities, and currencies.

Tensions in the Middle East, China's economic struggles, the ongoing Ukraine conflict, and strained U.S.-China relations were the primary factors influencing market reactions. These events underscore the interconnectedness of geopolitics and financial markets, where regional instability can have far-reaching global implications.

Currency Outlook

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