Sterling Edges Higher After Tumultuous Week While Dollar Treads Water Following Tame US Inflation

With markets heading into August we have seen a sport-filled summer underway, this week saw the fabulous opening of the Olympic Games in Paris, an excellent few days of cricket and a GB one and two at the Belgian GP. Heading into August many of you are taking time away, and we here at Central FX wish everyone a safe and relaxing holiday.

Sterling Performance

The pound rose on Friday but is still set for a second consecutive weekly decline against the dollar. A turbulent week in global markets has impacted higher-yielding assets, and investors are now focusing on Thursday's Bank of England meeting.?

Last week, the pound hit one-year highs above $1.31 but is now facing a 0.5% decline this week, trading at $1.28685. Despite this, it remains on track for a 1.6% gain this month and is this year's top-performing G10 currency against the dollar with a 1.1% rise.

Market volatility has hit the pound harder than lower-yielding currencies like the yen or Swiss franc. Futures traders currently hold the largest bullish bet on sterling in history, with net long positions worth $10.77 billion, nearly tripling since the start of the month.

In the current environment, where lower interest rate currencies tend to perform better, sterling has been under pressure. The Bank of England's meeting this week has markets pricing in roughly a 50/50 chance of a rate cut.

Dollar Performance

The dollar ended Friday largely unchanged, affected by a drop in Treasury yields following a tame U.S. inflation report. This report maintained expectations for a potential Federal Reserve easing in September.

The Commerce Department's June personal consumption expenditures (PCE) price index rose by 0.1%, as anticipated, after being unchanged in May. Year-over-year, the PCE price index increased by 2.5%, matching forecasts. This data supports an improving inflation environment, giving the Federal Reserve confidence that inflation is moving towards its 2% target.

Euro Performance

The euro experienced fluctuations but managed to end the week slightly higher, with a 0.13% increase on Friday, trading at $1.0858. However, throughout the week, it faced pressures like other currencies due to global market volatility.

Despite the slight weekly rise, the euro remains down 1.67% against the dollar this year, trailing behind the pound, which has been the top-performing G10 currency against the dollar with a 1.1% rise.

The euro's performance was influenced by various factors, including economic data from the Eurozone, expectations regarding the European Central Bank's monetary policy, and global market movements.

Economic indicators released during the week, such as inflation data and industrial production figures, contributed to shaping market expectations about the ECB's future actions.

European Central Bank and Monetary Policy

Market participants have been closely watching the ECB for any signs of changes in monetary policy. The central bank's stance on interest rates and economic stimulus measures continues to be a significant driver for the euro.

Expectations of the ECB maintaining a cautious approach amid persistent economic uncertainties have kept the euro under pressure. The Eurozone's inflation data, particularly the Consumer Price Index (CPI), plays a crucial role in shaping the ECB's policy decisions. Last week's data indicated a slight moderation in inflation, aligning with market expectations.

The euro's slight rise against the dollar last week reflects a broader trend of relative stability amid fluctuating market conditions. The dollar itself was relatively stable following a tame U.S. inflation report, which supported expectations for potential Federal Reserve easing in September.

Yen and Bank of Japan

The yen has been strong this month, reaching a near three-month high of 151.945 per dollar on Thursday. It started the month at a 38-year low of 161.96 before the Bank of Japan intervened in the currency market and raised expectations for a hawkish policy shift.

?The Federal Open Market Committee meets on July 30 and 31, coinciding with the Bank of Japan. While the Fed is expected to hold borrowing costs steady, traders anticipate a rate cut in September and possibly two more cuts this year.

The yield on U.S. 10-year notes fell by 5.4 basis points, while two-year note yields, which align closely with interest rate expectations, decreased by 5.6 basis points.

Markets are pricing in a 64% chance of a 10-bps hike by the Bank of Japan. This has reduced confidence in using the low-yielding yen for funding investments, although increased volatility makes it challenging to maintain short positions on the yen.

Other Currencies

The euro increased slightly by 0.13% to $1.0858. The Canadian dollar weakened for the eighth consecutive day against the U.S. dollar, trading at 1.3835 per U.S. dollar, influenced by falling oil prices and a recent interest rate cut by the Bank of Canada.?

The Australian dollar rose by 0.28% to US$0.6556, and the New Zealand dollar increased by 0.1% to US$0.5892. The dollar firmed slightly against the Chinese yuan, trading at 7.2502 yuan.?

The South African rand strengthened by about 0.6%, trading at 18.27 against the dollar, following the U.S. inflation report which did not alter expectations of a September rate cut by the Federal Reserve.

Global Economic and Currency Outlook for the Week Ahead

Central Bank Meetings

Federal Reserve: The Federal Open Market Committee will meet on July 30 and 31. While no immediate rate change is expected, markets are keenly watching for guidance on future monetary policy moves, particularly considering the expected rate cut in September and potential for further cuts this year.

Bank of England: The BoE meeting this week has garnered significant attention, with a roughly 50/50 chance of a rate cut. Investors will be looking for clues on the BoE's stance given the recent market volatility and economic conditions.

Bank of Japan: The BoJ meeting, also on July 30 and 31, is critical. Markets are pricing in a 64% chance of a 10 basis points rate hike. Any adjustments to Japan's monetary policy could have substantial impacts on the yen and global currency markets.

Economic Data Releases

U.S. Nonfarm Payroll: The U.S. jobs report on Friday will be a key indicator of economic health. Strong job numbers could support the dollar, while weaker-than-expected data might reinforce expectations of a Fed rate cut in September.

Eurozone GDP and Inflation Data: Preliminary GDP data and inflation figures for the Eurozone will be closely watched for indications of economic stability or further challenges.

China's Manufacturing PMI: This will provide insights into the health of the Chinese economy, which has global implications, especially for commodity currencies like the Australian and Canadian dollars.

Geopolitical Developments

Trade Tensions: Ongoing trade negotiations and tensions, particularly between the U.S. and China, can influence market sentiment and currency movements.

Brexit: Any new developments or statements regarding Brexit could impact the pound, especially as the October 31 deadline approaches.

Currency-Specific Outlook

U.S. Dollar

The dollar's performance will hinge on the outcomes and signals from the FOMC meeting and the nonfarm payrolls report. Stable inflation and strong economic data could strengthen the dollar, while weak data may heighten expectations of a September rate cut, potentially weakening it.

Euro

The euro will be influenced by Eurozone GDP and inflation data. Positive economic indicators could provide support, while disappointing data might increase pressure on the ECB for further stimulus, potentially weakening the euro.

British Pound

The pound's movement will largely depend on the BoE meeting and any Brexit-related news. A rate cut or dovish signals from the BoE could weigh on sterling, while any positive Brexit developments might provide support.

Japanese Yen

The yen could see significant volatility around the BoJ meeting. Any unexpected policy changes or indications of a hawkish stance could strengthen the yen, while a dovish outlook might weaken it.

Commodity Currencies

The Australian dollar, Canadian dollar, and New Zealand dollar will be affected by global risk sentiment, commodity prices, and economic data from China. A strong Chinese PMI could support these currencies, while weak data might pressure them.

Emerging Market Currencies

Emerging market currencies will be sensitive to global risk sentiment and the dollar's movements. Any signs of easing trade tensions or strong global economic data could support these currencies, while heightened risk aversion might lead to outflows and depreciation.

Summary

The week ahead promises to be eventful with several major central bank meetings, critical economic data releases, and potential geopolitical developments. Market participants will need to stay informed and be prepared for volatility across the currency markets. Central bank policies, economic indicators, and global risk sentiment will be the primary drivers of currency movements in the coming days.

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Thank you for reading! We'll be back next week with another edition. This edition of the Central FX weekly market’s view was written by Kevin Copping