NZD USD Forecast for the Week 28th November, 2016

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EUR/USD: Dollar Awaits U.S. Bankruptcy

The dollar has been rising since May 4. Last week, on May 26, the DXY Index reached 104.34. It hasn’t been this high since mid-March 2023. What is driving the U.S. currency up and, consequently, pushing the EUR/USD pair down? According to analysts at Commerzbank, “the absolute calmness in the options market suggests that the driving force behind the EUR/USD exchange rate is monetary policy considerations rather than ongoing U.S. debt ceiling negotiations.” It is worth noting that the probability of a rate hike at the June 14 FOMC (Federal Open Market Committee) meeting increased throughout May. At the beginning of the month, the likelihood of a rate increase was close to 0%, but by the end of the month, it reached 50%. It turns out that the U.S. economy is holding up very well compared to other economies, and the deterioration in lending has not been as severe or rapid as initially feared.

Of course, 50% is far from 100%. Moreover, the FOMC published the minutes of its latest meeting on Wednesday, May 24, and the key phrase regarding the possibility of additional tightening of monetary policy was absent. The document also revealed divergent opinions among committee members regarding further rate hikes. However, despite this, the flight to safety in anticipation of a potential U.S. default continued to support the dollar.

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The holiday shortened trading week starts tense but on an optimistic note as US President Joe Biden and House Speaker Kevin McCarthy finally reached an agreement to raise the debt ceiling. The deal must get approval in a congressional vote on Wednesday.

US Treasury Secretary Janet Yellen warned that the Treasury will be running out of money in about a week, by June 5th.

Presently, it feels like investors are confident that the US debt ceiling will be raised. The kneejerk reaction to a debt ceiling deal will be positive but gains could remain short-lived as most of the deal is already priced in, and the end of the det ceiling crisis means that the US treasury will issue $1 trillion debt to service its existing debt, pay its bills and start refilling the Treasury’s General Account, which fell to below $50billion last week, whereas the balance should be normally around $500bn. This means that the US Treasury will be sucking around half a trillion dollars from the market very shortly. We don’t know at what speed at which the market liquidity will drain, but we know that it will drain.

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The US 2-year yield fell sharply, while the S&P500 ended flat after hitting a fresh high since last summer on optimism that the US will finally agree to raise the debt ceiling.

The House will vote today to decide whether the debt limit bill gets approved at time to get a Senate approval by next Monday deadline.

The deal between Biden and McCarthy freezes discretionary spending for the next two years, which excludes weighty plans like Medicare or social care, and will only have a minor impact on around $20 trillion budget deficit projected for the next decade. Frozen spending means a spending cut in real terms as long as inflation remains high. The higher the inflation, the higher the spending cut in real terms.

But the problem is that at least 20 conservative Republicans of the House rejected Kevin McCarthy’s compromise on debt ceiling, saying that spending cuts are not enough. One hardcore Republican, Dan Bishop of North Carolina, threatened to vote to oust McCarthy because he ‘capitulated’ to Democrats. Democrats, on the other hand, are not fully happy either as they don’t want to freeze or to cut spending.

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Core bonds enjoyed another solid bid yesterday, further unwinding ‘hawkish sentiment’ that reigned since mid-May. Chinese inspired risk-off and softer than expected national CPI data from Germany (HICP 6.3% Y/Y from 7.6%) and France (6.0% from 6.9M%) supported the move. Italian inflation (8.1% from 8.7%, but 7.5% expected) didn’t suffice for bond investors to change tactics.

That said, German/European yields already reached intra-day lows early in the session, settling in a sideways pattern later. In the end, German yields lost between 3.8 bps (30-y) and 7.8 bps (5-y). US yields joined the broad bond market rebound, but the intraday pattern was a bit more choppy. Eco data were mixed with an awful Chicago PMI (40.4 from 48.6) and an unexpected rise in US April job openings (10 103k vs 9400k expected).

While seen as important input for the Fed, JOLTS didn’t stop the decline in yields. Fed speak was at least partially to blame. Fed’s Harker and Jefferson both supported the idea of a Fed pause/skip in the rate hike cycle to assess incoming data before deciding about the extent of further policy firming. Market expectations on a June Fed hike dropped below 50%. US yields declined between 5.2 bps (5-y) and 2.9 bps (30-y).

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EUR/USD started June with a 100-pip rally after a volatile end to May.

Given the selloff we saw last month, a retracement in early June was to be expected, although I did think a 1.0600 retest might come first.

So what should we watch ahead of Friday’s non-farm payroll (NFP)?

The first level I’m watching is 1.0760, as the euro didn’t give us a convincing break on Thursday, leaving it intact as resistance.

We saw something similar from the US Dollar Index (DXY) in relation to the 103.50 yearly open I’ve discussed at length.

So as of now, the dollar is still above critical support, and the EURUSD is below resistance.

But instead of expecting a reversal immediately from these levels, Friday’s NFP volatility could produce a few long wicks to trade next week.

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Gold Price (XAU/USD) stays on the bear’s radar for the second consecutive day as the precious metal renews intraday low near $1,945, extending the post-NFP losses amid to early Monday amid firmer US Dollar and the Treasury bond yields.

That said, the US Dollar Index (DXY) prints mild gains around 104.12 as it keeps the previous day’s recovery from a one-week low amid Monday’s sluggish Asian session. In doing so, the greenback’s gauge versus the six major currencies cheers the market’s fears of higher Federal Reserve (Fed) rates and the US-China tension, not to forget the fresh war headlines surrounding Russia and Ukraine.

Apart from that, an increase in the odds supporting June’s 0.25% Fed rate hike and a reduction in the market’s bets of a Fed rate cut in 2023 also seem to favor the US Dollar and yields, which in turn exerts downside pressure on the Gold price amid a sluggish start to the week. It’s worth noting that Friday’s Nonfarm Payrolls (NFP) surprised markets with a strong outcome and renewed hawkish concerns about the US central bank. That said, the US-China tension about Taiwan joins the headlines suggesting a heavy battle between Russia and Ukraine also weighs on the sentiment and allows the DXY to remain firmer, which in turn favors the Gold sellers.

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The GBP/USD pair has witnessed delicate barricades after climbing to near 1.2450 in the early European session. The Cable is expected to remain on tenterhooks as the USD Dollar Index (DXY) has attempted a recovery after dropping to near 103.81. More downside for the US Dollar Index (DXY) seems solid as the United States economy is moving towards recession.

S&P500 futures have taken nominal gains in the European session, portraying a mild recovery in the risk appetite of the market participants. US equities witnessed some selling pressure on Monday after the United States Institute of Supply Management (ISM) agency reported weaker-than-anticipated Services PMI data. The demand for US government bonds has retreated. The 10-year US Treasury yields have jumped to near 3.71%.

On Tuesday, US ISM Services PMI managed to dodge the 50.0 threshold that bifurcates expansion from the contraction phase. The Service PMI for May landed lower at 50.3 than the expectation of 51.5. This indicates that the economic indicator has hardly defended the contraction phase and expansion in service activity was extremely mild.

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Weak Chinese Trade Data Add to Growth Worries

German Bunds outperformed US Treasuries during European trading hours following an unexpectedly strong decrease of inflation expectations in the ECB’s April Consumer Expectations Survey. The divergence between the two became even larger as US Treasuries started underperforming (especially at the front end the curve) during the US session. The move started after the US Treasury announced plans to boost the size of its coming bills sales: $60bn for the 4-week tenor (+$25bn), $50bn for the 8-week tenor (+$35bn) and $46bn for the 17-week auction (+$2bn).

Since the debt ceiling has been raised, the US Treasury is rapidly trying to replenish its depleted general account with the Fed which shrank to its lowest level since 2017. In coming weeks/months, sizes at the longer tenors will be upped as well with the bigger question being whether this will drain more liquidity in times of Fed rate hikes and QT or whether it will just trigger a shift in investor allocation from one cash instrument to the other. Daily changes on the US curve ranged between +1.3 bps (2-yr) and -4.2 bps (30-yr). Minutes before the market close, US Treasuries managed to erase a large part of the intraday losses in a strange, inexplicable, short squeeze. German yields closed the session up to 4 bps lower at the front end and broadly stable at the very long end. Loss of interest rate support at the front end pulled EUR/USD back below 1.07 to close at 1.0693.

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The blue-chip-oriented Dow Jones gained cautiously on Wednesday while the tech-heavy Nasdaq 100 sank 1.75% in the worst single-day drop since April 25th. In fact, the Nasdaq/Dow ratio plunged 2.02%, marking the worst 24-hour period since October 27th, which was over 7 months ago. What explains this divergent dynamic and is it a concern for sentiment going forward?

Tech’s underperformance coincided with a strong day for developed countries’ 10-year government bond yields. An average of key nations (such as the United States, Canada, and Australia) soared 3.78% on Wednesday. That was the best single-day gain since December 20th. As we were reminded last year, growth-oriented companies face increasingly difficult challenges in a rising rate climate.

The surge in government bond yields follows two key events that are related: unexpected interest rate hikes from the Reserve Bank of Australia and Bank of Canada. The former was earlier this week while the latter occurred over the past 24 hours. These events served as not just a reminder that the fight against inflation is not done, but that other major central banks, such as the Fed, could yet follow.

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The Canadian dollar has appreciated sharply against the U.S. dollar since late May. The chart below shows how USD/CAD has fallen more than 2.0% over the past two weeks, with the pair now trading near C$1.3350 and steadily approaching its 2023 lows.

Bank of Canada’s surprising decision to raise interest rates at its June meeting after pausing its hiking campaign in January has reinforced recent FX dynamics, acting as another positive driver for the Loonie.

BoC’s aggressive stance could continue to put downward pressure on USD/CAD in the near term, especially if traders boost bets on further tightening in response to the central bank’s view that “monetary policy is not sufficiently restrictive” to bring inflation down to the 2.0% target.

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The EUR/USD pair recovers a few pips from the Asian session low and for now, seems to have stalled its retracement slide from over a two-week high touched on Friday. Spot prices currently trade just below mid-1.0700s, nearly unchanged for the day, as traders seem reluctant to place aggressive bets on the first day of a crucial week.

The latest US consumer inflation figures are due for release on Tuesday and will be followed by the highly anticipated FOMC monetary policy decision on Wednesday. The key data/event will provide more cues on the Federal Reserve’s near-term policy outlook, which, in turn, will determine the next leg of a directional move for the US Dollar (USD) and provide some meaningful impetus to the EUR/USD pair.

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US stock markets retained positive momentum yesterday with the three main indices rising by 0.55% (Dow) to 1.5% (Nasdaq). The S&P 500 rose by almost 1%, closing above the August 2022 top. Tech bell weather Nasdaq cleared that same technical hurdle earlier this month. Stock markets embrace the Fed’s “skip” idea while data simultaneously suggest that the economy and labour market aren’t cooling as rapidly as feared.

The latest NY Fed Survey of Consumer Expectations yesterday provided evidence for both Team Skip and Team Hike within the Fed. Inflation expectations declined at the short term horizon to their lowest level in two years (1y; 4.4% to 4.1%), while they increased slightly at the medium- (3y; 2.9% to 3%) and longer-term (5y; 2.6% to 2.7%) horizons. Labor market expectations were mixed as well with expected earnings growth declining (2.8% from 3%), and unemployment expectations and perceived job loss risk improving. Households’ perceptions and expectations for credit conditions and their own financial situations all deteriorated slightly.

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Gold price once again attracts some buyers near the 100-day Simple Moving Average (SMA) on Wednesday and recovers a part of the previous day’s slide to the weekly low. The XAU/USD sticks to its modest intraday gains heading into the European session and currently trades just above the $1,945 level, though remains well within a familiar range held over the past three weeks or so.

Federal Reserve’s rate-hike pause expectations lend support to Gold price

Soft consumer inflation figures released from the United States on Tuesday reaffirmed market bets for an imminent pause in the Federal Reserve’s (Fed) rate-hiking cycle, which, in turn, is seen lending some support to the Gold price. In fact, the US Labor Department reported that inflation, as measured by Consumer Price Index (CPI) barely rose in May and the year-on-year rate decelerated to the slowest pace since March 2021. The annual inflation print of 4.0%, meanwhile, is still twice the Fed’s 2% target and kept hopes alive for further policy tightening by the Fed.

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The U.S. dollar rallied in early European trade Thursday, boosted by the Federal Reserve’s hawkish projection of more tightening this year, while the euro weakened ahead of the latest European Central Bank policy meeting.

At 02:05 ET (06:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 102.835, recovering from the previous session’s four-week low.

The U.S. currency bounced after recent losses following the conclusion of the latest policy-setting meeting of the Federal Reserve on Wednesday, with the central bank deciding to pause its year-long policy tightening cycle, as widely expected.

However, the Fed also signaled in new economic projections that rates will likely rise by another half of a percentage point, i.e. two more hikes of 25 basis points, by the end of this year.

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The U.S. dollar edged higher in early European trade Friday, rebounding after hefty overnight losses following weak economic data, while the Japanese yen weakened as the Bank of Japan maintained its interest rates at very low levels.

At 01:45 ET (05:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 101.787, after sliding around 0.8% overnight to a new one-month low.

The dollar received a boost earlier in the week when the U.S. Federal Reserve forecast at least two more hikes this year, despite pausing its series of rate hikes, as inflation continued to trend above the central bank’s target range.

But a swathe of weak U.S. economic readings, including slowing industrial production and sluggish retail sales, raised questions over just how much higher the Fed can raise interest rates.

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The US Dollar (USD) holds steady early Monday after having suffered large losses against its major rivals last week. Stock and bond markets in the US will be closed in observance of the Juneteenth holiday. The European economic docket will not be featuring any high-impact data releases and market participants will pay close attention to comments from central bank officials.

The US Dollar Index (DXY) fell more than 1% and closed the third straight week in negative territory before going into a consolidation phase above 102.00 in the European session. The benchmark 10-year US Treasury bond yield fluctuated wildly following the Federal Reserve’s (Fed) monetary policy announcements but ended the week little changed below 3.8%.

On Sunday, US Secretary of State Antony Blinken and Chinese Foreign Minister Qin Gang reportedly had “candid and constructive talks” on their differences from Taiwan to trade. Sides are said to have agreed on little beyond keeping the conversation going with an eventual meeting in Washington, reported Reuters.

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The U.S. dollar gained in early European trade Tuesday, with this safe haven in demand as a rate cut by China’s central bank failed to assuage investor concerns over slowing economic growth.

At 01:55 ET (05:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 102.118, rebounding from its recent one-month low.

China’s central bank, the People’s Bank of China, cut its benchmark loan prime rate by 10 basis points earlier Tuesday, a move that had been widely telegraphed as Beijing struggles to shore up a slowing economic recovery.

However, this size of the rate decrease disappointed some who fretted that this would not be enough to shore up confidence, with the Chinese property sector particularly hard hit.

USD/CNY rose 0.2% to 7.1769, with the yuan trading just shy of its lowest level since late November, with traders looking for a wider stimulus package from Chinese authorities but receiving a lack of concrete measures from a cabinet meeting on Friday.

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The dollar was firmer on Wednesday leading into Federal Reserve Chair Jerome Powell’s appearance before Congress where he is expected to strike a hawkish tone, while sterling firmed slightly after hotter-than-expected British inflation data.

The annual pace of British consumer price gains was steady at 8.7% in May, against hopes it had cooled since April. Sterling briefly rose as far as 0.3% against the dollar to $1.2803 before settling back to $1.2765.

It also rose slightly on the euro and yen, as traders were betting the Bank of England would need to take rates higher. Markets now price another 150 basis points of hiking for a peak at 6% in a year’s time.

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Despite a boost in exports to China, New Zealand’s trade deficit broadened in May. The deficit increased from NZ$17.02 billion to NZ$17.12 billion, falling just short of economists’ prediction of NZ$17.24 billion.

Concurrently, the monthly trade surplus shrank from NZ$236 million to NZ$46 million. A substantial rise in milk powder, butter, and cheese exports (+21%) contributed to the export growth, while crude oil (-52%) and logs, wood, and wood articles (-15%) exports experienced declines.

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The German economy experienced a marked loss of momentum during the latter part of the second quarter, according to the latest ‘flash’ PMI survey conducted by Hamburg Commercial Bank. Weakening demand conditions led to a significant slowdown in business activity growth, while company expectations hit a six-month low and job creation rates also dropped. Inflation pressures eased in June, with manufacturers recording the first decline in output prices in over two and a half years. Although service sector costs and selling prices continued to increase, driven partly by higher wages and rising interest rates, inflation rates showed signs of deceleration.

The HCOB Flash Germany Composite PMI Output Index exhibited a substantial decline in June, falling from May’s 53.9 to 50.8. Despite remaining above the 50.0 thresholds indicating growth, this reading pointed to a sharp deceleration in the expansion rate, reaching a four-month low. The decline resulted from both a slower increase in service sector business activity (index down from 57.2 in May to 54.1) and a deepening downturn in manufacturing output (index dropping from 47.4 to 44.2).

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US
The US Federal Reserve (Fed) is anticipated to end its rate-hiking campaign shortly. Attention will turn to Personal Consumption Expenditures (PCE) readings, hoping for a decline in inflation. A decrease in inflation may boost swap futures’ confidence in one more Fed rate hike. Wall Street will keep a close eye on the Conference Board’s consumer confidence reading and Friday’s Personal Income and Spending data release.

Key Fed events include Fed’s Williams speech at the Bank for International Settlements, Fed Chair Powell’s address at the ECB’s global banking forum in Portugal, and the announcement of annual banking stress test results.

Eurozone
ECB President Christine Lagarde’s early-week appearances will garner significant attention due to recent interest rate hikes amidst ongoing inflation. Investors will closely watch the flash Harmonized Index of Consumer Prices (HICP) data on Friday.

The ECB has cautioned that significant data improvement is required to prevent another rate hike next month. A minor shift in the opposite direction could prompt the ECB to increase rates again in July before reevaluating in September. Inflation data from individual countries earlier in the week may offer insights into Friday’s expectations.

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US indices showed varied performance in a subdued trading session. The Nasdaq index experienced a decline of over 1% as Big Tech companies retreated, making it the poorest-performing index of the day. Tesla shares took a significant hit, falling by 6% following a downgrade from Goldman Sachs. Other major tech players, including Meta, Amazon, and Microsoft, also saw declines ranging from 2% to 3%.

Contrarily, the Russell 2000 index ended in positive territory, benefitting from a rebound in regional banking stocks. The Nasdaq 100/Russell 2000 ratio faced strong resistance at 8.2, historically signaling potential overvaluation of the tech sector compared to the broader market.

FX Market Update: Stable US Dollar in Calm Session

The US Dollar (USD) maintained stability during a calm trading session with limited news flow. The US Dollar Index traded within a narrow range, reaching a low of 102.610 and a high of 102.830. Traders awaited central bank speakers and upcoming US data releases, anticipating potential market volatility.

Among G10 currencies, the New Zealand Dollar (NZD) outperformed its counterparts, while the Australian Dollar (AUD) remained relatively steady against the USD. Positive discussions between New Zealand and China regarding participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) contributed to the NZD’s strength. As a result, the NZD/USD pair reached a high of 0.6177, causing the AUD/NZD pair to decline and approach the 1.08 level.

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In a bid to alleviate concerns and uncertainties, Chinese President Xi Jinping has recently assured foreign investors of his government’s unwavering commitment to addressing economic issues and unpredictable policy-making. Amid a backdrop of global apprehension, Xi underscored China’s dedication to development, openness, and the protection of foreign investors’ rights during his recent visit to Beijing, as reported by Xinhua News Agency.

China’s economy has been grappling with a slower recovery pace, particularly post-Covid Zero policies. This has led to intensified efforts by the nation to attract foreign investors. Compounding this situation are the endeavours by Western powers, including the US and Europe, to reduce their reliance on China, thereby creating an air of uncertainty about the country’s future growth prospects.

During the “Summer Davos” dialogue in Tianjin, Chinese Premier Li Qiang spoke emphatically about China’s readiness to collaborate with global entrepreneurs. He cautioned against the politicization of economies, urging CEOs to ensure the security of their supply chains, a sentiment he echoed during his recent visit to Germany.

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Kazuo Ueda, the current head of the Bank of Japan, has publicly supported the institution’s continuous implementation of monetary easing policies, despite the ongoing depreciation of the yen. He justified this by pointing out that, although the headline inflation rate is above the set target of 2%, the core inflation rate remains below this benchmark.

Ueda made these comments while attending the ECB Forum on Central Banking in Portugal. This event was attended by officials from the central banks of the United States, Europe, and the United Kingdom. During his address, Ueda noted that the value of the Japanese currency is subject to a multitude of influences, including the policy decisions made by these international central banks.

Despite his defense of the current monetary policy, Ueda expressed some uncertainty about the stability of inflation rates in Japan over the forthcoming years. However, he did acknowledge that should the central bank gain substantial confidence in future inflation stability, they would consider adjusting their policy approach accordingly.

The stance of the Bank of Japan stands in stark contrast to the fiscal strategies employed by the central banks of the US, UK, and Europe. These institutions have chosen to hike interest rates as a means of battling inflation, whereas the Bank of Japan has opted for an approach centered around ultra-low rates and market liquidity enhancements.

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The USD/JPY currency pair is currently holding steady near its year-to-date (YTD) peak, hovering just below the 145.00 level. This comes as the pair trades comfortably in the 144.55-144.60 region, a clear sign of its recent upward momentum. The pair’s movement has been closely monitored by investors and traders alike, especially given its performance in the past few weeks.

The surge of the USD/JPY beyond the 145.00 mark has led to speculation about a potential intervention from Japanese authorities. These speculations have caused a shift in investor sentiment, leading them to temper their bullish positions on the pair. Adding to this, the Japanese Finance Minister issued a warning about potential government actions if the Yen weakens excessively. This, coupled with a generally cautious market atmosphere, has provided some support for the JPY.

Investors are also grappling with concerns about the economic challenges that could arise due to increasing borrowing costs. These concerns have been further amplified by less than impressive macroeconomic data coming out of China. This, combined with a somewhat subdued action in the US Dollar, has put a cap on the USD/JPY pair’s movement.

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As the new week unfolds, the GBP/USD pair is navigating within a tight range, lingering around the 1.2700 mark. This limited fluctuation indicates a lack of significant momentum for the currency pair, which could be indicative of market participants’ cautious approach in the face of uncertain market conditions.

Simultaneously, the GBP/JPY cross is displaying an impressive performance, enticing fresh buyers and making steady progress towards its highest point since December 2015. The pair is currently trading within the region of 183.70-183.65, marking a daily increase of over 0.20%. The pair seems ready to extend the strong upward trend it has exhibited over the previous quarter.

This positive trajectory can be partially attributed to the Japanese Yen’s (JPY) relative underperformance. The Bank of Japan’s (BoJ) dovish stance has triggered a fresh wave of JPY selling. Market players appear convinced that BoJ’s negative interest rate policy will stay in place until at least next year. Further supporting this sentiment, BoJ Governor Kazuo Ueda recently dismissed the possibility of any immediate changes to the ultra-loose monetary policy settings and indicated no plans to adjust the yield curve control measures.

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Amid the recovery in oil prices and ongoing struggles of the US Dollar, the USD/CAD pair is experiencing a downward trend, moving towards the 1.3200 mark ahead of the release of Canada’s PMI. The USD/CAD has slid to 1.3235 as traders of the Loonie pair show determination to break through the stagnation that has lasted for three days. This movement was observed during the early European trading hours on Tuesday, following a period of inactivity during the Asian trading hours.

The recent losses experienced by the Loonie pair can be attributed to a surge in Canada’s principal export commodity, coupled with a pullback in the US Dollar Index (DXY). WTI crude oil, for instance, recorded slight gains at around $70.30, reflecting the impact of recent announcements from Saudi Arabia and Russia hinting at further supply cuts. These gains in the energy benchmark are also fueled by the anticipated increase in oil demand from the US and China, as these two economic powerhouses strive to resolve their differences.

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The USD/CAD pair has been a focal point for investors during Wednesday’s Asian session. This currency pair saw an uptick in buying, allowing it to recover from its weekly low of approximately 1.3200 achieved on Tuesday. At present, spot prices are hovering around the 1.3230-1.3235 range, reflecting a modest rise of nearly 0.10% for the day. Various factors on the global stage contribute to this mild gain.

A key worry influencing the market is the potential for a worldwide economic downturn, which could drastically affect fuel demand. This concern is currently overshadowing the anticipated supply squeeze due to production reductions announced by major exporters, specifically Saudi Arabia and Russia. These declarations have put Crude Oil prices under pressure, which directly impacts the USD/CAD pair.

Domestic issues also play a role in the performance of the pair. Last week’s Canadian data showed a weakening economy, with consumer inflation reaching a near-two-year low in May. This development is seen as a blow to the commodity-linked loonie and has influenced the pair’s movement. These elements, combined with a minor surge in the US Dollar (USD), have helped the USD/CAD pair gain traction.

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The US Dollar Index (DXY) oscillates near a weekly high of around 103.40, as market participants anticipate key US data and risk factors that could sustain the bullish trend of the DXY during Thursday’s early Asian session.

The index maintains its momentum after a three-day winning streak, primarily driven by concerns surrounding a hawkish Federal Reserve (Fed) and fears induced by China while downplaying weaker US data. According to recent Federal Open Market Committee (FOMC) minutes, nearly all members agreed on halting the rate hike trajectory, with some policymakers leaning towards a July rate increase of approximately 0.25%. This suggests a hawkish tilt at the US central bank, fueling the US Dollar Index.

Meanwhile, China’s disappointing Caixin Services PMI for June, which fell to 53.9 from 57.1, adds to escalating US-China tensions. Beijing’s fresh warnings of additional trade restrictions dampen sentiment and boost the DXY. Recent announcements from China about sudden controls on exports of certain gallium and germanium products, effective from August 1, represent the latest response to US restrictions on AI chip shipments to Beijing.

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USD/CAD Hits New 3-Week High Above 1.3370 as Investors Eye Canada/US Job Data

The USD/CAD pair has recently reached a new three-week high, hitting 1.3375 during the London trading session. This rally of the Loonie asset comes in spite of the prevailing weakness in the US Dollar Index (DXY), rising oil prices, and the anticipated additional interest rate hike from the Bank of Canada (BoC).

In Europe, S&P 500 futures have continued their downward trend initiated on Thursday. This came after the United States labor market demonstrated more resilience than anticipated, causing market sentiment to turn bearish. Investors are currently exercising extreme caution as they await the upcoming second-quarter result season and further labor market data.

The US Dollar Index (DXY) has found support near the 103.00 mark. As the Nonfarm Payrolls (NFP) data release draws closer, fluctuations in the USD Index are expected. Analysts at RBC Economics predict that the US jobs report for June will reflect a substantial increase in payroll employment by 260K, albeit a decrease from the +339K in May. However, this still signifies a high level of employment. They also anticipate a slight rise in the Unemployment Rate to 3.8%, calculated separately from the household survey, up from 3.7% in May.

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The EUR/GBP exchange rate has recently experienced a significant drop to 0.8550, marking a significant shift in the currency markets. This movement is not random; it reflects a complex interplay of various factors influencing both the Euro and the British Pound.

From the Euro’s perspective, several elements play a substantial role. Economic indicators such as inflation rates, GDP growth, and unemployment rates within the Eurozone can cause fluctuations in the value of the Euro. Large economies like Germany and France often have a more significant impact due to their size and influence. For instance, the recent unimpressive German inflation data has potentially contributed to the weakening of the Euro.

Political events within the Eurozone, such as elections, policy changes, or unexpected announcements, can also cause substantial currency movements. Changes in the European Central Bank (ECB) policies are particularly impactful. The ECB’s decisions on interest rates, quantitative easing programs, and other monetary policies directly influence the value of the Euro. In this context, the mixed central bank talks and data from the Eurozone have likely played a role in the EUR/GBP rate’s recent decline.

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A slight uptick in European stock futures has been observed, with the U.S. Consumer Price Index (CPI) report playing a crucial role in the trend. As of 02:00 ET (06:00 GMT), Germany’s DAX futures contract traded 0.4% higher, while France’s CAC 40 futures saw an increase of 0.4%. The FTSE 100 futures contract in the U.K., however, remained largely unchanged.

The positivity is believed to stem from the strong close on Wall Street, where the Dow Jones Industrial Average gained over 300 points, or 0.9%. Investors are hopeful that the upcoming U.S. inflation report for June may influence the Federal Reserve to conclude its interest rate hikes earlier than anticipated.

Federal policymakers are expected to raise interest rates during their next meeting later this month, following a pause last month. However, investors are keenly awaiting the monthly consumer inflation report for insights into potential additional hikes. The headline annual figure for June is projected to have risen by 3.1%, down from May’s 4% rise. Meanwhile, the core rate is predicted to have dropped for a third consecutive month to 5%, from 5.3%.

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The AUD/JPY cross is showing signs of momentum, pushing past the 100-hour Simple Moving Average (SMA) and reaching a two-day peak. This trend mirrors the progress of the EUR/USD pair, which is also advancing towards a fresh 2023 high close to 1.1150. The performance of both pairs has been influenced by a general weakening of the US dollar.

The AUD/JPY cross has managed to ascend to a two-day high, notably breaking through the 100-hour SMA. Market observers are now keenly waiting for the release of the Producer Price Index (PPI), an important economic indicator due later today.

Meanwhile, recent data from the US Bureau of Labor Statistics (BLS) reveals that the country’s Consumer Price Index (CPI) fell to 3% year-on-year in June, down from 4% in May. This figure came in slightly lower than the market estimate of 3.1%. Concurrently, core CPI inflation, which excludes unpredictable food and energy costs, slipped from 5.3% to 4.8%. Despite these decreases, both the CPI and core CPI saw monthly increases of 0.2%, not quite meeting analysts’ forecasts.

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The slowing down of US inflation has been a welcome development in the financial markets. Along with positive earnings news, this has contributed to a robust rally in equity markets. The EUR/JPY pair, however, has seen only a slight recovery from its intraday low, hovering around 154.80 as we head into Friday’s European session.

This performance of the EUR/JPY pair seems to reflect the recent bounce in Treasury bond yields, while also mirroring underwhelming data from Japan. Amid relatively slow trading hours, the US 10-year and two-year Treasury bond yields are showing modest gains around 3.78% and 4.65% respectively. This is after hitting a two-week low the previous day, indicating some form of recovery.

In Japan, the Government Bond (JGB) yields for 10-year have retreated from an 11-week high. This comes as the bond yields from Europe and Germany await the opening bell for their next move. Furthermore, Japan’s Industrial Production for May dropped significantly to -2.2% MoM and 4.2% YoY, compared to the previous figures of -1.6% and 4.7% respectively. This suggests a significant slowdown in Japan’s industrial sector. Capacity Utilization also fell sharply to -6.3%, a stark decline from the market forecast of -2.5% and previous readings of 3.0%.

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As the anticipated US Retail Sales data for June looms, the EUR/USD pair has experienced a noticeable increase in volatility, crossing the significant 1.1200 threshold. This major currency pair has found a degree of stability as investors from around the globe eagerly await these crucial figures that will undoubtedly influence their financial strategies and future market moves.

During the Asian trading session, S&P500 futures have logged some losses, signaling a cautious sentiment among market participants as we delve into the second-quarter earnings season. Additionally, US equities faced some downturns last Friday, with investors expressing apprehension that corporate earnings might experience fluctuations due to the Federal Reserve’s assertive tightening policies and the strict credit standards established by commercial banks to preserve asset quality.

Simultaneously, the US Dollar Index (DXY) is witnessing a decrease in volatility after forming a base just below the 100.00 level. It is projected that the DXY will exhibit significant movement following the announcement of the US Retail Sales data. The market consensus suggests an increased growth in monthly retail demand at a faster rate of 0.5%, a notable increase from the previous 0.3%. Excluding automobiles, retail demand is expected to see an upturn of 0.3%, a slight rise from the last recorded figure of 0.1%.

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The Australian dollar to United States dollar (AUD/USD) pair is currently demonstrating a steady performance, maintaining its position above the 0.6800 mark in the Tokyo session. Despite the Reserve Bank of Australia (RBA)’s inclination towards further policy restrictions, the Aussie currency has yet to experience a significant shift.

During the RBA’s monetary policy meeting in July, the board’s preference leaned towards the Australian economic outlook, leading to the decision to keep interest rates steady. This decision comes amidst a backdrop of weak consumer spending in the second quarter and a Gross Domestic Product (GDP) growth rate of approximately 0.2%. These figures illustrate the impact of the aggressive policy-tightening measures that have been implemented.

It’s worth noting that there is a stark contrast between the interest rates raised by the RBA and those of other developed economies. This discrepancy provides ample room for potential future hikes by the RBA, which could potentially influence the performance of the AUD/USD pair.

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The GBP/JPY currency pair saw a considerable drop of 100 pips to below 181.00, driven primarily by disappointing UK inflation data and weaker Treasury bond yields. The pair dipped further to around 180.80 in the early hours of Wednesday morning in London, reflecting the market’s reaction to these economic indicators. This decline has been amplified by cautious market optimism and a dovish perspective on the Bank of Japan (BoJ).

In June, the UK’s Consumer Price Index (CPI) inflation fell short of expectations, dropping to 7.9% Year-on-Year (YoY), compared to the anticipated 8.2% and the previous figure of 8.7%. A similar trend was observed in the Core CPI, which slipped to 6.9% YoY, moving against market predictions and previous readings of 7.1%.

This downturn in inflation rates has thrown into question the previously hawkish sentiment surrounding the Bank of England (BoE). The uncertainty has contributed to the GBP/JPY’s three-day losing streak, highlighting the sensitivity of the currency pair to changes in economic conditions.

Alongside this, BoJ Governor Kazuo Ueda defended the bank’s easy-money policy at a G20 meeting in India. He acknowledged that achieving the 2% inflation target sustainably remains a distant goal for the central bank, thus reinforcing a dovish outlook.

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The GBP/USD pair is enduring continuous strain, staying close to the critical 1.2920 level as the European session commences. This stress is fueled by the weaker-than-expected inflation data from the UK for June. The monthly Consumer Price Index (CPI) saw a mere increase of 0.1%, failing to meet the anticipated growth of 0.4% and significantly lesser than May’s 0.9% rise. More alarmingly, the yearly CPI fell to 7.9%, not meeting the predicted 8.2% and considerably lower than May’s 8.7% increment. Furthermore, the core CPI, which eliminates the unpredictable food and oil prices, dropped to 6.9%, below the expected market consensus of 7.1%.

Considering this underwhelming inflation data, there is speculation over the Bank of England’s (BoE) approach in its forthcoming policy meeting on August 3. Market analysts suggest that the BoE may lean towards a modest rate hike of 25 basis points (bps) instead of the previously speculated 50 bps increment, in an effort to stimulate economic growth amidst these uncertain times.

In the meantime, the US Dollar Index (DXY), a measure of the Greenback’s strength against other major currencies, has seen a significant surge, reaching the 100.20 mark after initially hitting the 100.00 level during the early Asian market hours. This rise in the DXY contributes further to the downward pressure on GBP/USD, making the Pound Sterling less appealing to investors due to a stronger US Dollar.

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