Forex Major Currencies Outlook (Aug 2 – Aug 6)

USD 

FOMC meeting gave us no change in rate or QE program, they remained at 0-0.25% and $120bn/month respectively. The statement reiterated that inflation has risen “largely reflecting transitory factors”. One significant change in the statement is that “the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.” In previous statement”'substantial further progress” was said to be “still a ways off”. Chairman Powell stated in the press conference that labor market still “has a way to go”, millions of people that had jobs before pandemic are jobless, adding that household spending is rising at highly rapid pace. He added that timing of the taper will depend on the incoming data, reversing back to data dependent stance and that advance notice will be provided before any changes. In a Q&A session Powell stated that there is still 'some ground to cover' on labour market before goal of tapering is reached. He admitted that the meeting showed talks surrounding timing of the tapering. 

Overall it was a dovish message from Fed with no clear signs of reducing their asset purchases, although it could be said that they have taken a small step toward a less accommodative policy. Investors have pushed the USD down and its decline continued until the end of the week. We can now see more talks about the tapering at the September meeting. Additional data will be available by then and new projections will be published at that meeting. 

Advance reading of Q2 GDP came in at 6.5% annualized vs 8.5% annualized as expected. Although there was a big miss, the level of output has now surpassed pre-pandemic level. Personal consumption was once again the biggest contributor, rising 11.8% and contributing 7.78% to the GDP. Business investment came in at 8% vs 11.7% in Q1 and subtracted -0.57% from the GDP. GDP price index came in at 5.7% vs 5.4% as expected while core PCE came in at 6.1% vs 5.9% as expected. Net exports subtracted -0.44% from the GDP. Inventories subtracted -1.13% from the reading showing that due to the supply chain disruptions companies inventories are depleted. There is a great chance that this will reverse in Q3 as businesses rebuild their inventories, should be a positive contributor. Government spending subtracted -0.27% from the GDP. 

Headline PCE inflation in June came in at 4% y/y, same as previous month. Core inflation came in at 3.5% y/y vs 3.7% y/y as expected, a tick from 3.4% y/y in May. Inflation rise is slowing down, or stagnating as in headline reading, which will confirm Fed’s view of transitory inflation. Energy prices as well as good prices were lower than in May indicating potential top in inflation reading. Personal income rose 0.1% vs 0.3% as expected while personal spending came in at 1% vs 0.7% as expected. 

This week we will have ISM PMI data for July as well as NFP numbers on Friday. Headline number is expected to come over 900k with the unemployment rate ticking down to 5.8%. Wages will again be of great importance as a sign of potential wage-induced inflation. 

Important news for USD: 

Monday:

• ISM Manufacturing PMI

Wednesday:

• ISM Non-Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate

EUR 

Results of Ifo survey for July show that German managers are happy with current situation but are starting to get more concerned about the future. Current situation reading improved to 100.4 from 99.7 in June and continued a six-month rising trend. Business climate and expectations came in at 100.8 and 101.2 respectively, down from 101.7 and 103.7 prints from previous month. Ifo notes that supply disruptions are darkening the picture of the future adding that tourism and consumer sectors are worried regarding another virus wave and devastating effect it can bring. 

Eurozone sentiment data showed economic sentiment rise to 119, highest level in the history of the reading. Industrial sentiment rose to 14.6, also the highest level and it represents eighth consecutive month of rising sentiment. Services sentiment came in at 19.3, less than expected, but still a sixth consecutive rising month. Consumer confidence, on the other hand, dropped to -4.4, marking the first drop in six months. Still, it is at way higher levels than it was before the pandemic started. The data shows that strength from Q2 is continuing at the start of Q3. 

Preliminary July inflation data came in at 2.2% y/y vs 2% y/y as expected on the back of German reading which jumped to 3.8% y/y. Higher oil prices and reintroduction of German VAT were the biggest contributors to inflation. French inflation reading came in at 1.2% y/y, down from 1.5% y/y in June while Eurozone’s core inflation came in at 0.7% y/y vs 0.8% y/y as expected and down from 0.9% y/y in June. With core inflation waning ECB will brush off the rise in headline reading as transitory. Q2 GDP for the Eurozone came in at 2% q/q vs 1.5% q/q as expected. All major economies showed higher than expected results, while German reading missed expectations. Q3 GDP should show continuation from Q2 and expectations are for it to come around 2%.

GBP 

Covid cases have been dropping during the week. Positive data have caused GBP to strengthen, pushing GBPUSD toward the 1.40 level. Prime Minister Johnson stated that August 16 is “locked in” as date for the lifting of self-isolation restrictions. EU agreed to give a grace period to the UK for Northern Ireland Protocol over the summer, which in turn should add more the GBP strength. 

This week we will have a BOE meeting. No changes to rate and the policy are expected since uncertainties regarding effects of Delta variant are dampening the economic recovery. Most members are afraid that too early withdrawal of stimulus could have negative impact on the economy. 

Important news for GBP: 

Thursday:

• BOE Interest Rate Decision

AUD 

Inflation data for the Q2 showed headline number jumping to 3.8% y/y from 1.1% y/y in the previous quarter. This is the highest inflation reading since 2008 and it can be attributed to the base effects. On the quarterly basis inflation came in at 0.8% and main contributor were transportation costs, a combination of higher gasoline prices and not enough vehicles. Core reading came in at 1.6% y/y vs 1.1% y/y in Q1. With RBA targeting core reading in 2-3% range the reading will be brushed off and will not warrant any action from them, although headline number will raise more than a few eyebrows. 

This week we will have an RBA meeting. There will be no changes in the rate, however expectations are that RBA will announce increase in bond purchases. 

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision

NZD 

Trade balance data for the month of June showed a surplus of NZD261m. Exports rose to the highest levels in almost a decade while imports posted rose to the level not seen November of 2019. NZDUSD had an up and down week, it started to lose ground and dropped over 60 pips, but then recovered all of those loses after the FOMC meeting and finished the week around 60 pips higher than at the start of the week. 

This week we will have employment data. It will be a very important reading since RBNZ will decide on the future course of rate hikes based on employment data. 

Important news for NZD: 

Wednesday:

• Employment Change
• Unemployment Rate 

CAD 

Headline inflation in June came in at 3.1% y/y vs 3.2% y/y as expected and down from 3.6% y/y in May. Core readings were also down, common at 1.7% y/y and trimmed at 2.6% y/y, while median remained at 2.4% y/y. Statistics Canada noted that:”While shelter (+4.4%) and transportation (+5.6%) prices contributed the most to the all-items increase, prices rose at a slower pace in four of the eight major components on a year-over-year basis in June. The headline CPI grew at a slower pace compared with May due in part to a slowdown in price growth for goods. Growth slowed the most in the clothing and footwear component, mostly due to lower prices for women's clothing.” If the May reading represented a peak in inflation then BOC may reconsider the speed of the tapering. 

This week we will have employment data. 

Important news for CAD: 

Friday:

• Employment Change
• Unemployment Rate

JPY 

Preliminary July PMI data showed manufacturing at 52.2 vs 52.4 in June, services at 46.4 vs 48 in June and composite at 47.7 vs 48.9 the previous month. Manufacturing held above the 50 level and indexes comprising the reading show weaker growth, while on the other hand services reading fell deeper into contraction, it is there for the 18 consecutive months, with output and new orders pointing to a stronger decline. The fourth state of emergency and ongoing covid-related situation is weighing heavily on the economy. There is a positive sentiment among surveyed that vaccination campaign will prove to be successful. Japan has extended state of emergency for Tokyo area until August 31 and announced new state of emergency for four new prefectures. 

CHF 

SNB total sight deposits for the week ending July 23 came in at CHF712.1bn vs CHF711.9bn the previous week. Although Swissy has been strengthening over the past week, pushing EURCHF toward the 1.08 level SNB is standing on the sidelines.

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