Forex Major Currencies Outlook (July 19 – July 23)

USD 

Inflation in June surprised to the upside and continued its trend. Headline number came in at 5.4% y/y vs 4.9% y/y as expected and up from 5% y/y in May. Core reading came in at 4.5% y/y vs 4% y/y as expected and up from 3.8% y/y the previous month. Prices of used cars were the biggest contributors showing a devastating impact that chip shortages have on a car industry. Core inflation is now at highest levels since 1991 and indicates economy running hot. USD has gained over 50 pips across the markets. The reading should prompt Fed to react and begin tapering QE to fight the overheating economy. Expectations are for the first hints to be shown at the Jackson Hole meeting in August. On the other hand, with used car prices contributing almost a third of the overall inflation reading, Fed could continue with its inflation is transitory narrative and avoid tapering. Without prices of used cars headline inflation would be almost 2% lower. 

Retail sales in May posted a positive surprise. The headline reading came in at 0.6% m/m vs -0.4% m/m as expected. Control group, it goes into GDP calculation, came in at 1.1% m/m vs 0.4% m/m as expected while ex-autos category came in at 1.3% m/m vs 0.4% m/m as expected. When we dig deeper into the report we see that food services and drinking places rose 2.3% m/m indicating that consumers are going out after reopening and spending their savings. Electronics rose 3.3% m/m and clothing rose 2.5% m/m while vehicle sales showed a drop of 2% m/m. 

In a prepared statement Fed Chairman Powell stated that economy needs continued support until “substantial further progress” is reached, which is still a ways off. On the inflation front he stated that inflation will remain elevated in the coming months but expects it to ease (continuing to characterize it as transitory). He seems unmoved by the recent inflationary readings which he characterized as “uncomfortably high”. 

EUR 

ECB President Lagarde stated that after bond purchases end on March 2022 a new form of bond-buying support program could be introduced adding that policy guidance will be revisited at July 22 meeting. Industrial production in May dropped significantly as it came in at -1% m/m vs -0.3% m/m as expected showcasing the difficulties enhanced by chip shortages and supply chain disruptions. 

This week we will have ECB meeting and preliminary July PMIs. ECB should come out with a change in language, but not a change in policy. 

Important news for EUR: 

Thursday:

• ECB Interest Rate Decision

Friday:

• Markit Manufacturing PMI (EU, Germany, France)
• Markit Services PMI (EU, Germany, France)
• Markit Composite PMI (EU, Germany, France) 

GBP 

Headline inflation data in June rose to 2.5% y/y vs 2.2% y/y as expected with core reading coming in at 2.3% y/y vs 2% y/y as expected. Transport prices were the biggest contributor to the rising prices with base effects being seen in the rise of prices in food, second-hand cars, eating and drinking out, etc. (all increases related to reopening). Inflation remains above the BOE target and BOE policy maker Cunliffe stated that it is hard to assess inflation rate during these unprecedented times. They will try to get a better read of supply and demand for August forecasts and then reassess inflation rate. 

Claimant claims change in June continued to decline and came in at -114.8k vs -92.6 in May thus putting claimant count rate at 5.8%, down from 6% in May. ILO unemployment rate in May ticked up to 4.8% from 4.7% the previous month as employment change showed an increase of 25k. Wages are showing healthy rise with average weekly earnings rising 7.3% 3m/y. However, regarding wages ONS sounds a warning stating that "this growth is affected by compositional and base effects, interpretation should be taken with caution". BOE policy maker Saunders stated that activity recovered a bit faster than it was expected in May which opens up a possibility to withdraw stimulus include by either ending QE in the next month or two and/or further policy action next year. The pound loved these comments and it shoot higher over 50 pips across the markets. 

This week we will have consumption data and preliminary July PMIs. 

Important news for GBP: 

Friday:

• Retail Sales
• Markit Manufacturing PMI
• Markit Services PMI
• Markit Composite PMI 

AUD 

Employment report for June showed employment rising by 29.1k vs 30k as expected. The unemployment rate was the highlight of the report as it fell to 4.9% from 5.1% in May, thus falling to lowest level in a decade. The participation rate remained at 66.2% and all of the gains in employment came from full-time employment which rose 51.6k. Employment is moving in the desired direction, however newly imposed lockdown in state of Victoria will dampen the impact on economy and leave RBA in the wait mode. RBA also sees full employment at much lower unemployment rate and they hope that when the unemployment rate falls to those levels it will lead to rise in wages. 

Trade data from China showed a surplus of $51.53bn vs $44.2bn as expected. A huge beat was accomplished by exports rising 32.2% y/y an improvement to May reading. On the other hand, imports rose 36.7% y/y but were down from the previous month. Trade surplus with the US is $164.92bn for the first six months of the year with surplus rising to $32.58bn in June from $31.78 in May. Q2 GDP came in at 1.3% q/q vs 1.2% q/q and 7.9% y/y vs 8% y/y as expected. Industrial production in June came in at 8.3% y/y vs 7.8% y/y while retail sales came in at 12.1% y/y vs 10.8% y/y. Industrial production was dragged by the issues surrounding automobile industry, while car sales had biggest drag on consumption. 

This week we will have Minutes from the latest RBA meeting. 

Important news for AUD: 

Tuesday:

• RBA Meeting Minutes 

NZD 

RBNZ has left the overnight cash rate unchanged at 0.25% as was widely expected but made tweaks to its monetary policy. Their Large Scale Asset Purchases (LSAP) program will be stopped on July 23. Economic conditions shown by the Quarterly Survey of Business Optimism were strong enough to warrant reduction in stimulus. The move makes RBNZ first major central bank to reduce pandemic-induced stimulus. The bank members have stated that economy is still not strong enough to go entirely without stimulus and that ongoing stimulus is necessary. Removal of stimulus was a very hawkish move and it led to overall NZD strength, The decision prompted local banks to move their rate hike projections to August meeting (August 18). 

Q2 inflation data came in at 1.3% q/q vs 0.8% q/q as expected and 3.3% y/y vs 2.8% y/y as expected. Additionally, core reading, which RBNZ targets into 1-3% range came in at 2.2% y/y vs 2% y/y previously. We are moving closer to the upper band which is yet another data point to nudge RBNZ toward the hike. A very important dataset for the August rate hike will be employment report on August 4. 

CAD 

BOC continued on its path of normalising monetary policy and slashed QE purchases by CAD1bn to CAD2bn/week at their July meeting. The decision to lower the purchases is a reflection of increased confidence in the strength of Canadian economy. Rates have remained at 0.25% as was expected. Inflation is expected to stay at or above 3% until the year end. Downside risks have diminished a bit and they still see output gap closing in H2 2022, although uncertainty around this is now higher. New projections see 2021 GDP around 6% vs 6.5% in April and at 4.25% for 2022 vs 3.7% in April. BOC governor Macklem stated that economy has proven to be “impressively resilient” adding that if the tempo continues current amount of QE will not be needed and reduction of QE program will continue to be gradual. Consumption is expected to lead the recovery and there is still around 500k jobs to recoup. Potential dates for QE reduction are October meeting and then completion of QE program in January of 2022. 

JPY 

BOJ provided no changes to its monetary policy. It has left short-term interest rate at -0.10% and targeted yield on 10yr remains around 0%. Growth projection for the fiscal year 2021/2022 has been revised down to 3.8% from 4% in April due to uncertainties surrounding pandemic developments. Newly imposed state of emergency will additionally have a negative impact on GDP and expected positive impact from hosting Olympic Games will be heavily dampened. Still, they upgraded their projection for 2022/2023 GDP to 2.7% from 2.4% in April. Inflation is seen rising to to 0.6% y/y in fiscal year 2021, that is up from 0.1% y/y in April. For fiscal year 2022 inflation is seen at 0.9% y/y and 1% for fiscal year 2023. 

CHF 

SNB total sight deposits for the week ending July 9 came in at CHF711.7bn vs CHF712.1bn the previous week. A small decline in the sight deposits as SNB stands on the sidelines satisfied with how markets are treating Swissy, although EURCHF has fallen to the 1.085 level.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}