Forex Major Currencies Outlook (June 27 – July 1)

USD 

Existing home sales in May came in at 5.41m, in line with expectations, down from 5.6m in April. Most of the deals were done using the rates from late March and early April so they do not reflect sentiment caused by Fed’s aggressive hiking. With mortgage rates standing at around 6% currently we can expect much bigger drops in the sales in the coming months. New home sales in May surged to 696k from 629k in April as home buyers take last chance to buy a house before mortgage rates go up. 

Fed Chairman Powell stated in his testimony before Congress that ongoing rate increases will be appropriate and added their strong commitment to bring inflation down. He reiterated Fed’s stance of data dependence in deciding about the pace of future rate hikes and added that recent data suggests that GDP picked up in the current quarter. Consumer remains strong while housing softened a bit. Powell commented that recession is “certainly a possibility” and admitted that achieving soft landing is “very challenging”. 

University of Michigan’s survey shows 5-year inflation expectations at 3.1% vs 3.3% as preliminary reported. Fed Chairman Powell used this reading as one of the main reasons to go for a 75bp at the June meeting. Now that it has come down to more appropriate levels markets are pricing in new, slower pace of rate hikes and USD is suffering at the end of the week. The yield on 10y Treasury started the week at 3.236% rising toward 3,3% on Tuesday and then tumbling down toward 3% during the week. After Michigan report came out FedWatchTool reversed odds of a 75bp rate hike from a 90.9% probability to 87.9% for July meeting and now sees a 12.1% probability of a 50bp rate hike. 

This week we will have PCE, expected to show another increase, personal spending and income data as well as ISM manufacturing PMI data. 

Important news for USD: 

Thursday:

• PCE

Friday:

• ISM Manufacturing PMI 

EUR

ECB's policymaker Kazaks said that he would support 25bp hike in July and 50 bp hike in September, adding that only way a 50bp would not materialize in September is if inflation surprises to the downside. He also added that investors should not expect 50bp hikes to become default. ECB President Lagarde confirmed at the testimony in European Parliament that they intend to raise rates by 25bp at July meeting and that there will be additional rate hike in September adding that wages have picked up.

Preliminary PMI data for the month of June started to show demand destruction in the Eurozone caused by the increase in cost of living. Manufacturing PMI came in at 52, same as German, lower than 53.9 as expected and 54.6 the previous month. Services were at 52.8 vs 55.5 as expected and down from 56.1 in May. Both business and consumer confidence are on the decline. Inflation pressures remain elevated, but they could be cooled down by such a low demand. Inventories in manufacturing are at high levels indicating probable reduction of activity in H2. Data for Q2 point to a positive GDP reading, however if negative trends continue we cannot exclude recession for Q4. Markets are lowering expectations for the rate hike path and currently price around 160bp of rate hikes for 2022.

This week we will have preliminary June inflation reading expected to continue to rise.

Important news for EUR:

Friday:

• CPI

GBP

Inflation data in May showed headline number at 9.1% y/y as expected. Monthly figure printed 0.7% indicating that inflation is not close to slowing down. Food and fuel prices were the biggest contributors. Core inflation gave a bit of a positive for consumers as it came in at 5.9% y/y, less than 6% y/y as expected and down from 6.2% y/y in April. Still, the printings are in line with BOE’s forecasts and there will be no change to their stance after this set of data. Retail sales in May continued to drop with headline number coming in at -0.5% m/m and -4.7% y/y. The more important ex fuel category fell -0.7% m/m and -5.7% y/y as cost-of-living squeezes consumers. Additionally, consumer confidence fell to the lowest level on record.

UK’s preliminary PMI data for the month of June fared much better than Eurozone’s. Services and composite readings were unchanged from May at 53.4 and 53.1 respectively while manufacturing dropped to 53.4 from 54.6 the previous month. S&P Global notes that “Current business growth is being supported by orders placed in prior months as companies report a near-stalling of demand. Manufacturers in particular are struggling with falling orders, especially for exports”. Business confidence is declining and businesses see greater need to pass the rising input costs to consumers thus intensifying inflation pressures.

AUD

Minutes from the June RBA meeting showed that board members see the need to normalize monetary conditions in the coming months and that more rate hikes will be needed. They agree that pace of 25bp rate hikes every meeting this year would be a rapid tightening. Inflation is expected to increase further in the coming months before eventually dropping down into the 2-3% targeted range. Future path of rate hikes will be data driven, particularly by data on inflation and employment. Governor Lowe stated in a speech that interest rates are too low considering the state of the economy (low unemployment and high inflation) and reiterated that Australians need to prepare for higher interest rates. He added that inflation is expected to peak at 7% in Q4. Chinese banks have decided to keep the 1-year and 5-year LPR (Loan Prime Rates) unchanged at 3.70% and 4.45% respectively.

This week we will have official PMI data and Caixin manufacturing data from China.

Important news for AUD:

Thursday:

• Manufacturing PMI (China)
• Services PMI (China)
• Composite PMI (China)

Friday:

• Caixin Manufacturers PMI (China)

NZD

GDT Price Index came in at -1.3% thus making it sixth auction of declining prices in the last seven auctions. NZD was battered for the majority of the week, holding its ground only against the JPY where it created a double top on Tuesday and then started to head down.

CAD

Inflation in the month of May printed another unpleasant surprise. Headline number came in at 7.7% y/y vs 7.4% y/y as expected and up from 6.8% y/y in April. Monthly inflation printed staggering 1.4% m/m. Energy and shelter prices are the biggest causes for the rising prices. All three core readings came in higher than previous month with Median printing 4.9% y/y, Trim 5.4% y/y and Common 3.9% y/y. BOC will be nudge by the report to give more weight to 75bp increase in order to contain inflation that is at 40-year high.

JPY

Preliminary June PMI data showed manufacturing tick down to 52.7 from 53.3 in May while services staged a nice rebound to 54.2 from 52.6 the previous month. As restrictions get removed and we are entering the summer months demand for services increases significantly improving the performance of the whole sector. Composite PMI also improved to 53.2 from 52.3 in May. National inflation data for May came in at 2.5% y/y for headline number, 2.1% y/y for ex fresh food category and 0.8% y/y for ex fresh food, energy category. The numbers match yearly rise from the previous month.

CHF

SNB total sight deposits for the week ending June 17 came in at CHF751.8bn vs CHF753.1bn the previous week. SNB surprised everyone last week with a 50bp rate hike and absence of the phrase “highly valued” regarding the Swissy. They seem to accept stronger Swissy in order to combat inflation and sight deposits show their abstination from intervening in the markets. SNB Chair Jordan stated that incoming data gives signs that further tightening is necessary, but it is still not clear when it will occur.

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