Forex Major Currencies Outlook (June 28 – July 2)

USD 

PCE inflation data in May came in line with expectations. Headline at 3.9% y/y and core at 3.4%. Although both readings were higher than previous month they show that inflation is not running out of control, no need for Fed to act faster than intended and consequently weaker USD. Personal income fell less than expected (-2% vs -2.5%) while personal spending remained flat. Flatness of spending can cause concern, however previous month’s reading was upwardly revised to 0.9% from 0.5% thus mitigating the weakness. Durable goods in May came in at 2.3% m/m vs 2.8% m/m as expected. Capital goods, a good proxy for capex, came in at -0.1% m/m vs 0.6% m/m as expected. Capital goods reading was partially offset by the upward revision to April’s reading (2.7% from 2.2%). Supply chain disruptions negatively impacted readings. 

Fed Chairman Powell testified in front of the congress and played down market expectations for rate hikes. He stated that Fed will not prematurely raise rates. They are confident that inflation will wane over time and incoming data confirms their assessment. Fed’s Kaplan, a hawk, stated that he sees a rate hike in 2022 and expects PCE for 2021 to be at 3.4%, then dropping to 2.4% in 2022. Fed’s Williams, a more neutral member, stated that in his view inflation will come down to around 2% in 2022 and 2023. Bipartisan deal on infrastructure deal has been reached. Now it has to go through senate for voting, but cracks already start to appear thus decreasing chances of it being legislated. 

This week we will have ISM manufacturing data as well as NFP data for June. Headline NFP number is expected to be around 600k with unemployment rate ticking down to 5.7%. Wages are now getting more attention for clues regarding potential wage inflation. 

Important news for USD: 

Thursday:

• ISM Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate
• Average Hourly Earnings 

EUR 

Preliminary PMI data for Eurozone in June showed manufacturing PMI stay unchanged at 63.1 due to small increase in German reading combined with a small decrease in French reading. Services, on the other hand, matched expectations but showed a big improvement from May reading coming in at 58 vs 55.2 the previous month. Again, German reading showed a big beat over expectations while French reading missed them. Ultimately, composite reading improved to 59.2 from 57.1 in May. Highly elevated numbers show that the Eurozone had a great rebound in Q2, even accelerating towards the end of it and is entering on a strong note into Q3. 

Preliminary consumer confidence in June came in at -3.3 vs -3.1 as expected. A slight miss can be overlooked since confidence is moving in the right direction, strengthening from -5.1 in May. Additionally, current reading is above pre-pandemic reading indicating that consumers are very optimistic regrading reopening which in turn will give strength to the economy at least until the end of 2021. German Ifo data for June continued to rise strongly, beating expectations. Business climate is now at 101.8, well above pre-pandemic levels. Current situation and expectations are also above pre-pandemic levels indicating growing optimism regarding economy within German companies. 

This week we will have preliminary inflation data for June. 

Important news for EUR: 

Wednesday:

• CPI

GBP 

Preliminary PMI data in June showed a small declines compared to May reading, however they are above the 60 level for the third straight month. Manufacturing came in at 64.2 vs 65.6 in May while services slightly dipped to 62.8 from 62.9 the previous month. Composite reading printed 61.7 vs 62.9 the previous month. With all three of Q2 months printing readings of over 60 it is easy to predict and expect very strong Q2 GDP reading, perhaps even above the 5% mark. 

BOE has left its rate and asset purchase program unchanged as was widely expected. In the accompanying statement they have characterized inflation as transitory adding that inflation expectations remain well anchored. They expressed their concerns about the number of people willing to go back to work after furlough scheme expires in September. GDP for Q2 was revised up by 1.5% from May’s report due to easing of restrictions and their positive effect on the economy. Overall, bank’s message oozed with cautious optimism. Markets are pricing two rate hikes by the H1 of 2023.

AUD

Markit came out with preliminary PMI data for the month of June and they showed declines when compared to the previous month. Manufacturing was at 58.4 vs 60.4 in May. Services were at 56 vs 58 in May while composite dropped to 56.1 from 58 the previous month. All three readings are well into the expansion territory which bodes well for the economy. Markit noted strong rebound from the pandemic induced crisis, although firms are “slightly less optimistic with regards to output in the next 12 months amid the uncertain virus and supply situation." 

This week we will have official and caixin manufacturing PMI data for the month of June. 

Important news for AUD: 

Wednesday:

• Manufacturing PMI (China)
• Non-Manufacturing PMI (China)
• Composite PMI (China)

Thursday:

• Caixin Manufacturing PMI (China)

NZD

NZDUSD had a bounceback of more than 150 pips during the week. Westpac’s quarterly Employment Confidence Index rose by 4.4 from March to 103.9. Westpac notes that confidence about labour market conditions is now greater than pre-pandemic levels. Trade surplus in May increased to NZD469m from NZD388m the previous month. NZDJPY longs were the best performing trade of the week. 

CAD

Retail sales in April came in at -5.7% m/m vs -4.9% m/m. April was the month when harsh lockdown restrictions were imposed and it manifested in big drop in consumption. Preliminary reading for May shows retail sales at -3.2% m/m. We can expect a pick up in consumption to show up in June reading as country reopens.

JPY

Preliminary PMI data for June shows manufacturing at 51.5 vs 53 the previous month. This is a second month of declines in manufacturing caused by supply chain disruptions. Positive from this is that reading is still in expansion territory. Services rebounded slightly to 47.2 from 46.5 in May but they could not attribute enough to the rise in composite PMI which fell to 47.8 from 48.8 the previous month. Markit notes that new orders continued to decline while employment continued to expand despite slowdown in demand. All three inflation data points for Tokyo area in came in flat. This makes it the first non-negative reading for headline inflation since September and since July for ex fresh food category. 

CHF 

SNB total sight deposits for the week ending June 18 came in at CHF712.2bn vs CHF711bn the previous week. As the Swissy gains strength and EURCHF moves away from the 1.10 level, SNB decided to raise their activity in the market.

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