Important calendar events
The dollar gained strength on Monday, and the dollar index rose above the 103.5 level. US Treasury yields remained strong, with the US 10-year bond yielding 3.86%.
US ISM Manufacturing PMI data released on Monday fell short of expectations, putting pressure on the dollar. ISM PMI dropped to 46.0 in June from 46.9 in July, against 47.2 expected. A print below 50 indicates that the US manufacturing sector is contracting, and Monday’s disappointing results show that the sector is shrinking faster than anticipated. Final manufacturing PMI, on the other hand, remained steady at 46.3 in June.
The U.S. Federal Reserve kept its interest rate steady at its June policy meeting for the first time in over a year. Fed officials have voted to keep the central bank’s interest rate at a target range of 5.00% to 5.25%.
The Fed has signaled that its tightening cycle is not over yet and that its peak rate might be higher than anticipated. The purpose of suspending rate hikes is to give policymakers time to assess the pace of cooling inflation and many economists believe that the Fed may resume rate hikes as early as July if inflation remains sticky. Powell has warned that additional firming may be appropriate, hinting at the possibility of two more rate hikes.
Fed Chair Jerome Powell reinforced this notion, stressing that US inflation is still at twice the Fed’s 2% target, and warned that the process of getting inflation back to target still has a long way to go. Powell hinted that consecutive rate hikes may be resumed if required, stating that the majority of FOMC members are in favor of two more rate hikes this year.
Final GDP data showed that the US economy expanded by 2.0% in the first quarter of the year. Preliminary GDP data indicated a 1.3% expansion in the previous quarter, but the final print exceeded expectations. Final GDP Price Index printed 4.1% print for the first quarter of 2023, indicating that inflationary pressures are not subsiding fast enough.
US Headline inflation dropped sharply to 4.0% year-on-year in May, from 4.9% in April. US Inflation cooled more than expected in May, as markets were anticipating a 4.1% print. Core CPI, on the other hand, which excludes food and energy, remained sticky at 0.4% every month and 5.3% on an annual basis. US headline inflation dropped to its lowest point since March 2021 after 12 consecutive months of declines. Core PCE Price Index, which is the Federal Reserve’s preferred inflation gauge, climbed by 0.3% in May, bringing the annual rate to 4.6% from 4.7%. Headline PCE, however, was up just 3.8%, indicating cooling inflation.
The EUR/USD pair was volatile on Monday, dropping to 1.087 in early trading but climbing to the 1.091 level later in the day. the EUR/USD pair declines, it may find support at 1.083, while resistance may be encountered near 1.097.
Eurozone PMI numbers released on Monday remained weak in June, dropping to 43.4 from 43.6 in May. A print below 50 indicates a contraction in the sector and Monday’s data were especially disappointing. Germany’s print was barely above 40, indicating that the manufacturing sector of the EU’s largest economy is shrinking.
ECB President Christine Lagarde, speaking at the ECB Central Bank Forum in Portugal last week, stressed that there is still a lot of ground to cover to bring inflation down and hinted at another rate hike in July. Lagarde admitted that recent economic data were weak and that the Eurozone economy remains stagnant, but remained confident that the EU would avoid going into recession.
The ECB raised interest rates by 25 bp at its policy meeting in June, bringing its main refinancing rate to 4.00%. The ECB has signaled that further rate hikes are required as inflationary pressures in the EU remain high. The ECB revised upwards its inflation forecasts for 2023, 2024, and 2025 by one-tenth of a percent, to 5.4%, 3.0%, and 2.2%, respectively. Higher inflation projections raised expectations for additional monetary tightening. Lagarde has pointed to further rate hikes up ahead to tackle sticky inflation in the Eurozone.
Euro Area headline inflation fell to 5.5% year-on-year in June from 6.1% in May, against expectations of 5.6%. Core CPI, which excludes food and energy, rose to 5.4% on an annual level from 5.3% in May but still fell below expectations of a 5.5% print. The latest inflation print is showing that the ECB’s efforts to bring inflation down are paying off, but it will likely not be sufficient to induce the central bank to abandon its hawkish policy just yet.
GDP data for the first quarter of the year showed that the Eurozone is technically entering a recession. Revised GDP showed a contraction of 0.1% for Q1 of 2023, in contrast to the Flash GDP data released earlier which showed an expansion of 0.1%. Deteriorating economic conditions in the Eurozone may force the ECB to rethink its hawkish monetary policy.
GBP/USD traded sideways on Monday, oscillating around the 1.268 level. If the GBP/USD rate goes up, it may encounter resistance near 1.275, while support may be found near 1.259.
Final Manufacturing PMI data released on Monday for the UK were slightly encouraging, providing support for the Sterling. Manufacturing PMI rose to 46.5 in June from 46.2 in May, indicating improving conditions in the Manufacturing sector. June’s print, however, remained well below the 50 threshold that denotes sector expansion.
The BOE raised interest rates by 50 basis points at its June meeting, bringing the bank rate to 5.0%. Sticky inflation in the UK is putting pressure on BOE policymakers to increase interest rates. Bailey warned that if price pressures remain persistent, further tightening would be required. Bailey has also stressed that unsustainable wage rises were largely responsible for the 50-bp rate hike. Labor shortages in the UK have pushed up wage growth, increasing inflationary pressures.
The BOE is expected to continue to increase interest rates in the coming months as it fights to bring inflation down. The BOE has been following an aggressively hawkish monetary policy, aiming to bring inflation down. As the US has paused rate hikes, BOE interest rates are now almost on par with Fed rates, boosting the Sterling.
UK inflation in May surprised to the upside, showing that price pressures in the UK remain high, forcing the Bank of England to extend its hiking cycle. Headline inflation in the UK remained unchanged at 8.7% year-on-year in May. UK inflation remains sticky, exceeding expectations of a drop to 8.4%. Core CPI, which excludes food and energy, was also hotter than anticipated in May. Core CPI rose to 7.1% on an annual basis from 6.8% in April, versus 6.8% expected. This is much higher than the BOE’s goal of 2% and public confidence in the BOE’s efforts to curb inflation has fallen to its lowest level on record.
Britain’s economy expanded by 0.2% month-on-month in April after a contraction of 0.3% in March. GDP grew by 0.1% for the 3-month figure to April pointing to slow growth, and cooling recession concerns. Final GDP data for the first quarter of the year will be released on Friday and may provide additional information on the UK’s economic outlook.
The Yen retreated further on Monday, and USD/JPY rose to the 144.8 level. If the USD/JPY pair declines, it may find support near 142.6. If the pair climbs, it may find resistance at 145.1.
Economic activity data released on Monday for Japan were encouraging, providing support for the currency. Tankan Manufacturing Index and Tankan Non-Manufacturing Index both rose above expectations. Tankan manufacturing index rose to 5 in the first quarter of the year, with a print above zero indicating improving conditions in the sector. The non-manufacturing index rose even higher, with a print of 23 for the first quarter of 2023.
The Yen has been retreating, weighed down by the BOJ’s persistently dovish policy. Japanese authorities, however, have stressed that they are monitoring the Yen’s decline and may intervene to boost the currency against one-sided currency trading.
The BOJ maintained its ultra-accommodating monetary policy at its June meeting, holding its short-term interest rate target steady at -0.10% and keeping its yield curve control program unchanged. The BOJ has signaled it is in no rush to change its dovish stance despite rising inflation rates.
BOJ Governor Kazuo Ueda has stated that, even though price pressures are expected to grow over the next few months, there is high uncertainty on next year's wage growth. Ueda also stressed that more time is needed until the bank’s 2% inflation target became sustainable.
Tokyo Core CPI increased by 3.2% in June from 3.1% in May but fell short of expectations of a 3.4% print. National Core CPI dropped to 3.2% in June from 3.4% in May. June’s print exceeded expectations of 3.1%, indicating that inflation in Japan continues to rise contrary to BOJ’s expectations. BOJ Core CPI rose to 3.1% in June from 3.0% in May. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households.
Final GDP data for the first quarter of the year showed that the Japanese economy expanded by 0.7%, against a preliminary GDP print of 0.4%. The GDP data exceeded expectations, alleviating recession concerns for Japan. Final GDP Price Index showed a 2.0% annual expansion, versus 1.2% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.
Written by:
Myrsini Giannouli
industry presence
as a Liquidity Provider
and reliable execution
client funds
customer support
The website you are now viewing is operated by TopFX Global Ltd, an entity which is regulated by the Financial Services Authority (FSA) of Seychelles with a Securities Dealer License No SD037 that is not established in the European Union or regulated by an EU National Competent Authority.
If you wish to proceed please confirm that you understand and accept the risks associated with trading with a non-EU entity (as these risks are described in the Own Initiative Acknowledgment Form and that your decision will be at your own exclusive initiative and that no solicitation has been made by TopFX Global Ltd or any other entity within the Group.
Don't show this message again
The TopFX website uses cookies to optimise user experience.
These cookies fall under the following categories: essential, functional and marketing cookies. Marketing cookies may also include third-party cookies.
You can customize your selection of which cookies you want to accept.
These cookies are necessary for the website to function correctly and cannot be switched off.
Functional cookies allow the website to remember users' preferences and the choices you make on the website such as username, region, and language.
These cookies are used to track visitors across our websites and show you more relevant ads. Marketing cookies also include third-party cookies from partners. For more information relating to data protection & collection please view our Privacy Policy and Cookie Disclosure.
