Important calendar events
The dollar remained steady on Tuesday as markets eyed the Fed rate decision on Wednesday. The dollar index traded around the 101.3 level with low volatility. US Treasury yields gained strength on Tuesday, with the US 10-year bond climbing to 3.90%.
US economic activity data were mixed on Tuesday. CB Consumer Confidence rose to 117.0 in July from 110.1 in June, exceeding expectations of 112.1. This is a leading indicator of consumer spending, and its increase indicates improved economic activity. Richmond Manufacturing Index on the other hand dropped further into negative territory, with a -9 print in July from -7 in June. A print further below 0 indicates worsening conditions in the manufacturing sector.
Market attention will be focused on the Fed policy meeting on Wednesday. The U.S. Federal Reserve kept its interest rate steady at its June policy meeting for the first time in well 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 market odds are in favor of another rate hike this week. Even though US inflation slowed more than expected in June, dropping close to the Fed’s 2% goal, Fed policymakers will likely raise rates again this week to ensure a sustainable drop in inflation. Most analysts expect that the US central bank will raise interest rates by 25-bp on Wednesday. Wednesday’s rate hike has already been priced mainly in thought and markets will focus on forward guidance.
There is considerable doubt on whether the Fed will continue hiking rates after this week’s rate increase. Cooling US inflation rates have shifted Fed interest rates expectations towards a less hawkish direction putting pressure on the dollar. Market participants will follow the Fed’s press conference on Wednesday closely, for hints into the central bank’s future policy direction. If the Fed maintains a hawkish bias and points to more rate hikes up ahead, interest rate expectations will rise again, boosting the dollar.
US Inflation cooled significantly in June, showing that the Fed’s efforts are paying off. Headline inflation dropped sharply to 3.0% in June from 4.0% in May versus the 3.1% forecast. US monthly inflation rose by 0.2% against the 0.3% forecast, indicating that a weakening trend in inflation is prevailing. Core inflation, which excludes food and energy, dropped to 4.8% on an annual basis in June from 5.3% in May versus the 5.0% forecast. Core inflation had been particularly sticky up till now but finally dropped to the lowest since October of 2021.
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. The final GDP Price Index printed 4.1% for the first quarter of 2023, indicating that inflationary pressures are not subsiding fast enough.
EUR/USD extended losses on Tuesday, dropping below the 1.104 level. If the EUR/USD pair declines, it may find support at 1.094, while resistance may be encountered near 1.127.
German IFO Business Climate data on Tuesday showed a deterioration of business confidence in Germany. The index dropped to 87.3 in July from 88.6 in June, indicating declining business sentiment in the Eurozone’s largest economy.
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.
ECB President Christine Lagarde has maintained a hawkish stance and has pointed to further rate hikes up ahead to tackle sticky inflation in the Eurozone. Lagarde has 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 is holding its next policy meeting this week on the 27th, just a day after the Fed’s meeting. Market odds are in favor of another ECB rate hike of 25 basis points on Thursday and the ECB is expected to continue its policy of monetary tightening further. Many economists expect yet another rate hike in September despite the deterioration of economic growth in the eurozone.
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. Deteriorating economic conditions in the Eurozone may force the ECB to rethink its hawkish monetary policy.
Euro Area headline inflation fell to 5.5% year-on-year in June from 6.1% in May, against expectations of 5.6%. Final Core CPI, which excludes food and energy, rose to 5.5% on an annual level from 5.3% in May. 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.
The Sterling gained strength on Tuesday and GBP/USD climbed to 1.289. If the GBP/USD rate goes up, it may encounter resistance near 1.314, while support may be found near 1.274.
The Sterling edged lower last week, as signs of cooling inflation eased some of the pressure on the BOE to maintain its aggressively hawkish policy. British inflation dropped unexpectedly in June, indicating that the BOE may not have to raise rates as high as expected. Headline inflation in the UK eased to its lowest level over the year, dropping to 7.9% year-on-year from 8.7% in May against expectations of an 8.2% print. Core CPI, which excludes food and energy, also came in at 6.9% for June compared with May's three-decade high of 7.1%, while markets were anticipating a 7.1% print.
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. BOE Governor Andrew Bailey has warned that if price pressures remain persistent, further tightening would be required. Bailey vowed last week to "see the job through" by bringing down inflation and providing price stability.
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.
Britain’s economy contracted by 0.1% month-on-month in May after an expansion of 0.2% in April. The British economy shrank less than expected, however, as markers were anticipating a 0.3% contraction in May. GDP was stagnant in the 3 months to May.
The USD/JPY declined on Tuesday, dropping to the 140.9 level. If the USD/JPY pair declines, it may find support near 137.2. If the pair climbs, it may find resistance at 142. USD/JPY declined last week as the currency pair was mainly driven by the dollar’s movement and the dollar continued its descent.
The Yen has been weighed down by the BOJ’s persistently dovish policy. 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 has also stressed that more time is needed until the bank’s 2% inflation target becomes sustainable.
The next BOJ monetary policy meeting will be held this week, on the 28th. Reports that the central bank will maintain its yield-control policy unchanged at this week's policy meeting have put pressure on the Yen. Markets have been anticipating a hawkish shift in the BOJ’s policy for some time now, but BOJ officials have so far been unyielding in their dovish stance.
The BOJ Policy Statement and press conference following the policy meeting are expected to attract market attention. If BOJ's forward guidance indicates that the central bank could tweak its yield curve control in the future, the Yen might rally. On the other hand, a persistently dovish outlook may push the Yen further down.
National Core CPI rose to 3.3% in July from 3.2% in May. Inflation in Japan continues to rise contrary to BOJ’s expectations and has exceeded BOJ’s target for more than a year. BOJ Core CPI dropped slightly to 3.0% in July from 3.1% in June. 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.
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Written by:
Myrsini Giannouli
présence dans l'industrie en tant que fournisseur de liquidités
et une exécution fiable
séparés
de premier ordre
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