Important calendar events
The dollar slipped on Thursday, with the dollar index touching the 102.4 level. US Treasury yields, on the other hand, continued to gain strength, with the US 10-year bond climbing to the 4.18% level.
ISM services PMI data eased in July to 52.7, down from June’s 53.9, against expectations of 53.1. US Unemployment Claims on Thursday showed a slight increase in unemployment claims to 227K from 221K in the previous week.
Upbeat US jobs data boosted the dollar on Wednesday. ADP Non-Farm employment change showed that 324K new job openings were created in June, exceeding expectations of only 191K job openings.
The U.S. Federal Reserve raised interest rates by 25 basis points last week, after holding its interest rate steady at its June policy meeting. Fed officials voted unanimously to raise the central bank’s interest rate to a target range of 5.25% to 5.50%, the highest level in 22 years.
The Fed’s forward guidance remained the same, stressing that future steps would be determined by several parameters, including the cumulative effect of tightening on the economy, the progress of inflation, as well as other financial developments. The Fed’s message was ambiguous, aiming to give the central bank flexibility towards adjusting its future monetary policy and adopting a data-dependent approach. The Fed’s message was more hawkish than anticipated, indicating that further tightening is still on the table.
Cooling US inflation rates, though, have shifted Fed interest rates expectations towards a less hawkish direction. Core PCE Price Index data last week, enhanced this notion. This is the Fed’s preferred inflation gauge, and signs of cooling inflation may influence the Fed’s next rate decision. Core PCE rose 0.2% monthly in July, bringing the annual rate to 4.1%, against expectations of 4.2%.
In addition, 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.
Advance US GDP data showed that the US economy expanded by 2.5% in the second quarter of the year, against expectations of only 1.8% growth.
EUR/USD traded sideways on Thursday, oscillating around the 1.094 level. If the EUR/USD pair declines, it may find support at 1.083, while resistance may be encountered near 1.115.
Flash CPI data for July showed that inflationary pressures in the Eurozone are easing. Euro Area headline inflation fell to 5.3% year-on-year in July from 5.5% in June. Core CPI, which excludes food and energy, remained at 5.5% on an annual level against the expectation of 5.4%. The ECB’s efforts to bring inflation down seem to be paying off, easing some of the pressure on the central bank to continue its monetary tightening.
Preliminary GDP data for the second quarter of the year on Monday showed that the Eurozone economy expanded by 0.3%, exceeding expectations of 0.2% growth, after contracting by 0.1% in Q1 of 2023.
The ECB raised interest rates by 25 bp at its July policy meeting, bringing its main refinancing rate to 4.25%. The ECB’s forward guidance was not as decisively hawkish as anticipated, though. The central bank hinted that future rate decisions will be data-based.
ECB President Christine Lagarde stated that the central bank’s focus was a timely return of inflation to the 2% medium-term target, leaving the door open for another rate hike in September. Lagarde, however, remained non-committal in her press conference about the possibility of a hike in September. This is a dovish sign given Lagarde’s decisively hawkish stance in the past few months.
GBP/USD exhibited high volatility after the BOE policy meeting on Thursday. The currency pair dropped to 1.261 after the announcement of the bank interest rate but climbed back to 1.271 later in the day. If the GBP/USD rate goes up, it may encounter resistance near 1.299, while support may be found near 1.261.
The BOE raised interest rates by 25 basis points at its policy meeting on Thursday, bringing the bank rate to a 15-year high of 5.25%. The BOE had raised interest rates by 50-basis points at its June meeting though, and market odds were split between a 25-bp and a 50-bp rate hike. As a result, the 25-bp rate hike had been fully priced in and came as a disappointment to market participants expecting an even higher raise.
The Sterling plummeted after the announcement of the BOE interest rate but recovered soon afterward. MPC members’ votes showed a hawkish tendency, increasing expectations of future rate hikes and boosting the Sterling. 7 members voted in favor of the 25-bp point rate hike and only one BOE member voted for a pause in rate hikes from two in the previous meeting and 2 MPC members were in favor of a 50-bp interest raise.
High inflation in the UK is putting pressure on BOE policymakers to increase interest rates. Signs of cooling inflation recently eased some of the pressure on the BOE to maintain its aggressively hawkish policy, though. 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 in 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.
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.
USD/JPY was volatile on Thursday, touching the 143.9 level before paring gains and dropping back to 142.6. If the USD/JPY pair declines, it may find support near 138. If the pair climbs, it may find resistance at 143.9.
The BOJ showed signs of relaxing its ultra-easy policy last week. The central bank maintained its short-term interest rate target steady at -0.10% as expected.
The central bank, however, has loosened its yield curve control. The BOJ maintained the band around the 10-year Japanese government bond yields of +- 0.5% with the yield target around 0% but will offer to purchase 10-year bond yields at 1% through fixed-rate operations. This will maintain the rate ceiling but effectively allow rates to float beyond the cap, allowing for rises by a further 50 basis points. Markets have interpreted this tweak in the BOJ’s monetary policy as a step towards an eventual shift in the bank’s massive stimulus program.
BOJ Governor Kazuo Ueda, however, stated that relaxing the yield curve control policy is not intended as a step toward policy normalization, but rather as a step aimed at enhancing the sustainability of the policy. Markets have been anticipating a hawkish shift in the BOJ’s policy for some time now, but BOJ officials have been unyielding in their dovish stance. Signs of rising inflation, however, are encouraging the BOJ to tighten its monetary policy.
The minutes of the latest BOJ meeting were released on Wednesday and provided insight into the central bank’s decision-making process. Deputy governor Shinichi Uchida stated on Wednesday that the central bank's decision was not a prelude to an exit from ultra-low interest rates and emphasized there is still a long way to go before the BOJ can raise interest rates.
National Core CPI rose to 3.3% in June 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
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