Important calendar events
Dollar price edged higher on Wednesday, with the dollar index hovering just above the 100 level. US Treasury yields on the other hand continued to decline, with the US 10-year bond dropping to 3.75%.
US Housing data on Wednesday fell short of expectations, putting pressure on the dollar. Housing Starts, which reflect the annualized number of new residential buildings, dropped to 1.42M in June from 1.56M in May versus the 1.48M anticipated. Similarly, new Building Permits fell to 1.44M in June from 1.50M in May against 1.49M expected. A decline in the housing sector indicates decreasing economic activity and health.
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.
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, however, and market odds are in favor of another rate hike in July after June’s pause. The purpose of suspending rate hikes was to give policymakers time to assess the pace of cooling inflation. Even though US inflation slowed more than expected in June, dropping close to the Fed’s 2% goal, most analysts expect another 25-bp rate hike in July.
Fed policymakers reiterated their hawkish stance and will likely raise rates further to ensure a sustainable drop in inflation. There is, however, doubt on whether the Fed will continue hiking rates after July’s rate increase or whether July’s rate hike will be the last one this year. Fed interest rates expectations are shifting in a less hawkish direction putting pressure on the dollar.
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.
Unemployment claims and other economic activity indicators on Thursday may cause some volatility in dollar price ahead of next week’s Fed rate decision.
The euro edged lower on Wednesday and EUR/USD dropped to the 1.119 level. If the EUR/USD pair declines, it may find support at 1.083, while resistance may be near 1.127.
Eurozone Final CPI and Core CPI data on Wednesday tallied with preliminary estimates and did not significantly affect the price of the Euro. 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 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.
The Euro’s rally has been mainly driven by the dollar’s weakness in the past couple of weeks. US disinflation in June lowered the Fed’s expected rate ceiling, with markets expecting an end to rate hikes after July’s Fed meeting. The dovish reassessment of Fed rate expectations has been driving the dollar down.
The ECB, however, still has a lot of ground to cover to bring inflation down. Market odds are in favor of another ECB rate hike in July and the ECB is expected to continue its policy of monetary tightening further. Market expectations are more hawkish for the ECB than the Fed, and market dynamics favor the Euro against the dollar.
ECB President Christine Lagarde has maintained a hawkish stance, hinting at another rate hike in July. 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.
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.
The Sterling declined on Wednesday on soft British inflation data and GBP/USD dropped below 1.290. 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 on Wednesday, 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 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.
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 puts 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. UK 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.
Headline inflation in the UK remained unchanged at 8.7% year-on-year in May, which is much higher than the BOE’s goal of 2%. UK inflation remains sticky, forcing the Bank of England to extend its hiking cycle. Core CPI, which excludes food and energy, was also hotter than anticipated in May.
USD/JPY gained strength on Wednesday, approaching the 140 level. If the USD/JPY pair declines, it may find support near 137.2. If the pair climbs, it may find resistance at 145.1. 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 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.
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Written by:
Myrsini Giannouli
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