Euro steady ahead of the ECB Central Bank Forum

Important calendar events

• JPY: BOJ Core CPI
• GBP: BRC Shop Price Index, MPC Members Dhingra, and Tenreyro Speeches
• EUR: German Retail Sales
• USD: Core Durable Goods Orders, Durable Goods Orders, HPI, S&P/CS Composite-20 HPI, CB Consumer Confidence, New Home Sales, Richmond Manufacturing Index

USD

The dollar was mostly flat on Monday and the dollar index fluctuated around the 102.7 level with low volatility. US Treasury yields increased on Monday, with the US 10-year bond yielding 3.73%.

Recent developments in Russia provided some support for the safe-haven dollar, but as the crisis has not escalated yet, geopolitical concerns eased.

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. Fed Chair Jerome Powell has warned that additional firming may be appropriate, hinting at the possibility of two more rate hikes.

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. Easing inflation enhances the odds of a pause in rate hikes at Wednesday’s Fed meeting.

The US economy expanded by 1.3% in the first year of 2023 against predictions of a 1.1% growth. The preliminary GDP Price Index, which is an important inflation gauge, exceeded expectations, rising by 4.2% in Q1 of 2023 versus the 4.0% anticipated. 

On the data front, several key economic indicators are due on Tuesday for the US, including, Durable Goods Orders and CB Consumer Confidence. Economic data may cause volatility in dollar prices ahead of the Fed interest rate decision in July. 

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EUR 

The Euro traded sideways against the dollar on Monday, with the EUR/USD pair oscillating around the 1.090 level. If the EUR/USD pair declines, it may find support at 1.084, while resistance may be encountered near 1.101.

The ECB Central Bank Forum in Portugal is one of the key financial events of the week and its outcome is expected to affect the Euro and other currencies as well. The ECB forum started on Monday and will end on Wednesday. ECB President Christine Lagarde delivered the opening remarks at the ECB Forum on Monday. Lagarde and other ECB policymakers will discuss the central bank’s policy in the days ahead. The heads of several major central banks are due to deliver speeches at the forum on Wednesday, including Fed chair Powell and BOE Governor Bailey. 

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. ECB President Christine Lagarde has pointed to further rate hikes up ahead to tackle sticky inflation in the Eurozone.

Headline inflation in the Eurozone cooled to 6.1% year-on-year in May from 7.0% in April, beating expectations of 6.3%. Core Inflation, which excludes food and energy, also slowed to 5.3% on an annual basis in May versus 5.6% in April and 5.5% forecast. 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. 

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GBP 

The Sterling edged lower on Monday, with GBP/USD dropping to 1.271. If the GBP/USD rate goes up, it may encounter resistance near 1.285, while support may be found near 1.268. 

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 warned that if price pressures remain persistent, further tightening would be required. Bailey also stressed after the policy meeting 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.

Headline inflation in the UK remained unchanged at 8.7% year-on-year in May according to CPI data released on Wednesday. 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. 

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JPY

The Yen traded sideways against the dollar on Monday and USD/JPY fluctuated around the 143.5 level. If the USD/JPY pair declines, it may find support near 139.8. If the pair climbs, it may find resistance at 145. 

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 excessive short-selling. 

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. 

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. 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 released last week 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. The final GDP Price Index printed 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.

BOJ Core CPI is due on Tuesday and may affect the Yen, as inflation in Japan may influence the BOJ’s future policy.

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Written by:
Myrsini Giannouli

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