05.07.23: US Federal Reserve Rhetoric will Trigger Next Moves for Sterling and Euro Against the Dollar
The US market holiday on Tuesday was crucial in curbing activity and tight ranges prevailed across asset classes.
The global economy will remain a significant focus in the short term.
Chinese developments will remain important with risk appetite generally vulnerable if the economy continues to struggle.
In these circumstances, the dollar would also tend to secure net support in global markets.
The US economic developments will be crucial over the next few days.
During Thursday and Friday, the focus will be firmly on the US data releases.
On Thursday, the jobless claims, ADP employment and JOLTS job-openings data will give further evidence on the labour market.
The ISM services-sector report will also be released and will also be important for market sentiment.
The US manufacturing sector has been in recession for month with services-sector data robust.
Last month, however, there was a weaker-than-expected release for services with a reading of 50.3 and only just above the 50.0 expansion/contraction threshold.
There are expectations of a limited rebound this month, but any further deterioration would spark increased speculation over underlying US deterioration and recession risks.
Rabobank commented; “the softer than expected US June ISM manufacturing data has fed the market’s expectation that the Fed is likely to end of its programme of tightening policy fairly soon.
It added; “Indeed, while the resilience of many G10 economies was a strong theme during the first half of this year, the inversion of the US yield curve (which briefly reached a 41-year peak in the yesterday) suggests that the market is preparing for the possibility of a sharp loss of momentum in the economy as tighter policy brings the prospect of far lower growth and interest rates into view.”
If the evidence of a weaker economy does emerge, the Fed response will be crucial for global markets.
Strong data would lessen immediate concerns surrounding the outlook and provide near-term dollar support.
Pound US Dollar Exchange Rate Outlook
The Pound was held in tight ranges on Tuesday with no significant domestic or global developments.
The UK 2-year yield posted a fresh 15-year high near 5.35% on Tuesday.
With conditions very quiet, the Pound drew an element of support from high yields and interest in carry trades.
The Pound to Dollar (GBP/USD) exchange rate nudged above the 1.2700 level, but was unable to make more than limited headway and settled close to this level.
The overall data flow will remain limited in the short term. Yields, however, will be important for short-term currency demand and the overall UK economic dynamics.
Markets will continue to monitor housing-sector trends in the short term with further concerns that higher mortgage rates will undermine the residential sector.
There will also be reservations surrounding the commercial property sector as higher interest rates take effect.
Global risk trends will also be an important element in the short term.
Overall, GBP/USD can nudge higher on yield grounds if overall volatility remains low.
Euro (EUR) Exchange Rates Today
There were no significant Euro-Zone developments on Tuesday with ECB officials not making comments during the day.
The Euro to Dollar (EUR/USD) exchange rate was unable to make any headway and drifted lower during the day.
The latest Chinese data was weaker than expected with the Caixin PMI index dipping to 53.9 from 57.1 the previous month.
The data triggered fresh reservations surrounding the Chinese and global growth outlook which sapped potential support for the Euro.
The final Euro-Zone PMI index for June will be released on Wednesday with the evidence on inflation pressures watched closely.
Weaker inflation pressures would increase speculation that the ECB hawkish stance will not be sustainable.
Although EUR/USD is likely to be resilient, it is unlikely to make significant headway in the very short term.
US Dollar (USD) Exchange Rates Outlook
US markets were closed for the Independence Day holiday on Tuesday which had a major impact in curbing activity.
The dollar index overall edged higher amid further reservations surrounding the global economy.
There are strong expectations that the Federal Reserve will raise interest rates at this month’s policy meeting.
There will be a substantial reaction if these expectations shift.
The US data releases later in the week will also be important with a particular focus on labour-market data.
The immediate focus will be on the Federal Reserve minutes from June’s policy meeting. The Fed forecasts released with the meeting indicated that members are expecting two further rate hikes.
Markets have priced in a July rate hike, but not an increase beyond that.
The minutes will have an impact on expectations with very hawkish rhetoric underpinning the currency if markets are more convinced that rate hikes will continue beyond this month.
The dollar overall, however, is likely to be subdued unless there is a slide in risk appetite.
Other Currencies
After dipping following the Reserve Bank of Australia policy decision, the Australian dollar recovered ground amid hawkish elements within the statement.
The Pound to Australian dollar (GBP/AUD) exchange rate hit highs at 1.9100 before a slide to test support below the 1.9000 level and consolidated just above this level.
The New Zealand dollar secured a limited net advance as high interest rates attracted carry trades.
The Pound to New Zealand dollar (GBP/NZD) exchange rate retreated to test the 2.0500 level.
The yen struggled to gain sustained support, but markets were wary over the risk of Bank of Japan intervention.
The Pound to yen (GBP/JPY) exchange rate tested 7-year highs just below 184.00 and settled around 183.80.
The Day Ahead
There are no major US data releases on Wednesday, but the Federal Reserve will release the minutes from the June policy meeting.
Rhetoric from committee members will be watched closely with commentary on inflation and peak rates watched closely.
Comments from Fed speakers will also be watched closely during the day.
Markets will still be wary over the possibility of intervention to support the yen by the Bank of Japan.
Overall trends in equity markets will be a significant element during the day.
www.exchangerates.org.uk