Written by Convera’s Market Insights team
Waiting for Wednesday
Boris Kovacevic – Global Macro Strategist
The macro week in the United States is off to a slow start and is only expected to come into gear from Wednesday onwards. However, the last three days are unusually heavy as they feature the FOMC decision, ISM purchasing manager index for the manufacturing sector and the nonfarm payrolls report. All three have the potential to move markets and the assumption going into the risk events is that the US economy is starting to lose steam and that the Federal Reserve will therefore start to cut interest rates from September onwards. Any deviation to that baseline will lead to market repricing.
The US dollar entered the week on stronger footing, ending the US session in the plus against all G10 currencies. The decline of US Treasury yields and equity benchmarks from last week has paused for now as investors pare back stretched positions before the risk events. The US Dollar Index (104.05) has fallen below its 2024 trend line that had a support line at around the 105.00 mark but is still within the broader three-year upwards channel until a break of the 103.00 area.
Overall, the US macro flow should be slightly negative for the Greenback. The ISM PMI and job growth are expected to show continued cooling of both the manufacturing sector and labor market. A print below 200k (175k consensus) on the jobs report could arguably be below the neutral rate needed to sustain a stagnant unemployment rate. And the FOMC is likely to lean into the dovish tilt and signal a likely September cut. The European macro side would have to compensate for that and come in very weak to support the dollar.
Bounce back from $1.28
Boris Kovacevic – Global Macro Strategist
The British pound continues to moderate against the US dollar after it reached the highest level in a year at $1.30 two weeks ago. The loss of momentum has mainly been a function of global factors such as the Japanese yen finding a bottom recently and rapidly appreciating against the dollar, euro, and pound.
Risk-off sentiment took over currency markets with investors displaying a slight bias for safe-haven assets. Some of this flight so safety has moderated going into this week as equities found their footing and the fall of short-term yields took a breather. Now, the focus shifts to the upcoming macro data for new guidance. European and US data will set the tone with the main risk events being the Eurozone inflation print and US jobs report.
However, on the monetary policy front, both the rate decision of the Bank of England and Bank of Japan will influence the pound. The BoC meeting has been described as hanging on a knife edge as policymakers remain divided on the timing of the easing cycle. Economists slightly favor a rate cut on Thursday, while options markets put the probability at around 45%. GBP/USD has bounced back from a quick retracement to the $1.28 mark, which now acts as the first support level to the downside. A breach of the level on a dovish BoE meeting would put $1.2650 into focus. No interest rate chance on Thursday and US macro disappointments on the other side would be able to lift the pair to the other $1.29 area again.
Euro retreats ahead of a heavy week
Ruta Prieskienyte – Lead FX Strategist
The cautious mood has spilled over into the final week of July, with the euro on the backfoot for the second trading session against the US dollar. EUR/USD retreated to a near three-week low below $1.082 as markets brace for an action-packed week. European equities started the week in red, but bonds remained bid. Germany’s 10-year bond yield fell to 2.35%, the joint lowest level since early April, on expectations of monetary policy easing.
Preliminary Q2 GDP growth figures for several Eurozone economies due today will provide an update on the economic performance and price pressures within the currency bloc. Last week, flash PMIs for the Eurozone pointed to an unexpected stagnation in private sector activity in July, led by a bigger contraction in manufacturing and a slowdown in services, with Germany and France continuing to underperform against the wider region. In fact, the Eurozone Citi Economic Surprise Index has plunged by approximately 80 basis points since the start of June. Such a deterioration is occurring at the fastest pace in the past 12 months. Yet, the FX markets have shrugged off these macro developments and have, in fact, priced out 7 basis points of easing by the ECB according to the OIS market over the same time period.
Both the market and the ECB continue to focus predominantly on the developments of inflationary pressures, and it can be argued that they are underpricing the risks posed to growth by the current restrictive monetary policy backdrop. Once the ECB narrative shifts to the growth narrative, we expect further euro weakness to follow.
Oil down by 2% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: July 29-August 02
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
