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- The US dollar index continued rising ahead of the NFP data.
- Sterling has retreated ahead of the July 4th election in the UK.
- Japanese yen’s sell-off has accelerated and is at a multi-decade low.
- Chinese yuan has continued easing as the economic growth slows.
- The euro reacts to Sunday’s election in France.
The US dollar rose for four straight weeks and moved to its highest level since April as signs of more divergence between the Fed and other central banks rose. The US dollar index rose to $106, up by 4% from its lowest point in 2024.
British pound waits for election
The GBP to USD exchange rate retreated to 1.2620, its lowest level since May 15th as traders waited for the upcoming snap election. Similarly, the EUR to GBP pair rose to 0.8472, its highest point since June 10th.
Recent polls show that the Labour Party will win by a big margin on the July 4th election. Tories, who have been in power for 13 years, are expected to lose as voters express concern about the economic stagnation.
It is unclear how a Labour win will impact the British pound. What is clear, however, is that the Bank of England (BoE) will start cutting interest rates as soon as in its August meeting since inflation has reached its 2% target.
Therefore, the GBP/USD pair has dropped because of the potential divergence between the Fed and the BoE. The Fed is expected to maintain its interest rates for longer because inflation has remained higher than expected.
US dollar and the nonfarm payrolls data
The US dollar rallied against most currencies last week. This rally continued after the US published a mixed personal consumption expenditure (PCE) report on Friday.
According to the Bureau of Labor Statistics (PCE), the core PCE rose by 0.1% from April, the smallest increase in six months. On an annual basis, the headline and core PCE rose to 2.6% in May, higher than the Fed’s target of 2.0%.
The PCE is the Fed’s favorite inflation gauge because it considers changes in urban and rural areas in the US. The CPI, another inflation gauge, looks at prices in urban areas.
Still, analysts expect that the Fed will wait before cutting rates, with most of them seeing the first cut coming in December. Cutting interest rates before the November election could open the Fed into political bias criticism.
The main catalyst for the US dollar this week will be the upcoming non-farm payrolls (NFP) data scheduled for Friday. These are important numbers because they form part of the Fed’s dual mandate of ensuring full employment and prices stability.
Japanese yen fall intensifies
The Japanese yen has become the worst-performing G-20 currencies this year. The USD/JPY pair surged to 160 last week, meaning that it has jumped by 60% from its lowest point in 2020. It has also risen for three straight weeks.
The Japanese yen has been in a freefall because of the actions by the Bank of Japan (BoJ) and the government. Over the years, the government has borrowed heavily, bringing the total public debt to over $9 trillion, higher than the country’s GDP of less than $5 trillion.
As a result, the Bank of Japan has struggled to raised interest rates as the country’s inflation rose. Interest rates in the country have remained at zero, creating an ideal carry trade opportunity among traders.
Carry trade happens when investors borrow low-interest-rate currencies to invest in higher-yielding ones. Therefore, barring any major moves by the BoJ, the USD/JPY pair will likely continue rising.
Chinese yuan drop unabated
The Chinese yuan has also continued retreating against the US dollar as concerns about the economy continued. The USD/CNY pair soared to 7.2, its highest level since November 13th.
Recent economic numbers showed that the economy is not doing well. On Sunday, a report showed that the manufacturing PMI remained at 49.5 in June while the non-manufacturing PMI fell to 50.5.
The PMI is an important metric that looks at the performance of key sectors, with a reading of below 50 meaning that the industry is contracting. Other numbers like retail sales and industrial production have also weakened recently. In a note to the FT, a Shanghai-based trader said:
“A great number of traders are expecting a one-off depreciation of the yuan, similar to what occurred in 2015, due to the enormous downward pressure that has built up over the past few months,”
Euro stabilizes as focus turn to France election
Meanwhile, the EUR/USD exchange rate stabilized last week as investors focused on Europe’s inflation and the French election.
As was expected, right-wing political parties won, dealing a blow to Emmanuel Macron. However, it is unclear how these results will impact the French economy and the euro.
The main driver for the EUR/USD exchange rate will be Europe’s inflation data scheduled for Tuesday. Economists polled by Reuters expect the data to show that the headline inflation softened to 2.5% in June.
A lower inflation figure means that the European Central Bank (ECB) will decide to slash interest rates again. Such a move will widen the spread between the Fed and ECB interest rates, creating another carry trade opportunity.
South African rand volatility continues
The South African rand continued its volatility as the ANC and the Democratic Alliance continued negotiations on the next government. The USD/ZAR exchange rate initially dropped to 17.86 as hopes of a government formation rose. It then rebounded to 18.20 as the talks continued.
Still, in the medium term, analysts believe that the two parties will reach an agreement, a move that will benefit the South African rand.
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