FX Market Update: Pound, Yen, NZD Rises as the US Dollar Slumps

The US dollar dropped against most currencies after the relatively weak US PMI and jobs number last week.

The dollar index, which weighs its performance against a basket of currencies, dropped for seven straight days and settled at $104.87.

US dollar drops after weak data

The US dollar retreated last week after the Institute of Supply Management (ISM) published weak manufacturing and services numbers. The two numbers remained below 50 in June, which is a sign that they were contracting.

Another report released on Friday sent a mixed picture about the US jobs market. The Bureau of Labor Statistics (BLS) said that the economy added 206k jobs in June, beating the median estimate of 186k.

However, the unemployment rate continued rising, reaching 4.1%, its highest point in months. Wage growth also softened during the month.

As a result, the US dollar dropped because these numbers means that the Federal Reserve will likely start to cut interest rates earlier than expected. Before the PMIs and jobs numbers, most analysts were expecting the bank to cut in December.

Now, if the upcoming inflation numbers confirm that prices are falling, there is a likelihood that the Fed will start cutting as soon as in September.

Politics could be a hindrance to when the Fed will start cutting. If it cuts in September, it will be accused of boosting Joe Biden’s re-election chances.

The US dollar, like other currencies, reacts to central bank decisions. In most cases, it falls when there are hopes of rate cuts and vice versa. In a note, analysts at ING Bank said:

Certainly September is very much in play for a first Fed rate cut and those expectations will be boosted further if core CPI comes in at 0.2% month-on-month as expected next week.

Analysts at ING Bank

Turkish lira wavers as inflation falls

The Turkish lira wavered last week after the country’s statistics agency published an encouraging inflation report. The USD/TRY exchange rate was trading at 32.6, a few points below the all-time high of 33.17.

According to the statistics agency, the headline Consumer Price Index (CPI) dropped from 75.45% in May to 71.60% in June. The drop was bigger than the median estimate of 72.60%. It was also the first time that the country’s inflation dropped since May last year.

If Turkey’s inflation continues dropping, there is a likelihood that the country’s central bank (CBRT) will start cutting interest rates later this year.

The CBRT has been hiking interest rates since Erdogan won the election in 2023. It has boosted them from 8.50% in May to 50% today, one of the highest levels globally.

The Turkish lira, one of the world’s worst-performing currencies, will this week react to the country’s retail sales and forex reserves data.

British pound rises after election

The British pound has rebounded sharply in the past few days as investors reacted to last week’s general election in the UK. The GBP/USD pair rose for four straight days and moved to 1.2815, its highest point since June 17th.

This rally happened as the UK election went in line with expectations. The Labour Party won the majority, helping Keir Starmer become the country’s prime minister.

Looking ahead, the GBP/USD exchange rate will react to the upcoming UK GDP data, which will provide more information about the economy’s performance in May.

Economists expect the data to show that the economy expanded by 0.2% in May after stagnating in the previous month.

The biggest catalyst for the sterling, however, will be the next actions by the Bank of England (BoE). With inflation falling and with the election done, analysts expect the BoE to cut interest rates by 0.25% in the next meeting on August 1st.

New Zealand dollar waits for RBNZ decision

The New Zealand dollar to USD exchange rate has also rallied in the past few days, helped by the weak greenback. The NZD/USD pair rose to 0.6150, its highest point since June 20th and 5% above its lowest point this year.

The currency will be in the spotlight this week as the Reserve Bank of New Zealand (RBNZ) delivers its interest rate decision on Wednesday. Economists polled by Reuters expect the bank will leave rates unchanged at 5.5% and point to a cut later this year.

The RBNZ’s view is boosted by the recent inflation data. According to the statistics agency, inflation dropped to 4% in the first quarter and is heading in the right direction.

South Korean won gains ahead of rates decision

The South Korean won also gained against the US dollar last week as focus now shifts to the country’s central bank decision. The USD to KRW exchange rate dropped to 1,375, down from the year-to-date high of 1,400.

This pullback has helped the currency stabilize after it crashed by over 9% between January and April this year, reaching its lowest point in 15 years.

In addition to the upcoming US inflation data, the USD/KRW pair will react to the central bank’s decision. In recent statements, the central bank governor has raised hopes of rate cuts even as the economic growth accelerates.

The bank now expects that the economy will grow by 2.5% this year, helped by the robust demand for semiconductors.

Japanese yen crash eases

Meanwhile, the Japanese yen crashed to 161.98 against the US dollar and then strengthened slightly to 160. Yen has been the worst-performing currency in the G-7 as it dropped by almost 15% against the dollar.

The currency’s recent gains is mostly about the US dollar weakness since concerns about Japan have remained. The main issue is that Japan has a heavy debt burden of over $9 trillion, which has made it difficult for the Bank of Japan to hike interest rates.

More rate hikes by the BoJ would make it difficult for the government to pay its giant $9 trillion public debt. As a result, the spread between the BoJ interest rates of 0.0% and the Fed’s 5.50% will remain, making the currency less attractive.