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- The US dollar index tumbled to its lowest level in over a month after the weak inflation data.
- The British pound rallied after the strong UK GDP data and after a hawkish statement by BoE’s chief economist.
- The euro jumped ahead of the upcoming European Central Bank (ECB) decision.
- The Bank of Japan continued its forex interventions, boosting the yen.
US dollar sell-off accelerates
The US dollar index continued its downward trend after a series of weak economic data raised the possibility of Federal Reserve interest rate cuts. It dropped to a low of $104, its lowest point since June 7th.
Data released this month showed that the US economy was softening. The unemployment rate rose to 4.1% in June after falling to 3.5% in July last year. Wage growth has slowed while the participation rate was lower than expected.
Another report by the ISM showed that the manufacturing and services PMIs dropped below 50 in June. Last week, data by the Bureau of Labor Statistics (BLS) revealed that the headline Consumer Price Index (CPI) dropped for the third consecutive months.
These numbers affected the US dollar because they mean that the Federal Reserve will start cutting interest rates sooner than expected. A currency like the Fed drops when there are signs that the Fed is cutting rates. For example, the dollar index dropped to $89.21 in 2020 as the Fed slashed rates to zero. In a statement, analysts at ING said:
“With the Fed keen to avoid a recession and achieve the targeted “soft landing” we think the Jackson Hole Conference at the end of August will be the venue for the Fed to signal more explicitly that interest rate cuts are coming.”ING
Sterling continues its momentum
The British pound continued its strong rally against the US dollar and the euro. The GBP/USD exchange rate rose for the third consecutive week and reached to its highest point since July 2023.
Similarly, the GBP/EUR pair soared to 1.1903, its highest level since August 2022. Sterling has risen as the market moves on from the recent British election in which the Labor Party won decisively.
It then continued rising last week after Huw Pill, the Bank of England’s (BoE) chief economist warned that the rate cut may not come as soon as expected. Pill believes that the economy is still doing well while the core inflation remains stubbornly high.
It then rallied after the UK published strong GDP numbers on Friday, which showed that the economy expanded by 0.4% in May.
This will be an important week for pound since the Office of National Statistics (ONS) will publish the latest inflation numbers. The consumer and producer inflation data will help to determine whether the BoE will cut interest rates on August 1st.
Euro in focus ahead of ECB decision
The euro will be a key currency to watch this week as the European Central Bank (ECB) delivers its monetary policy decision on Thursday.
Christine Lagarde has hinted that the ECB will keep interest rates unchanged as it observes the bloc’s inflation.
Preliminary data released by Eurostat showed that the bloc’s inflation rose by 0.2% MoM and 2.5% YoY in June. Core inflation rose to 0.3% and 2.9%, meaning that it is still above the ECB’s target of 2.0%. Eurostat will release its final inflation data on Wednesday.
Therefore, the EUR/USD pair has risen recently because of the hopes that the Fed will join the ECB in cutting rates this year.
Japanese yen rises amid interventions
The USD/JPY exchange rate rallied to a multi-decade high of 161.76 last week. It then quickly retreated to 157.88 as the US dollar dropped and as the market speculated that Japan continued its intervention.
According to Bloomberg, the government likely spent $22 billion or 3.5 trillion yen in interventions. Before that, the bank spent 4 trillion in interventions in May as the currency continued its downward trend.
Japan has used its vast dollar holdings to intervene in the forex market since at least 2022. Despite these moves, the currency has become the worst performer in the developed world because of the actions by the Bank of Japan (BoJ).
Unlike other central banks, the BoJ has left interest rates low in the past few years because of the government’s huge debt load. Therefore, there is a likelihood that the Japanese yen will resume its downward trend against the dollar.
Australian dollar waits for jobs data
The Australian dollar has been in a strong uptrend against the euro and the dollar in the past few months. The AUD/USD exchange rate has risen for five straight weeks and has moved to its highest point since January.
This rally happened as signs of a divergence between the Fed and the Reserve Bank of Australia (RBA) rose. As noted above, there are signs that the Fed will start cutting rates as soon as in its September meeting.
Conversely, the RBA has hinted that it will either hold rates steady for longer or even hike them. This happened as the country’s inflation data has remained at an elevated level for longer than expected.
Later this week, the AUD/USD pair will react to the country’s jobs numbers scheduled on Thursday. Economists expect the data to show that the unemployment rate remained at 4.1% as the economy added 20.2k jobs in June.
Jobs numbers are important for a currency because they are part of a central bank’s dual mandate. In this case, strong numbers will likely boost the case for a more hawkish RBA.
Other currencies to watch
The other currencies to watch this week will be the Zambian kwacha, Indonesian rupiah, and the Canadian dollar. The Zambian kwacha has rallied recently after the government introduced a new law to curb de-dollarization. Businesses using the dollar in local transactions could now face up to 10 years in prison, a move that many of them have criticized.
The Indonesian rupiah will be in the spotlight as the central bank delivers its rates decision on Wednesday. Canada will publish its inflation data on Tuesday, a number that will have a role in the next BoC decision.
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