FX Market Update: USD, JPY, BRL, GBP in Focus Ahead of Central Bank Decisions

The forex market will have some notable events this week as the Bank of England (BoE) and the Federal Reserve deliver their interest rate decisions and as the US publishes important jobs numbers.

US dollar in the spotlight

The US dollar will be the currency to watch this week as the country will publish important economic numbers. On Tuesday, the Conference Board will publish the July consumer confidence report.

Economists expect the data to show that confidence dropped below 100 in July. This is an important report because consumer confidence is the biggest part of the US economy. Highly confident consumers spend more and boost inflation.

The other important event will come out on Wednesday when the central bank will deliver its interest rate decision. Based on past statements of key officials like Jerome Powell, the Fed is expected to leave interest rates unchanged. In a note, analysts at ING said:

“The Federal Reserve will still leave monetary policy unchanged but we believe they will use it to offer the clearest hint yet that they're starting to seriously consider an interest rate cut, most probably at the subsequent September FOMC meeting.”

ING Analysts

With inflation falling, the Fed is now focusing on the labor market, which has shown some cracks recently. Data released in July showed that the unemployment rate rose to 4.1% in July, its highest level since 2021.

The Fed's actions are important for the Federal Reserve. Signs that it will cut interest rates would lead to a risk-on sentiment among investors and push the US dollar lower.

On the other hand, signs that the Fed will hold rates higher will make the dollar more attractive since other central banks like the European Central Bank (ECB) and the Bank of Canada (BoC) have started slashing rates.

Strong Japanese yen waits for the BoJ

The Japanese yen has been in the spotlight as it crashed to a multi-decade low against the US dollar earlier this month. The USD/JPY pair soared to a high of 161.76, much higher than the year-to-date low of 140.

Recently, however, the pair has crashed to a low of 151.91 as the Japanese yen staged a strong comeback against the US dollar, euro, franc, and sterling.

This rebound happened for two main reasons. First, there was a general view among investors that the yen had become a bargain, especially with the country’s inflation rising. Second, according to Bloomberg, the Bank of Japan (BoJ) intervened in the forex market by spending over $22 billion.

Looking ahead, the USD/JPY pair will be in the spotlight as the BoJ delivers its decision on Friday. Some economists see the bank hiking rates by 15 basis points while others believe that it will hold rates at zero for longer.

The likely scenario is that the USD/JPY pair bounces back as the impact of the BoJ interventions fade and as traders buy the dip.

British pound awaits for first cut

The other top currency to watch this week will be the British pound as the Bank of England delivers its rate decision.

Economists are mixed on what to expect in this meeting. Some analysts believe that the bank will cut interest rates since the country’s inflation has retreated to the target of 2.0% and there are signs that the economy is softening. In a note, a JP Morgan analyst said:

“We look for a [quarter percentage point] rate cut next week, but in a very tight 5-4 vote. A cut would feel like it’s coming despite, rather than because of, data developments since May . . . The case for lower rates is far from clear”.

JP Morgan Analyst

Other analysts expect the bank to leave rates unchanged since, Huw Pill, its Chief Economist, has warned that inflation is still high.

The most likely scenario is that the GBP/USD resumes the uptrend this week if the Federal Reserve hints that a rate cut is coming in September.

Brazilian real drops for 7 straight months

Meanwhile, the Brazilian real is on track to drop for seven consecutive months and is nearing its all-time low against the dollar. The USD/BRL exchange rate was trading at 5.67, a few points below its all-time high of 5.98.

This trend happened as the Brazilian central bank embraced a more dovish monetary policy. It has slashed interest rates from almost 14% in December to the current 10.5%. These rate cuts have made it one of the most dovish central banks in the market.

The Brazilian real has also dropped because of the weak prices of some of the country’s top commodities. Corn has slumped by over 50% from its highest point in 2022 while soybeans are down by over 37%.

Therefore, the hope is that the Brazilian central bank will leave interest rates at 10.50% when it meets on Thursday. More rate cuts would lead to a further depreciation of the currency and stir inflation.

Ethiopian birr’s major changes

The Ethiopian birr has been in a freefall for years. The USD/ETB exchange rate has risen from 5 in 2005 to almost 60 today. Most recently, the pair has risen in each month since 2019 as the economy has slumped.

Now, the government is making major changes to solve the crisis. In a statement, the president said that it would free-float the currency and end its managed floating exchange rate system. In a managed floating rate system, a country controls the exchange rate.

Some countries have done this successfully. However, for a developing country like Ethiopia with no vast foreign reserves, the system has been difficult, leading to dollar shortages.

Moving to a free-floating system could lead to more birr weakness in the near term as the market adjusts. On the positive side, it could help Ethiopia unlock $10 billion in financing from the International Monetary Fund (IMF).

Australian inflation data ahead

The Australian dollar is another top currency to watch this week as the country publishes its inflation report on Wednesday.

Unlike most countries, Australia does not publish its inflation numbers each month. Instead, it releases its numbers every quarter, a situation that leads to a lag on monetary policy.

Australia will publish its second-quarter inflation report ahead of the Reserve Bank of Australia (RBA) decision next week.

These numbers are important because the RBA has warned that it could hike interest rates if inflation remains stubbornly high. If this happens, it will leave the RBA as the only major central bank hiking interest rates.

The data will come at a time when the AUD/USD pair has slumped in the past few weeks. It has dropped for 10 straight days and is hovering at its lowest point since May this year. This drop is a sign that analysts expect that the bank will leave interest rates unchanged instead of hiking.