FX Market Update: USD and GBP Waits for Inflation and Retail Sales Data

Japanese yen stabilizes

The Japanese yen has been in the spotlight in the past few weeks after staging a strong comeback following the Bank of Japan’s (BoJ) intervention and the recent rate hike.

In its recent decision, the bank decided to hike interest rates for the second consecutive time this year.

It hiked rates by 0.25%, pushing them to their highest point in decades. As a result, this decision pushed many investors to start unwinding the carry trade that has existed for a long time.

A carry trade is a situation where investors borrow the cheap Japanese yen and then invest in other high-yielding countries like Australia and the United States. Now, with the BoJ hiking rates and the Fed expected to cut in September, the interest rate spread has narrowed, making the carry trade less attractive.

The USD/JPY peaked at 162 in July and then crashed to 141.75 on Monday last week and ended the week at 146.62. Similarly, the AUD/JPY exchange rate peaked at 109.30 in July and then retreated to 90.20 on Monday and settled at 96. The GBP/JPY fell from 208.13 to 180 and bounced back to 187.

Turkish lira crashes to a record low

The Turkish lira continued its downward trend, falling to a record low even after the country published an encouraging inflation report.

Data by the statistics agency showed that the headline inflation retreated from 71.60% in June to 61.78% in July.

This was an important reading because it was the second consecutive month that the country’s inflation dropped. It peaked at 75.45% in May and retreated to 71.60% in June, meaning that inflation has peaked.

Therefore, the currency retreated to a record low because the country’s central bank may decide to start cutting interest rates prematurely. In previous statements, the central bank governor has hinted that the bank was prepared to maintain restrictive policies until inflation falls.

The challenge, however, is that Turkey does not have an independent central bank, and the country’s president, Recep Erdogan, hates high interest rates. As such, as he has done in the past, he could replace the central bank governor.

Mexican peso rises after rate cut

The USD/MXN exchange rate retreated from last Monday’s high of 20.20 to a low of 18.80.

This retreat happened even as the Mexican central bank caught market participants off-guard with a surprise interest rate cut.

It slashed rates for the second time this year in a bid to supercharge an economy that is slowing. Part of the slowdown is because the Mexican peso has been relatively strong in the past few years, making its exports more expensive. In a statement, an analyst at JPMorgan said:

“Economic activity is cooling on several fronts and that is what most worries me, the slowdown started before the cool down in economic conditions in the US.”

US dollar waits for inflation report

The US dollar crashed to a multi-month low of $102.16 last week as the Japanese yen surged.

It then bounced back and moved to $103.15 as the conditions stabilized since there was no major economic data released last week.

Now, the focus among investors is on the upcoming US inflation data scheduled for Tuesday. Economists polled by Reuters expect the data to show that the country’s inflation remained above 3% in June.

The US dollar will likely retreat if the country publishes softer-than-expected inflation numbers because they will make the case for a Fed cut. A higher-than-expected report will likely not change the Fed’s view to slash rates because the bank is now more focused on the labor market, which has softened recently. Bloomberg analysts said:

“July’s CPI will likely be soft, with the year-over-year change in core CPI edging further down. Markets may rally around this news, but we think the implication for Fed’s preferred price gauge — the core PCE deflator — will be more mixed when the CPI data are taken account together with PPI.”

Bloomberg

The greenback will also react to the upcoming US retail sales, industrial manufacturing, and initial jobless claims data.

Zambian kwacha waits for central bank decision

The Zambian kwacha has been in a downtrend in the past few weeks.

In this period, the USD/ZMW exchange rate rose to 26.10, its highest point in weeks as focus remained on the country’s de-dollarization drive.

The government has recently enacted policies to reduce the usage of the dollar in the economy as a measure to fight against inflation. In recent statements, the IMF and local businesses have pushed back against the de-dollarization drive and warned that it could lead to reduced business output.

The key driver for the Zambian kwacha this week will be the central bank decision. Economists see the bank hiking interest rates for the seventh straight meeting in a bid to defend the falling currency and fight back against inflation.

The other African central bank to watch will be the Namibian one, which is set to leave interest rates unchanged at 7.75%. Namibia dollar is pegged to the South African rand, meaning that the central bank will have to do what the South African central bank did last month.

Sterling waits for UK inflation data

The British pound has pulled back sharply from its highest point in July.

The GBP/USD pair dropped from a high of 1.3043 and was trading at 1.2760 on Friday, higher than last week’s low of 1.2663.

It will be in the spotlight this week as the UK is set to publish the latest inflation and retail sales data on Friday. Economists expect these numbers will show that the country’s retail sales and inflation rose in July.

A sign that inflation remains at an elevated level will mean that the Bank of England will go slow on its rate cuts. It slashed interest rates by 0.25% in its last meeting and hinted that more cuts were coming.