FX Trends: Room for EUR upside, but mixed prospects for others

Both rates and risk appetite may foster USD weakness over the coming weeks, in our view. The median interest rate projection (known as “dots” projection) of the Federal Open Market Committee’s (FOMC) 13-14 June meeting suggest two additional 25bp hikes before year-end, while the market is priced for only one more hike. From rates’ perspective, the message remains that the Fed’s pace of tightening has slowed, and there is likely not a great deal more tightening to come, providing little support for the USD. Meanwhile, US economic data points to a soft landing, rather than more onerous outcomes, which should support risk appetite. Inflation (with US CPI for June on 12 July), rather than economic activity, may be the greater consideration for the USD over the near term.

EUR-USD is likely to break back above 1.10 and extend over the coming weeks. At its 15 June meeting, the European Central Bank (ECB) hiked rates by 25bp. It merely said a July hike is likely and action thereafter would be data-dependent, basically in line with expectations. Although a lot of hawkish news is already in the price, upcoming data (like Eurozone CPI for June on 30 June, with German and Spanish CPI data the day before) and any signs of continued tightness in regional labour market may still keep the ECB rhetoric on the more hawkish side. Risk appetite may also be becoming more of a consideration for EUR-USD.

The GBP has been supported by hawkish surprises on wages and inflation since the start of the year, but upside has become increasingly constrained, as markets price an aggressive tightening path for the Bank of England (BoE), including another 50bp hike on 3 August and a peak policy rate of around 6.25%, i.e., 125bp higher than the current rate (Bloomberg, 23 June 2023). However, we suspect that fears around UK growth are overstated, and thus, while a hawkish BoE may not offer much upside for the GBP, we do not expect a material move lower on the basis of recession risks. We look for GBP-USD to track sideways below 1.30 in the weeks ahead.

While other G10 central banks have been on tightening paths of varying intensity, the Bank of Japan (BoJ) has stuck to its accommodative policy stance. Barring a near-term shift in the BoJ rhetoric, the market is unlikely to start flirting with the idea of a 28 July policy shift, and so there is unlikely to be near-term support for the JPY on this front. However, the combination of the FX intervention threat and a possible topping out in US yields should prevent further USD-JPY upside, in our opinion. As such, we look for USDJPY to track sideways over the coming few weeks.

The Swiss National Bank (SNB) policy path may offer little support to the CHF, especially considering the relatively benign Swiss inflation backdrop, and the likely multiple hikes from the ECB, the BoE, and possibly the Fed. On the external front, the lack of global recession, less prominent financial stability concerns, and generally buoyant equity markets suggest little scope for ‘safe-haven’ support for the CHF. We expect a small dip in USD-CHF in the weeks ahead.

Including recent retail sales data, Canadian activity data have generally surprised on the upside. With core and headline inflation also running over 4% from a year ago in April, the risks remain to the hawkish side for the Bank of Canada (BoC). With markets priced for 17bp of tightening at the next meeting on 12 July (Bloomberg, 23 June 2023), there may be some upside for the CAD over the short term.

The Reserve Bank of Australia’s (RBA) more hawkish stance versus the Fed means that short-term yield spreads may move further in the AUD’s favour. However, until there is a broader recovery in mainland China (with 2Q GDP and June economic activity data due to be released on 17 July) and a brighter outlook for Australia’s key exports, there may be little decisive direction for AUD-USD over the near term, in our view.

Subdued data so far may imply that the recent recovery in NZD-USD is prone to correction over the near term. The latest data impulse in New Zealand has been less supportive – net migration in April showed both a decline in arrivals and a pick-up in departures, while 1Q GDP fell 0.1% from the previous quarter, undershooting the Reserve Bank of New Zealand’s (RBNZ) forecast of +0.3% (Bloomberg, 15 June 2023). This also means that the RBNZ is unlikely to deliver any hawkish surprise at its 12 July meeting.

Note: *As at 14:00 HKT on 26 June 2023.

Source: HSBC, Bloomberg

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Dovish

Dovish refers to an economic outlook which generally supports low interest rates as a means of encouraging growth within the economy.

Hawkish

Hawkish is typically used to describe monetary policy which favours higher interest rates, and tighter monetary controls to keep inflation in check.

MoM / YoY

Month on month / Year on year

PMI

Purchasing Managers Index (PMI) is an indicator of economic health of the manufacturing sector (>50 represents expansion vs. the previous month).

IMM data

International Monetary Market (IMM) is a division of the Chicago Mercantile Exchange (CME) that deals with the trading of currencies and interest rate futures and options and the IMM data is part of the Commitments of Traders (COT) reports published by the U.S. Commodity Futures Trading Commission (CFTC). The IMM data provides a breakdown of each Tuesday’s open futures positions on the IMM. Speculative positions are a trader’s non-commercial positions (i.e. not for hedging purposes).

G10

G10 refers to the most heavily traded, liquid currencies in the world: USD, EUR, JPY, GBP, CHF, AUD, NZD, CAD, NOK, and SEK.

Fed / FOMC

Federal Reserve System (US’s Central Bank)/Federal Open Market Committee.

ECB

European Central Bank (Eurozone’sCentral Bank).

BOE

Bank of England (UK’s Central Bank).

BOJ

Bank of Japan (Japan’s Central Bank).

BOC

Bank of Canada (Canada’s Central Bank).

RBA

Reserve Bank of Australia (Australia’s Central Bank).

RBNZ

Reserve Bank of New Zealand (New Zealand’s Central Bank).

SNB

Swiss National Bank (Switzerland’s Central Bank).

Lagarde

Christine Lagarde, President of the European Central Bank (ECB).

Powell

Jerome Powell, Chair of the Board of Governors of the Federal Reserve System (Fed).

Bailey

Andrew Bailey, Governor of the Bank of England (BOE).

Kuroda

Haruhiko Kuroda, Governor of the Bank of Japan (BOJ).