Weekly Recap August 07 - 11, 2023

Participants in the foreign exchange (forex) market focused their attention on Chinese economic data and U.S. inflation statistics during this week. These factors have a significant impact on monetary policy predictions and overall market sentiment. The released reports indicated the possibility of a decrease in both inflation and growth, prompting traders to carefully consider various narratives. These include discussions about potential supplementary stimulus measures from China, the potential culmination of the Federal Reserve's rate hike cycle, and the varied statements from Fed officials throughout the week.

If you didn't catch the most significant forex news, here's a recap of the key highlights from last week's FX activities.

USD Pairs Despite initial concerns leading up to the July release of the U.S. Consumer Price Index (CPI), the dollar began the week positively due to early-week risk aversion.

Subsequent events in China's trade activities significantly impacted global market sentiment. Investors proceeded cautiously due to unclear prospects of additional stimulus, adding to worries about a potential global economic downturn.

By the middle of the week, the dollar's upward momentum paused temporarily, possibly as traders reduced their long positions in anticipation of the awaited inflation report. A consolidation phase followed, succeeded by a rapid decline in the USD's value when the annual CPI was revealed to be weaker than expected.

Nevertheless, supporters of the dollar quickly regained their confidence. The market appeared to dismiss the underwhelming U.S. bond yield data. Attention likely shifted to the monthly headline and core CPI figures, both of which aligned with predictions. Furthermore, optimistic sentiment might have been fuelled by hawkish comments from Fed Governor Daly.

Throughout Friday, the dollar managed to maintain its gains. This was influenced by a better-than-expected update in the Producer Price Index (PPI), countering the unforeseen decrease in consumer confidence as indicated by the University of Michigan's index.

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Federal Reserve Governor Michelle Bowman indicated over the weekend that there might be a necessity for additional interest rate hikes.U.S. Trade Balance for June: -$65.5 billion (versus a forecast of -$65.1 billion; previous -$68.3 billion).San Francisco Fed Chief Daly asserted that the Fed still needs to work further on controlling inflation, stating that the recent CPI figures aligned largely with expectations.U.S. Producer Price Index change for July: 0.3% month-on-month (versus a forecast of 0.2% month-on-month; previous 0.0% month-on-month).Bearish Headline Arguments

Philadelphia Fed President Harker hinted that the Fed might have reached the end of the current rate-hiking cycle. He later suggested the possibility of keeping interest rates steady before initiating rate cuts next year.Moody’s downgraded 10 mid-size regional U.S. banks and placed six others under review.U.S. IBD/TIPP economic optimism index fell from 41.3 to a one-year low of 40.3 in August (forecast was 43.0).U.S. Weekly Initial Jobless Claims: 248.0k (forecast was 229.0k; previous was 227.0k).U.S. Consumer Price Index change for July: 3.2% year-on-year (forecast was 3.3% year-on-year; previous was 3.0% year-on-year); Core CPI at 4.7% year-on-year (forecast and previous were 4.8% year-on-year).University of Michigan U.S. Consumer Sentiment Index for August: 71.2 (forecast was 71.3; previous was 71.6).EUR Pairs Throughout the first half of the week, Euro pairs demonstrated mainly sideways movement. This was attributed to the lack of major upcoming reports. Instead, the Euro acted as a contrasting currency in relation to its counterparts, especially those with impending catalysts. It appeared to capitalize on the prevalent risk-averse sentiments during this period.

As the week ended, the Euro recorded gains against most of its forex counterparts, barring the U.S. dollar. Particularly noteworthy were its significant advancements against the yen and currencies tied to commodities.

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Sentix Investor Confidence for August: -18.9 (versus a forecast of -23.4; previous -22.5); sentiment for Germany plummeted to -30.7, marking the lowest level since October 22.Germany's final Consumer Price Index (CPI) for July stood at 6.2% (matching the forecast; previous 6.4%). This is attributed to the ongoing impact of rising food prices and a more pronounced increase in energy costs compared to the two preceding months.The ECB Economic Bulletin indicated that the Governing Council maintains the perspective that inflation will persist at an elevated level for an extended duration.Bearish Headline Arguments

German industrial production decelerated by 1.5% month-on-month in July (as opposed to an estimated decline of 0.4%; previous dip of 0.1%).Consumer inflation expectations for the Euro area over the next 12 months declined in June, dropping from 3.9% to 3.4% based on an ECB survey.GBP Pairs  At the start of the week, the British Pound showed positive advancement, but it later retraced within a specific range over the subsequent days, possibly due to a prevailing sense of risk aversion in the market.

Amid the release of the U.S. Consumer Price Index (CPI), market volatility surged. During this period, the British Pound exhibited a bearish tendency, likely influenced by the strength of the U.S. dollar and the overall risk-averse sentiment prevailing at the time.

However, the situation took an unexpected turn on Friday due to a positive update on the U.K. Gross Domestic Product (GDP) for the second quarter. This data conveyed to traders that the Bank of England's efforts to manage inflation were still ongoing. This revelation seemed to attract enough buyers to position the British Pound in the second position for the week, closely following the U.S. dollar.

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The U.K. economy experienced an unforeseen growth of 0.2% quarter-on-quarter in Q2 (compared to 0.1% in Q1 and an anticipated stagnation). This growth was supported by advancements in sectors such as manufacturing, computer programming, and hospitality.U.K. Manufacturing Production for June displayed a notable increase of 2.4% month-on-month (versus a forecast of 0.2% month-on-month; previous decrease of -0.1% month-on-month).Bearish Headline Arguments

U.K. house prices declined by 0.3% month-on-month in July, contrasting with the expected stable reading and the previous dip of 0.1%, as reported by Halifax.RICS House Price Balance for July stood at -53.0% (as opposed to a forecast of -52.0%; previous -48.0%). The statement noted that a more restrictive lending environment was significantly impacting homebuyer activity.BRC Retail Sales Monitor for July reported a growth of 1.8% (as opposed to a forecast of 3.8%; previous 4.2%).CHF Pairs The Swiss economy had a relatively modest lineup of news events, featuring only the jobless rate and SNB foreign currency reserves data in the early part of the week.

For most of the week, most currency pairs involving the Swiss franc experienced limited fluctuations within a relatively narrow range. However, on Thursday, CHF/JPY and NZD/CHF deviated from the broader trend.

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The Swiss jobless rate increased marginally, rising from 2.0% to 2.1% in July, contrary to the projected 2.0% reading.AUD Pairs At the beginning of the week, Australian currency pairs had a slow start, with traders displaying apprehension ahead of significant economic releases from China. This cautious approach might have been influenced by the recent shift in sentiment, indicating that the Reserve Bank of Australia (RBA) was likely to delay any further rate hikes.

The currency associated with commodities experienced a decrease upon uncovering the disappointing underlying aspects of a primarily positive headline in the Chinese trade balance. This decline was mainly attributed to reduced imports and exports due to weaker demand conditions.

After a brief pause in the middle of the week, the higher-yielding Australian dollar (AUD) encountered another decline due to a miss in China's Producer Price Index (PPI) and the absence of details regarding stimulus plans from China's central bank and government.

The subdued inflation outlook in Australia probably contributed to the downward pressure, but the actual selling intensified during the U.S. trading session on Thursday. This corresponded with a broader shift in sentiment towards risk-off after Federal Reserve officials reaffirmed their leaning towards upcoming rate hikes.

Bullish Headline Arguments

Australia's ANZ job advertisements increased by 0.4% month-on-month in July, rebounding from an earlier slump of 2.7%. This recovery followed a downward revision from the initial reported 2.5% drop.NAB's business confidence index improved, transitioning from a downgraded figure of -1 in June to +2 in July, indicating relatively improved business conditions.Bearish Headline Arguments

Australia's Westpac consumer sentiment index decreased by 0.4% in July, a response to the RBA's decision to pause, following an earlier uptick of 2.7% in June.China's trade surplus expanded from $70.6 billion to $80.6 billion in July, surpassing the forecasted $70.8 billion. However, this increase was accompanied by a 14.5% year-on-year decline in exports and a 12.4% year-on-year decrease in imports.Chinese headline Consumer Price Index (CPI) declined by 0.3% year-on-year in July, contrary to the expected 0.4% decrease and the prior stagnant reading. Additionally, the headline Producer Price Index (PPI) fell by 4.4% year-on-year, a reduction from the preceding 5.4% slump and the anticipated 4.0% decrease.Australia's Melbourne Institute inflation expectations dropped from 5.2% to 4.9% in July, implying weaker anticipated price pressures over the subsequent 12 months.CAD Pairs The Canadian dollar began the week with consolidation efforts, as bullish endeavours aimed to counter the negative sentiment following Canada's disappointing job report from the previous Friday.

However, the Canadian dollar encountered downward pressure on Tuesday due to a combination of factors. These factors included risk-off sentiments triggered by weak Chinese trade data, a decrease in Canada's exports, and the downgrading of several U.S. lenders.

There was a brief recovery in its value before facing setbacks when China's inflation figures fell short of expectations. Following this, most currency pairs involving the Canadian dollar (except CAD/JPY and NZD/CAD) resumed trading within established ranges.

Bullish Headline Arguments

Canada's Building Permits for June showed a noteworthy increase of 6.1% month-on-month (versus a forecast of -1.3% month-on-month; previous increase of 12.6% month-on-month).Bearish Headline Arguments

As reported by the Energy Information Administration (EIA), the U.S. is expected to produce a record 12.8 million barrels per day in 2023, offsetting the output cuts made by OPEC.Canada's Trade Balance for June stood at -C$3.7 billion (as opposed to a forecast of C$410 million; previous -C$2.68 billion). Exports experienced a 0.4% decrease in real terms, while real imports increased by 0.9%.NZD Pairs Like the Australian dollar, the New Zealand dollar began the week with a period of tight consolidation. Traders seemed to exercise caution, possibly due to their anticipation of China's trade balance and inflation reports.

The currency associated with commodities responded to significant bearish sentiments on Tuesday, as evident declines occurred in Chinese exports and imports. The currency only slightly capitalized on the minor improvement in New Zealand's quarterly inflation expectations.

This was followed by another phase of consolidation over the following days. However, increased volatility emerged around the time of the U.S. Consumer Price Index (CPI) release, leading most New Zealand dollar pairs to establish new intraweek lows, except for NZD/JPY.

Bullish Headline Arguments

New Zealand's quarterly inflation expectations experienced a slight increase, rising from 2.79% to 2.83% quarter-on-quarter. This uptick implies the potential for an escalation in price pressures within the next two years.Bearish Headline Arguments

China's trade surplus expanded from $70.6 billion to $80.6 billion in July, surpassing the anticipated $70.8 billion. This increase occurred alongside a considerable 14.5% year-on-year decline in exports and a 12.4% year-on-year decrease in imports.In July, China's headline Consumer Price Index (CPI) decreased by 0.3% year-on-year. This contradicted the estimated decline of 0.4% and the prior unchanged reading. Furthermore, the headline Producer Price Index (PPI) plummeted by 4.4% year-on-year, a reduction from the previous 5.4% decline and the projected 4.0% fall.JPY Pairs The Japanese yen is notably falling behind its counterparts, experiencing significant declines on both Tuesday and Thursday.

Bearish sentiment was apparent early in the week, which intensified as the sell-off gained momentum following Japan's release of earnings and spending data that fell below expectations. Briefly, a risk-off sentiment stemming from weak Chinese trade data provided a momentary boost, but the negative trend quickly resumed before the U.S. Consumer Price Index (CPI) release.

The yen found stability on Thursday, coinciding with U.S. inflation updates and hawkish statements from Federal Reserve officials. Given the lack of substantial news from Japan, one could argue that the yen returned to its characteristic 'safe haven' characteristics, especially as speculation about Fed rate hikes regained prominence. This was supported by comments from Fed representatives indicating increased likelihood of upcoming rate hikes.

Bullish Headline Arguments

Japan's Economy Watchers Sentiment index improved from 53.6 to 54.4 in July, surpassing the consensus of 54.0.Bearish Headline Arguments

Japanese leading indicators declined from 109.2% to 108.9% in June, aligning with expectations and indicating a decline in economic activity.Japanese average cash earnings saw a 2.3% year-on-year increase (as opposed to the projected 3.0% forecast) in June. Moreover, household spending experienced a significant drop of 4.2% year-on-year following a prior decline of 4.0%.Japanese producer prices increased by 3.6% year-on-year in July, which was higher than the projected 3.5% gain. Nevertheless, this growth rate was slower than the previous increase of 4.3%, marking the seventh consecutive monthly decline.This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.