Weekly Recap August 28 – September 1, 2023

Fluctuations in major currencies over the past week were driven by shifting expectations regarding interest rate hikes and the potential for a recession. These fluctuations were primarily instigated by reports from the United States, which hinted at a less assertive stance by the Federal Reserve.

On the other hand, talks of potential interest rate hikes in the Eurozone, despite the region's ongoing struggle with sluggish economic growth, exerted downward pressure on European currencies like the EUR, GBP, and CHF.

If you happened to miss the significant developments in the forex market from last week, here's a brief overview of what unfolded.

USD Pairs The initial batch of underwhelming U.S. economic reports on Tuesday bolstered the belief that the Federal Reserve plans to exercise caution in its upcoming interest rate hikes.

As a result, the U.S. dollar underwent a substantial and widespread depreciation. This downward trend intensified on Wednesday following the release of both the ADP employment report and the revised second-quarter GDP figures.

It appears that the U.S. dollar is poised to wrap up the week with losses against major currencies, having traded close to its weekly lows. This outcome was influenced by a somewhat unfavorable employment situation report on Friday. Nonetheless, the impact was partially offset by a better-than-expected ISM manufacturing report just before the close of the London market.

Bullish Headline Arguments

FHFA House Price Index for Q2 showed a 3.1% year-on-year increase, beating forecasts and the previous figure.The Goods Trade Balance for June revealed a narrower deficit of -$91.18 billion compared to expectations, indicating an improvement in the trade balance.Pending home sales index surprised with a 0.9% month-on-month gain, exceeding forecasts.Core PCE Price Index for July met expectations, with inflation-adjusted consumer spending rising.Challenger Jobs Cuts for August reported a higher number of job cuts than forecasts.Personal income in July showed a slight decrease, while personal spending increased significantly.The ISM Manufacturing PMI for August exceeded expectations, indicating growth in the manufacturing sector.Bearish Headline Arguments

The Job Openings and Labor Turnover Survey indicated a decrease in job openings from June to July.Conference Board U.S. consumer confidence came in lower than expected for August.The ADP Private Payrolls Change for August fell short of forecasts.The second estimate for U.S. GDP growth in Q2 was lower than anticipated.Weekly Jobless Claims for the week ending August 25 came in slightly lower than expected.U.S. Non-Farm Payrolls for August missed expectations, with a higher unemployment rate and lower average hourly earnings.EUR Pairs

At the outset, the euro functioned as a contrasting currency, but the landscape shifted on Wednesday when the release of Germany and Spain's Consumer Price Index (CPI) data lent support to the European Central Bank (ECB) in considering further interest rate hikes. Nevertheless, a significant twist occurred on Thursday, driven by a combination of bullish expectations and apprehensions regarding economic growth, fueled by disappointing data releases within the Eurozone.

Unless there are more optimistic surprises in the Eurozone's economic indicators, the prospect of additional rate hikes by the ECB potentially impeding economic growth in the Euro area may continue to apply downward pressure on the common currency in the near future.

Bullish Headline Arguments

ECB Governing Council member Robert Holzmann indicated on Monday that there is a likelihood of interest rate increases in September.Euro area M3 money supply for July showed a decline of -0.4% month-on-month, compared to a 0.6% increase in June. Adjusted loans to households also dropped by -1.3% year-on-year, contrasting with a 1.7% year-on-year increase in June.Spanish inflation increased in August, rising by 2.4% year-on-year, up from 2.1% in July, primarily due to higher fuel prices.Germany's Preliminary CPI reading for August matched the forecasted 0.3% month-on-month, consistent with the previous month.ECB's Isabel Schnabel expressed concerns that risk-free interest rates had returned to February's levels, potentially hindering efforts to bring inflation back to the target level promptly.Germany's retail sales declined by -0.8% month-on-month in July, falling short of the expected 0.3% increase and compared to a -0.2% reading in the previous month.The Euro area's Flash core CPI estimate for August was 5.3% year-on-year, in line with the forecast and slightly down from the 5.5% year-on-year figure in July.The Euro area unemployment rate remained at 6.4% in July 2023, matching both the forecast and the previous month's rate.Bearish Headline Arguments

Germany's consumer climate, as reported by GfK, worsened from -24.4 to -25.5 in August, driven by diminishing income expectations and a decreased willingness to make purchases.Germany's Import Prices Index change for July exhibited a significant year-on-year decline of -13.2% and a month-on-month decrease of -0.6%, contrary to the forecasted no change and the previous month's -1.6% month-on-month decrease.Germany's unemployment rate remained unchanged at 2.9% in July 2023, with minimal month-on-month job growth.GBP Pairs 

Despite the United Kingdom not releasing many notable economic reports this week, traders remained active, causing short-term fluctuations in the value of the British pound.

At the beginning of the week, the GBP was utilized as an alternative currency during Monday and Tuesday, but it experienced increased demand associated with a willingness to take on more risk on Wednesday.

Initially, European currencies, including the GBP, benefited from the prospects of higher interest rates in Europe and a weakening U.S. dollar. However, this sentiment shifted to concerns about economic growth in the region, leading to the GBP relinquishing a substantial portion of its gains over the course of the week. Nevertheless, it managed to conclude the week as one of the top three major currencies before Friday's market close.

Bullish Headline Arguments

On Thursday, BoE Chief Economist Huw Pill expressed the Bank of England's commitment to continue its efforts against inflation and the expectation that borrowing would remain high for an extended period.Bearish Headline Arguments

According to the British Retail Consortium, annual shop price inflation in the UK decreased from 7.6% to 6.9% in August, marking the slowest price increase since October 2022.The UK's M4 Money Supply for July showed a decline of -0.5%, contrary to the forecast of -0.2%, and a decrease from the previous month's -0.1%.Net mortgage approvals in the UK fell to 49.4K in July, down from 54.6K in June.The UK's net individual lending decreased from 1.7 billion GBP to 1.4 billion GBP in July, despite increasing for the third consecutive month.CHF Pairs

 Switzerland unveiled a set of economic updates this week, with some experts suggesting signs of a slowdown as we transition away from the summer season. Nevertheless, traders predominantly factored in the Swiss franc's dual role as a safe haven and a European currency, which played a pivotal role in market dynamics.

This became evident when the Swiss franc appreciated in value on Tuesday, in response to lackluster U.S. reports that hinted at a less aggressive tightening approach by the Federal Reserve.

However, as the week progressed, the Swiss franc relinquished the gains it had accrued, primarily due to investor apprehensions regarding the potential for higher interest rates and their potential impact on the economic growth of the region.

Bullish Headline Arguments

In August 2023, Switzerland's inflation rate stood at 0.2% month-on-month, surpassing the forecast of 0.1% month-on-month, and reversing the previous month's -0.1% month-on-month.Bearish Headline Arguments

The KOF economic barometer declined from 92.2 to 91.1 in August, primarily due to negative developments in the employment situation during the month.Swiss retail sales for July showed a year-on-year decrease of 2.2%, falling short of the forecasted 2.0% year-on-year and the previous month's 1.0% year-on-year figures.AUD Pairs 

The Australian dollar experienced a week marked by volatility, with its movements driven by China's stimulus measures and data releases during the Asian session, while acting as a "risk asset" during the European and U.S. sessions.

The AUD reached its peak for the week on Thursday, following the release of U.S. core PCE data, which hinted at a less aggressive approach to rate hikes by the Federal Reserve.

Despite encountering a few setbacks, the Australian dollar is set to conclude the week on a positive note against all major currencies.

Bullish Headline Arguments

On Monday, China reduced stamp duty on securities transactions and lowered margin requirements for stock purchases to stimulate capital markets.Australia's retail sales rebounded by 0.5% month-on-month in July, surpassing expectations of 0.3%, and marking an annual increase of 2.1%, the highest since August 2021.Australia's construction activity in Q2 increased by 0.4% quarter-on-quarter, although it was lower than the expected 1.0% rise.On Tuesday, the People's Bank of China (PBOC) supported the yuan by setting a midpoint rate at 7.1851 against the USD, significantly stronger than market consensus.China's manufacturing PMI for August was 49.7, beating expectations of 49.1 and surpassing the previous month's 49.3.PBOC announced a 200 basis point cut in its FX Reserve Requirement Ratio (RRR) from 6% to 4%, effective from September 15, reducing the foreign currency reserves banks must hold.Bearish Headline Arguments

Australian inflation slowed from 5.4% year-on-year to a 17-month low of 4.9% year-on-year in July due to decreases in holiday travel and fuel prices.

Building approvals in Australia dropped by 8.1% month-on-month in July, missing expectations and marking a decline from the previous month.Private capital expenditure in Australia rose by 2.8% quarter-on-quarter in Q2, exceeding expectations, with investments primarily directed toward new equipment and machinery.

China's non-manufacturing PMI for August was 51.0, lower than expected (51.3) and continuing a five-month weakening trend.

China's Caixin manufacturing PMI in August increased to 51.0, defying expectations of a decline to 49.0, indicating a return to expansion.CAD Pairs

At the onset of the week, despite the upward trajectory of crude oil prices, the Canadian dollar, closely tied to oil, witnessed depreciation against most currencies, except for the US dollar (USD) and Japanese yen (JPY).

Thankfully, those with a bullish outlook on the Canadian dollar (CAD) received some respite later in the week as the currency found a bottom on Wednesday and began a gradual ascent against all other currencies. This uptrend was likely underpinned by the consistent rise in oil prices throughout the week.

Friday introduced significant volatility for the CAD as traders weighed a stronger-than-expected Canadian GDP report against the prevailing market sentiment, heavily influenced by key data releases from the United States.

Bullish Headline Arguments

Canada GDP on July: 0.2% m/m (-0.2% m/m forecast; 0.2% m/m previous)Bearish Headline Arguments

Current Account deficit grew by C$3.5B to C$6.6B in Q2 2023, much better than the -C$9.0 deficit forecastCanada Manufacturing PMI for August: 48.0 vs. 49.6 in JulyNZD Pairs 

Much like its Australian counterpart, the New Zealand dollar, also known as the Kiwi, exhibited notable volatility throughout the entire week, reacting to risk-related developments across various trading sessions.

The NZD underwent significant oscillations but reached its peak on Thursday, bolstered by the release of the U.S. core PCE and initial jobless claims reports.

As it stands, the New Zealand dollar seems poised to wrap up the week with gains against most of its major currency counterparts.

Bullish Headline Arguments

New Zealand business confidence lifted another 9 points to -3.7, the highest reading since mid-2021 as inflation indicators continued to easeBearish Headline Arguments

Building consents dipped by 5.2% m/m (-25.4% y/y) in July vs. 3.4% m/m uptick in JuneJPY Pairs 

Discussions surrounding the Federal Reserve's potential shift to a less hawkish stance triggered a notable upswing in the value of the Japanese yen on Tuesday.

However, this upward momentum was short-lived, as on Wednesday, the yen experienced a depreciation in response to a Bank of Japan (BOJ) member's suggestion that the central bank might reconsider its dovish position as early as January to March of the following year.

Fortunately for those who held a bullish outlook on the Japanese yen (JPY), market sentiment shifted towards risk aversion on Thursday, lifting the yen from its week-long lows. This upward movement almost managed to push it into positive territory against most major currencies by the weekend, despite a week characterized by predominantly negative news emanating from Japan.

Top of Form

Bullish Headline Arguments

In July, retail sales in Japan accelerated from 5.5% year-on-year to 6.8% year-on-year, surpassing June's figure of 5.6%. The monthly increase was notable, at 2.1% compared to June's 0.4% uptick.Bearish Headline Arguments

Over the weekend, BOJ Governor Ueda expressed the view that Japan's underlying inflation is expected to decline, despite remaining slightly below their target.

In July, the unemployment rate in Japan increased for the first time in four months, rising from 2.5% month-on-month to 2.7% month-on-month.Consumer confidence in Japan declined from 37.1 to 36.2 in August, falling short of the expected 37.5.

Industrial production in Japan dropped by 2.0% from June to July, a larger decline than the anticipated 1.4% drop, following a 2.4% gain in June. Manufacturing machinery and electronic components were the primary contributors to this decline.

Housing starts in Japan decreased by 6.7% year-on-year, contrary to the expected -1.3% and the previous month's -4.8%, marking the second consecutive monthly decline in July.

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