Weekly Recap July 24 – 28, 2023

During the past week, there were notable market fluctuations triggered by a significant policy adjustment from a major central bank!

All eyes were on the European Central Bank (ECB) as it adopted a more dovish approach, as I’ve been mentioning for long time already. This move stood in stark contrast to the Federal Reserve's unwavering hawkish stance, especially after the release of positive U.S. GDP data, which further highlighted their position.

For those who may have overlooked the major forex headlines, here's a brief recap of the FX activity from last week.

USD Pairs

At the beginning of the week, dollar pairs exhibited limited range trading as traders exercised caution in anticipation of the July FOMC decision.

In the run-up to the event, there was a gradual decline in prices, signalling that market participants were expecting a less hawkish announcement. However, Fed Chairman Powell and other policymakers surprised everyone by keeping the possibility of further tightening moves on the table.

Despite this unexpected turn, dollar bulls remained sceptical, leading to a significant sell-off in the U.S. currency after the FOMC statement and in the subsequent trading sessions.

The situation took a swift turn when the U.S. advanced GDP report was published, revealing a robust economic performance throughout Q2. This alleviated concerns about a domestic recession and bolstered expectations for Fed rate hikes. This positive outlook received additional support on Friday with the latest U.S. consumer confidence reading.

Bullish Headline Arguments

S&P Global flash manufacturing PMI improved from 46.3 to 49.0 in July, indicating a stronger pace of industry growth compared to the forecast of 46.1.

CB consumer confidence index jumped from an upgraded reading of 110.1 to 117.0 in July, surpassing the consensus at 112.1, as Americans became more optimistic about the economy.

As expected, the FOMC hiked interest rates by 0.25% from 5.25% to 5.50% and kept the possibility of future rate hikes open, with Powell stating they will assess the situation meeting-by-meeting.

Initial jobless claims decreased from 228K to 221K in the week ending July 22, better than the forecast of 239K.

The Q2 advanced GDP showed robust growth of 2.4% quarter-on-quarter, exceeding the estimated 1.8% GDP reading and the earlier figure of 2.0%, which was upgraded from the initially reported 1.1% reading.

Durable goods orders surged by 4.7% month-on-month, surpassing the forecast of 1.3% and the previous figure of 1.8%. Core durable goods orders also increased by 0.6%, higher than the projected 0.1% uptick.

Pending home sales rebounded by 0.3% month-on-month in June, recovering from the earlier 2.5% slump (which was upgraded from the initially reported 2.7% drop) and better than the projected 0.5% dip.

The University of Michigan Consumer Sentiment Index for July rose to 71.6 from the previous reading of 64.4, reflecting an improvement in consumer sentiment.

Bearish Headline Arguments

S&P Global flash services PMI declined from 54.4 to 52.4 in July, falling short of the consensus at 54.0, signalling a slowdown in expansion.

New home sales decelerated from a revised figure of 715K to 697K in June, missing the forecast of 726K and marking the first decline since February.

U.S. Core PCE for June remained at 0.2% month-on-month as expected, unchanged from the previous figure of 0.3% month-on-month. Additionally, personal income dipped to 0.3%, below the forecast of 0.4% month-on-month and the previous figure of 0.5% month-on-month.

EUR Pairs

As the week began, the euro encountered uncertainty caused by underwhelming flash PMI readings from Germany and France. These results cast doubts on the ECB's ability to sustain its hawkish stance.

In the middle of the week, the euro experienced some consolidation as traders awaited the ECB decision and chose to overlook mixed business and consumer sentiment indices.

Despite the central bank implementing the anticipated 0.25% rate hike, Chairperson Lagarde's accompanying statement created a stir. She mentioned the possibility of pausing rate hikes, which added to the market's reaction and uncertainty.

Bullish Headline Arguments

German GfK consumer climate index improved from a revised reading of -25.2 to -24.4, indicating a slight decline in pessimism compared to the forecast of -24.8.

The Spanish unemployment rate decreased from 13.3% to 11.6%, surpassing the forecast of 13.0%, with 603,900 more people employed in Q2.

France's GDP accelerated from 0.1% to 0.5% quarter-on-quarter in Q2, as a rebound in exports offset lower consumption and slower investment growth.

Germany exited recession, recording 0.0% growth in Q2, outperforming the expected 0.1% and previous -0.1%.

Germany Preliminary CPI for July stood at 6.2% year-on-year, exceeding the forecast of 6.1% and the previous figure of 6.4%.

Bearish Headline Arguments

French flash manufacturing PMI declined from 46.0 to 44.5 in July, indicating a sharper contraction than the estimated 46.1. Services PMI also dipped from 48.0 to 47.4, falling short of the 48.5 forecast.

German flash manufacturing PMI dropped from 40.6 to 38.8 in July, reflecting a faster pace of contraction compared to the consensus at 40.9. Services PMI decreased from 54.1 to 52.0, suggesting slower growth.

Germany Ifo business climate index for July came in at 87.3, below the forecast of 87.6 and the previous figure of 88.6, signalling weaker optimism.

As expected, the ECB raised the deposit rate to 3.75%, but Chairperson Lagarde suggested a possible hold for the next meeting, indicating that the hiking regime might be nearing its end.

GBP Pairs

Following a phase of consolidation, the pound witnessed a significant downturn on Monday after encountering disappointing flash manufacturing and services PMI figures. These figures suggested that the impact of policy tightening was adversely affecting business activity.

Nevertheless, the pound was able to recoup these losses and even made further gains throughout the week. Consequently, it engaged in sideways trading against other currencies due to the absence of significant U.K. data releases.

As events unfolded, the pound's price action remained predominantly mixed. It capitalized on euro weakness but yielded to yen strength towards the end of the week.

Bullish Headline Arguments

The CBI industrial order expectations index improved from -15 in June to -9 in July, exceeding the consensus of -17, and marking its first improvement in two years.

Bearish Headline Arguments

S&P Global flash manufacturing PMI for July came in at 45.0, lower than the previous figure of 46.5, although employment rose for the fourth consecutive month, it did so at a slower pace.

S&P Global flash services PMI for July declined from 53.7 to 51.5, falling short of the estimate at 53.1, indicating a slower pace of industry growth.

The CBI realized sales index dropped from -9 in June to -25 in July, missing the forecast of -9, as orders placed with suppliers declined for the second consecutive month.

CHF Pairs

Throughout the week, the Swiss franc lacked significant economic releases to provide direction for its movements, leading it to depend on other currencies and general market sentiment.

Initially, there was a phase of consolidation at the start of the week. However, as risk appetite increased, a sell-off in the franc followed, aligning with the release of positive U.S. data on Thursday. Consequently, the franc strengthened against higher-yielding currencies and European counterparts.

Bullish Headline Arguments

The KOF Swiss Economic Barometer for July came in at 92.24, surpassing the previous figure of 90.73, indicating a positive economic outlook.

Bearish Headline Arguments

The Credit Suisse economic expectations index declined from -30.8 in May to -32.6 in June, indicating a worsening sense of pessimism among investors.

AUD Pairs

During the middle of the week, Australian bulls sprang into action as the prospect of additional stimulus from China emerged. The potential easing measures, particularly targeting the property sector, raised expectations of increased commodity demand.

However, the situation took a turn when Australia released a disappointing CPI report, dampening hopes for future rate hikes by the Reserve Bank of Australia (RBA).

Despite efforts by Aussie traders to recover from these losses later, they struggled to hold their positions when a hawkish statement from the U.S. Federal Reserve triggered risk-off flows. As a result, the Australian dollar (AUD) faced significant losses against the U.S. dollar, further compounded by positive U.S. GDP data. Additionally, it depreciated against the yen amid rumours of a potential yield curve control (YCC) adjustment.

Bullish Headline Arguments

The flash manufacturing PMI in China improved from 48.2 to 49.1 in July, reaching its highest level in five months.

The People's Bank of China (PBOC) intervened in the foreign exchange market to strengthen the yuan, setting the USD/CNY rate at 7.1406, beating the forecast of 7.2044.

China's state-sponsored media promised more stimulus measures, such as rate cuts, tax cuts, debt resolution, real estate policy adjustments, and fee reductions.

Bearish Headline Arguments

The flash services PMI in China declined from 50.3 to 48.0 in July, ending a three-month period of growth.

Australia's headline CPI slowed from 1.4% q/q to 0.8%, missing the expected 1.0% increase, and the annual reading dropped from 5.6% to 5.4% as projected.

Australian import prices declined by 0.8% q/q as anticipated in Q2, following a previous 4.2% slump, while the export price index tumbled 8.5%.

CAD Pairs

There was limited economic data for the Canadian dollar (CAD) during the week, resulting in traders relying on cues from crude oil prices and general market sentiment.

Consequently, CAD pairs experienced mostly sideways movement at the beginning of the week before risk-off sentiment dominated on Wednesday.

Volatility increased on Thursday, providing an opportunity for the Canadian currency to generate profits on long positions, especially against the euro and Australian dollar. However, it failed to maintain gains against the yen and U.S. dollar.

Bullish Headline Arguments

Canadian Prime Minister Trudeau made an announcement regarding a cabinet reshuffle to place greater emphasis on economic recovery.

Canada's GDP for May showed a growth of 0.3% m/m, slightly below the forecast of 0.4% m/m but an improvement from the previous figure of 0.1% m/m.

NZD Pairs

The New Zealand dollar had a quiet week in terms of economic data, causing it to lag its counterpart, the Australian dollar, and move in line with overall market sentiment.

While other currencies experienced significant consolidation at the start of the week, the New Zealand dollar began the week with strong momentum on Monday and gradually continued to rise, buoyed by hopes of China's stimulus measures midweek.

As the week progressed, it weakened against the U.S. dollar ahead of the FOMC decision on Wednesday, and against the Japanese yen, as there were expectations of a tweak to the Yield Curve Control (YCC) policy in the Bank of Japan's statement.

Bullish Headline Arguments

New Zealand's balance of trade for June showed a surplus of 8.8 million NZD, driven by an increase in exports to 6.3 billion NZD and a decrease in imports to 6.3 billion NZD.

Bearish Headline Arguments

Credit card spending in July rose by 5.0% year-on-year, falling short of the forecast of 8.7% y/y, but still stronger than the previous figure of 3.4% y/y.

JPY Pairs 

Throughout most of the week, the Japanese currency experienced a period of consolidation, with yen traders anticipating a significant announcement during the upcoming BOJ statement.

There were speculations of potential adjustments in the yield curve control policy, despite BOJ Governor Ueda emphasizing that the current policy is suitable now.

On Thursday, the yen witnessed a sharp rally against other currencies, as traders likely reduced their short positions in anticipation of the actual BOJ event and amid growing speculation of YCC tweaks, which were eventually confirmed during the BOJ statement.

However, yen bulls were disappointed when Governor Ueda pushed back on speculation of potential rate hikes, clarifying that the adjustment to the yield curve control policy was not a step towards policy normalization.

Bullish Headline Arguments

Tokyo core CPI for July increased by 3.2% year-on-year, surpassing the forecast of 2.9% and the previous reading of 3.1%.

The BOJ maintained its interest rates at -0.10% and raised the upper limits of its fixed-rate bond-buying program from 0.5% to within 1.0% of the 0% target, seen as preparation for an exit from the accommodative monetary policy.

Bearish Headline Arguments

Japanese flash manufacturing PMI declined from 48.4 to 48.1 in July, indicating a sharper contraction than the expected improvement to 50.1.

BOJ core CPI declined from 3.1% year-on-year to 3.0% in June, as anticipated, indicating a decrease in underlying price pressures.

A Japanese official noted that BOJ Governor Ueda believes long-term yields remain stable under the yield curve control policy.

Japan's Services Producer Price Index (PPI) for June recorded a year-on-year increase of +1.2%, down from +1.7% in May, and a monthly decrease of -0.2%, following the previous reading of 0.0%.

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