FX Weekly – Fed Tapering Expectations Continues to Support the Greenback
US Dollar (Weekly range 92.40 – 93.40)
The current risk-off environment is supporting the greenback which continues to be the main driver in the FX space. The US dollar appears to have aligned with the Fed’s hawkish stance of policy normalization later this year. Additionally, any doubts of the US recovery were set aside by record-high ISM services and a strong NFP report for July.
The markets are now beginning to price in the Fed’s rate expectations which continues to support the dollar. In the week ahead, US CPI data for July may not have any major FX impact as the Fed has reiterated that they expect a flattening of inflation data in the months ahead. External factors should dictate the underlying narrative for FX: the spread of the Delta variant is forcing countries with low vaccination rates to revert to strict containment measures - which may ultimately offer a supportive narrative to the safe-haven dollar in the week ahead.
Canadian Dollar (Weekly range 1.2450 1.2600)
Canadian payroll data for July printed on the weak side as the economy gained only 94k jobs versus the forecasted 150k. The fact that the CAD did not nosedive after the USD spiked on NFP data suggests that the Canadian economy is on a solid path to recovery. Last week’s price action clearly suggests that the BoC will remain on its path of policy normalization with most expecting an end to QE later this year.
The week ahead is a quiet one for the CAD with no major economic data releases or BoC speakers scheduled. The markets will be looking for signs of resilience in the oil market as OPEC releases its monthly market report. Look for the CAD to be driven by external global factors and oil.
Euro (Weekly range 1.170 -1.1820)
Given the bullish dollar run and the ECB’s ultra-dovish tone, there isn’t much that is going to help the euro in the short term. The spread of the delta-variant will keep markets reluctant to unwind dollar positions in the week ahead. The only thing that could keep the euro supported is that most of the eurozone is refraining from travel restrictions and draconian measures of containment given that most of the countries are widely vaccinated.
Data wise this week’s focus will be on the German ZEW survey. Expectations are that the index of the survey may fall for a third consecutive month, but the assessment of the current situation may continue to rise. There are no major data releases or ECB speakers this week which may cause the EUR/USD to move below the 1.1750 lows should the dollar continue to remain supported.
British Pound (Weekly range 1.3810- 1.3980)
This past week was all about the BoE for the GBP. The main takeaway from last week’s announcement was the unchanged optimistic tone which suggests that the Bank will start QE reduction once the policy rate is at 0.5%. The negligible reaction in the GBP was expected as this level is not going to be seen before the end of 2022 or early 2023.
This week sees the release of UK growth numbers for Q2. Analysts are expecting a blockbuster reading of 5% growth QoQ despite the summer months likely to show a pause in activity given the spread of the delta variant. That said, the British economy will be back to pre-pandemic levels by the year-end with underlying fundamentals positive for the GBP. This week GBP/USD will struggle to break above the 1.40 level given that the USD will continue to remain supported.
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