Risk currencies continue to be pushed by external factors rather than the underlying macroeconomics or central bank differential. The EUR is facing political pressure from the White House, GBP has Brexit only the AUD has moved on actually macro reasons but is clearly under pressure from the bear markets in China – so it’s not completely moving by theory.
The trading week
Split week, end of July, the start of August, there is a plethora of data releases and central bank policy meetings. It also marks the start of Australian earnings season which always throws up bottom-up volatility. However, I want to concentrate on the data and the central bank meetings of the week.
First, we have the Bank of Japan, meeting for its July meeting, there will be no major change here, however, there has been growth believe that Kuroda et. al. may start talking about what to do with their quantitative easing program. Ignore this – the BoJ is stuck in is a loop and can’t get out.
The Federal Reverse and the Bank of England meet for their respective August meetings and will be key to the trading week, more on this later. The global data this week will be key to underlying assumptions from central banks and inside the trading of crosses. The most notable being: European Q2 GDP and June CPI read, European growth did drop off in the second quarter this year just something to be aware of if you are looking at EURUSD. The US sees the release of its core Private Consumption Expenditure (PCE) and the July non-farm payrolls (NFP) on Friday.
The USD is, in my opinion, the strongest currency around, and I suspect that both pieces of US data will confirm this bias. Now although this trade was interrupted by the President’s accusations of currency manipulations last week, the trade remains and the dips are likely to be buying opportunities.
Hawkish Bankers – Cable
The Federal Reserve is on track to hike rates a further six times in the next 18 months to go with the seven already enacted since the bottom of its policy cycle. Although the August meeting is a non-press conference meeting and will not see rates moving a further 25 basis points it is expected to reiterate that September will see US interest rates increasing. What may make the USD strengthen harder is if the Fed makes mention of the current trends in US employment which is at its strongest levels since the 1950’s in some instances furthermore conformation PCE reaching its 2% target will on added to the hike haste to avoid overheating. Staying the course on the USD.
The most actionable, but most risky trade release of the week is the Bank of England on Thursday. Consensus has the BoE meeting as a live event with the Reuters consensus seeing a 25 basis point rise to 0.75% from 0.5% this is despite the ongoing issues with Brexit.
The UK economy has been solid without being brilliant; housing outside of London has been rather mixed and future growth has the caveat of Brexit. However, the BoE has wanted to move out of its highly accommodative policy stance now for over 4 years and Thursday would be the second rate rise in the post-Brexit environment.
GBPUSD is a risky trade, driven of late by news from Downing Street or Westminster rather than anything else, the trade here is tight and the gap could be large if no move occurs or the outlook is clouded by Brexit. The statement then for trade direction is key, so mind the gap in Cable.