Dollar's Days Numbered? Euro and Pound Eye Comeback as Yen Faces Intervention Threat
Thursday, 18 July, Week 29
EURUSD: Euro's Fate Hangs in the Balance as ECB Decision Looms
Five-Week Review: Euro Struggles to Break Free from Dollar's Grip
Over the past five weeks, EURUSD has been locked in a tug-of-war, reflecting the conflicting forces of a weakening dollar and a struggling Eurozone economy. The pair initially benefited from the broad USD sell-off that began in late June, as markets increasingly priced in Fed rate cuts. This pushed EURUSD to a four-month high of 1.0950 on July 3rd, aligning with the long-term analysis that highlighted the potential for euro strength amid a dovish Fed. However, the euro's gains were capped by persistent concerns about the Eurozone's economic outlook, particularly after Germany entered a technical recession in Q1 2024. Weak economic data, including disappointing PMI readings and industrial production figures, further weighed on the euro, pushing EURUSD back below 1.0900.
The release of US inflation data on July 11th, showing a further decline in both headline and core CPI, reignited hopes for a Fed pivot and triggered another leg higher in EURUSD. The pair briefly touched 1.0930 before retreating again as markets awaited the ECB's monetary policy decision. The long-term analysis highlighted the potential for euro weakness if the ECB maintains a dovish stance, and this uncertainty has kept EURUSD range-bound in recent days.
In conclusion, EURUSD has been volatile over the past five weeks, reflecting the conflicting forces of a weakening dollar and a struggling Eurozone economy.
Five-Day Outlook: Market Reacts to ECB Decision and Lagarde's Speech
The coming five days will likely see EURUSD reacting to the outcome of the ECB meeting that occurs on Thursday. Hawkish comments from ECB President Lagarde, suggesting a willingness to continue raising rates to combat inflation, could provide support for the euro and push EURUSD higher. Conversely, dovish remarks, indicating concerns about the economic outlook and a preference for a pause in the tightening cycle, could weigh on the euro and send EURUSD lower.
Further weakness in US economic data, particularly in the housing market, could also boost EURUSD, as it would reinforce expectations for a Fed pivot towards rate cuts. However, any signs of resilience in the US economy or hawkish comments from Fed officials could limit the euro's gains. Geopolitical tensions, particularly the ongoing war in Ukraine and the US-China trade dispute, could also impact EURUSD, with any escalation in these tensions likely to trigger a flight to safety, benefiting the USD and weighing on the euro.
A positive market reaction to the ECB meeting, coupled with further weakness in US economic data, could push EURUSD higher over the next five days. Conversely, a negative market reaction to the ECB meeting, signs of resilience in the US economy, or escalating geopolitical tensions could send the pair lower.
GBPUSD: Sterling Eyes Further Gains as BoE Rate Cut Bets Fade
Five-Week Review: Sterling Surges to One-Year Highs on Inflation Surprise
GBPUSD has been on a tear over the past five weeks, surging to one-year highs as the UK economy has shown signs of resilience and inflation has surprised to the upside. The pair started the period around 1.2500, but quickly gained momentum as the USD weakened on the back of easing US inflation and expectations for a Fed pivot towards rate cuts. This broad USD weakness, coupled with a more optimistic outlook for the UK economy, pushed GBPUSD to a high of 1.2809 on July 5th, aligning with the long-term analysis that highlighted the potential for sterling strength amid a dovish Fed.
The release of UK inflation data on July 17th, showing that CPI remained at the BoE's 2% target for the second consecutive month, further boosted GBPUSD. The data surprised markets, which had expected a slowdown to 1.9%, and led to a sharp reduction in bets for a BoE rate cut in August. This, combined with continued USD weakness, propelled GBPUSD to a fresh one-year high of 1.30099. The long-term analysis highlighted the potential for sterling strength if UK inflation remains elevated, and this has been a key driver of the pair's recent surge.
In conclusion, GBPUSD has surged over the past five weeks, driven by a combination of USD weakness, a more optimistic outlook for the UK economy, and a surprise upside inflation reading.
Five-Day Outlook: UK Data and BoE Rhetoric in Focus
The coming five days will be crucial for GBPUSD, with the release of key UK economic data and the BoE's rhetoric likely to be the main drivers of price action. Strong UK data, particularly for retail sales and employment, could further boost GBPUSD, as it would reinforce the view that the UK economy is on a solid footing and reduce the likelihood of a BoE rate cut. Conversely, weak data could weigh on the pound and send GBPUSD lower.
The BoE's rhetoric will also be closely watched. Hawkish comments from BoE officials, suggesting a willingness to continue raising rates to combat inflation, could provide support for the pound. Conversely, dovish remarks, indicating concerns about the economic outlook and a preference for a pause in the tightening cycle, could weigh on the pound. Geopolitical tensions, particularly the ongoing war in Ukraine and the US-China trade dispute, could also impact GBPUSD, with any escalation in these tensions likely to trigger a flight to safety, benefiting the USD and weighing on the pound.
Strong UK data, coupled with hawkish BoE rhetoric, could push GBPUSD higher over the next five days. Conversely, weak UK data, dovish BoE rhetoric, or escalating geopolitical tensions could send the pair lower.
USDJPY: Yen Braces for Volatility as Intervention Threat Looms
Five-Week Review: Yen Rebounds from Historic Lows, But Intervention Fears Persist
USDJPY has been on a wild ride over the past five weeks, surging to multi-decade highs before pulling back sharply as the threat of intervention by the Japanese government loomed large. The pair started the period around 155.00, but quickly accelerated higher as the USD strengthened on the back of robust US economic data and hawkish Fed rhetoric. This, combined with the BoJ's continued commitment to its ultra-loose monetary policy, pushed USDJPY to a 38-year high of 162.00 on June 26th, aligning with the long-term analysis that highlighted the potential for yen weakness amid a widening interest rate differential.
However, the yen's rapid depreciation prompted suspected intervention by the Japanese government, with the Ministry of Finance likely selling billions of dollars to support the currency. This, coupled with a shift in market sentiment towards the BoJ's policy outlook, triggered a sharp reversal in USDJPY. The BoJ's indication that it may consider how to start reducing bond purchases at its July meeting raised expectations for a less accommodative stance in the coming months, further weighing on the pair.
USDJPY has since fallen back below 158.00, but the threat of intervention remains. The long-term analysis highlighted the potential for yen volatility as the market continues to assess the BoJ's policy intentions and the likelihood of further intervention.
In conclusion, USDJPY has been extremely volatile over the past five weeks, surging to multi-decade highs before pulling back sharply as the threat of intervention by the Japanese government loomed large.
Five-Day Outlook: BoJ Meeting and Intervention Risks to Dominate
The coming five days will be crucial for USDJPY, with the BoJ's monetary policy meeting and the potential for further intervention likely to be the main drivers of price action. While a hawkish surprise from the BoJ is unlikely, any hints of a shift towards policy normalisation, such as an announcement of a timeline for reducing bond purchases or a signal of future rate hikes, could trigger a sell-off in USDJPY. Conversely, a dovish BoJ, reaffirming its commitment to ultra-loose policy, could support the pair.
The threat of intervention also remains a key risk. Any signs of renewed yen weakness, particularly if USDJPY approaches the 160.00 level, could prompt the Japanese government to step in again, potentially triggering a sharp reversal in the pair. US economic data and Fed rhetoric will also be important to watch, as a hawkish Fed could support USDJPY, while a dovish Fed could weigh on the pair.
A shift in BoJ policy towards normalisation or aggressive intervention by the Japanese government could send USDJPY lower over the next five days. Conversely, a dovish BoJ, limited intervention, or a hawkish Fed could push the pair higher.
Conclusion: Dollar's Grip Loosens as Euro and Pound Seek Comeback, Yen Faces Intervention Threat
The forex market is entering a period of heightened uncertainty, as major central banks grapple with slowing growth, persistent inflation, and geopolitical risks. While the USD has reigned supreme in recent months, its dominance could be challenged in the coming weeks. The euro and the pound are showing signs of life, with the potential for further gains if the Fed pivots towards rate cuts and the UK and Eurozone economies prove more resilient than expected. However, the yen remains vulnerable to intervention risks, with the BoJ's policy intentions and the Japanese government's willingness to support the currency likely to be key drivers of USDJPY in the coming days.
Action Points for the Coming Days:
Thursday, 18th July: Monitor the ECB's monetary policy meeting and President Lagarde's press conference for clues about the central bank's assessment of the Eurozone economy and its policy intentions.
Friday, 19th July: Watch for the release of UK retail sales data for June, as this will provide insights into the strength of consumer spending and the UK economy's overall momentum.
Week 30: Pay close attention to the BoJ's monetary policy meeting for clues about the central bank's assessment of the Japanese economy, its tolerance for inflation, and its plans for future policy adjustments.
Weeks 29-33: Stay vigilant about geopolitical developments, particularly the war in Ukraine and tensions in the Middle East, as these could impact risk sentiment and influence currency valuations.
Sources:
Bank of England
Bank of Japan
European Central Bank
Federal Reserve
Trading Economics
Reuters
Bloomberg
S&P Global
Office for National Statistics (UK)
Federal Statistical Office (Germany)
INSEE (France)
Cabinet Office, Japan
Ministry of Internal Affairs & Communications, Japan
Ministry of Finance, Japan
Ministry of Economy Trade & Industry (METI)
Ministry of Land, Infrastructure, Transport and Tourism, Japan
Tankan Sponsored by Thomson Reuters
IMF "World Economic Outlook"
OECD "Economic Outlook 114"
CFTC COT Reports
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