Forex Forecast: The Four Pairs to Watch This Week
US dollar fell, hinting at rate cuts. Euro, Canadian dollar rose; Australian and New Zealand dollars fluctuated.
Wednesday, August 21, 2024, Week 34
This report provides a comprehensive short-term outlook on four key forex pairs: USDCAD, EURUSD, AUDUSD, and NZDCAD. The report aims to equip forex traders with actionable insights by analysing recent market trends, economic indicators, and upcoming pivotal events.
The selection of these specific pairs is based on their sensitivity to near-term events, such as the upcoming Jackson Hole Economic Symposium and key economic data releases from the US, Canada, and the Euro Area.
For clarity, this report defines the near term as a five-day outlook, the short term as a five-week outlook, the mid-term as a five-month outlook, and the long term as a five-year outlook.
Recent Market Performance and Themes
Over the past five days, global stock markets have retreated from their recent highs, with the US S&P 500 and Nasdaq 100 snapping an eight-day rally. Bond yields have steadied, while the US dollar has weakened against most major currencies, including the euro, British pound, and Canadian dollar.
The key market theme driving sentiment has been anticipation of the upcoming Jackson Hole Economic Symposium, where Fed Chair Jerome Powell's speech is expected to provide clues about the future path of US monetary policy.
This anticipation has led to increased volatility in the forex market, as traders position themselves for potential shifts in interest rate differentials and risk sentiment.
Five-Week Market Performance and Themes
Over the past five weeks, global stock markets have generally recovered from the selloff earlier in the month, driven by easing inflation concerns and hopes for a soft landing for the US economy. Bond yields have declined, reflecting expectations for less aggressive monetary policy tightening by major central banks.
The US dollar has weakened against most major currencies, as traders anticipate a potential shift towards rate cuts by the Federal Reserve. The key market theme driving sentiment has been the interplay between easing inflation and slowing economic growth, with investors closely watching economic data releases for signs of a potential recession.
USDCAD: Loonie Strengthens Amid Fed Rate Cut Expectations
Historically, the USDCAD has been heavily influenced by the interest rate differential between the US and Canada, as well as fluctuations in oil prices, given Canada's status as a major oil exporter. The pair is also sensitive to broader risk sentiment, with the Canadian dollar often weakening during periods of global risk aversion. The USDCAD influences the intermarkets of stocks, bonds, and commodities through its impact on the Canadian economy and its sensitivity to global economic conditions.
The USDCAD has been trending downwards over the past five days, with the Canadian dollar strengthening towards 1.360 per USD. This move has been driven by US dollar weakness amid growing expectations for a Fed rate cut in September, supported by recent dovish comments from Fed officials and easing inflation data. The Canadian dollar has also benefited from firm oil prices, which have steadied near $74.000 per barrel.
The USDCAD has been volatile over the past five weeks, reflecting shifting market sentiment and uncertainty about the future path of monetary policy in both the US and Canada. The pair initially strengthened in early August, reaching a high of 1.383 on August 4th, as the Bank of Canada unexpectedly cut interest rates, but has since weakened as the US dollar has come under pressure from rate cut expectations. The trigger event for the recent weakening of the USDCAD was the release of weaker-than-expected US jobs data on August 2nd, which fueled expectations for a more aggressive Fed easing cycle.
The USDCAD has been volatile over the past six months, reflecting shifting market sentiment and uncertainty about the future path of monetary policy in both the US and Canada. The pair initially strengthened in early March, reaching a high of 1.382 on March 16th, as the Bank of Canada paused its rate hiking cycle, but has since weakened as the US dollar has come under pressure from rate cut expectations.
Upcoming Pivotal Events
Wednesday, August 21, Week 34: Release of the minutes from the July FOMC meeting, which could provide further insights into the Fed's thinking on interest rates.
Friday, August 23, Week 34: Fed Chair Powell's speech at the Jackson Hole Economic Symposium, a key event that could offer clues about the Fed's outlook and policy intentions.
Wednesday, September 4, Week 36: BoC interest rate decision, which will provide insights into the central bank's assessment of the Canadian economy and its potential policy response.
EURUSD: Euro's Ascent Continues Amid Dollar Weakness
Historically, the EURUSD has been heavily influenced by the interest rate differential between the Euro Area and the US, as well as broader risk sentiment and economic growth differentials. The pair is also sensitive to geopolitical events, particularly those affecting the Euro Area. The EURUSD influences the intermarkets of stocks, bonds, and commodities through its impact on the European economy and its role as a major global currency.
The EURUSD has been trending upwards over the past five days, with the euro strengthening above $1.109. This move has been driven by broad US dollar weakness amid growing expectations for a Fed rate cut in September, supported by recent dovish comments from Fed officials and easing inflation data. The euro has also benefited from firm gold prices, which have hit record highs, and a relatively resilient Euro Area economy.
The EURUSD has been trending upwards over the past five weeks, reflecting the euro's resilience amid a weakening US dollar and a relatively stable Euro Area economy. The pair has found support around the 1.068 level, as seen in the historical data from April 24th, 2024. The recent uptrend began in late July. The upcoming Jackson Hole Economic Symposium could trigger a break below this level if Fed Chair Powell signals a more hawkish stance than anticipated, potentially leading to a reversal of the EURUSD uptrend.
The EURUSD has been in an uptrend for the past six months, reflecting the euro's resilience amid a weakening US dollar and a relatively stable Euro Area economy. The pair has found support around the 1.068 level, as seen in the historical data from April 24th, 2024. The recent uptrend began in late February.
Upcoming Pivotal Events
Wednesday, August 21, Week 34: Release of the minutes from the July FOMC meeting, which could provide further insights into the Fed's thinking on interest rates.
Friday, August 23, Week 34: Fed Chair Powell's speech at the Jackson Hole Economic Symposium, a key event that could offer clues about the Fed's outlook and policy intentions.
Thursday, August 29, Week 35: Release of the flash estimate of HICP inflation for August 2024, a key indicator of inflation trends in the Euro Area.
AUDUSD: Aussie Dollar Rides Wave of US Dollar Weakness
Historically, the AUDUSD has been heavily influenced by commodity prices, particularly iron ore and coal, given Australia's status as a major commodity exporter. The pair is also sensitive to the interest rate differential between Australia and the US, as well as broader risk sentiment and economic growth differentials. The AUDUSD influences the intermarkets of stocks, bonds, and commodities through its impact on the Australian economy and its sensitivity to global economic conditions.
The AUDUSD has been trending upwards over the past five days, with the Australian dollar strengthening towards $0.675. This move has been driven by a combination of factors, including a weaker US dollar amid expectations for a Fed rate cut, firm gold prices, and a relatively resilient Australian economy. The Australian dollar has also benefited from minutes of the Reserve Bank of Australia's (RBA) last meeting, which indicated that the cash rate will stay steady for an extended period.
The AUDUSD has been trending upwards over the past five weeks, reflecting the Australian dollar's resilience amid a weakening US dollar. The pair initially weakened in early August, reaching a low of 0.649 on August 1st, as the RBA kept interest rates unchanged and signalled a cautious stance, but has since strengthened as the US dollar has come under pressure from rate cut expectations. The trigger event for the recent strengthening of the AUDUSD was the release of weaker-than-expected US jobs data on August 2nd, which fueled expectations for a more aggressive Fed easing cycle.
The AUDUSD has been volatile over the past six months, reflecting shifting market sentiment and uncertainty about the future path of monetary policy in both the US and Australia. The pair initially weakened in early March, reaching a low of 0.641 on March 16th, as the RBA paused its rate hiking cycle, but has since strengthened as the US dollar has come under pressure from rate cut expectations.
Upcoming Pivotal Events
Wednesday, August 21, Week 34: Release of the minutes from the July FOMC meeting, which could provide further insights into the Fed's thinking on interest rates.
Friday, August 23, Week 34: Fed Chair Powell's speech at the Jackson Hole Economic Symposium, a key event that could offer clues about the Fed's outlook and policy intentions.
Wednesday, August 28, Week 35: Release of the July Monthly CPI Indicator for Australia, a key gauge of inflation trends and the RBA's potential policy response.
NZDCAD: Kiwi Dollar Faces Headwinds Amid Economic Weakness
Historically, the NZDCAD has been influenced by the interest rate differential between New Zealand and Canada, as well as fluctuations in commodity prices, particularly dairy, given New Zealand's status as a major dairy exporter. The pair is also sensitive to broader risk sentiment, with the New Zealand dollar often weakening during periods of global risk aversion. The NZDCAD influences the intermarkets of stocks, bonds, and commodities through its impact on the New Zealand economy and its sensitivity to global economic conditions.
The NZDCAD has been trending upwards over the past five days, with the New Zealand dollar strengthening towards 0.834 per CAD. This move has been driven by a combination of factors, including a weaker Canadian dollar amid concerns about the health of the Canadian economy, a relatively stable New Zealand dollar, and firm gold prices.
The NZDCAD has been trending upwards over the past five weeks, reflecting the New Zealand dollar's resilience amid a weakening Canadian dollar. The pair has been range-bound between 0.814 and 0.834, with the recent uptrend beginning in early August. The upcoming RBNZ interest rate decision on November 13th could trigger a break above this range if the central bank signals a more hawkish stance than anticipated, potentially leading to a strengthening of the New Zealand dollar. Conversely, a more dovish stance from the RBNZ could trigger a break below this range, potentially leading to a weakening of the New Zealand dollar.
The NZDCAD has been volatile over the past six months, reflecting shifting market sentiment and uncertainty about the future path of monetary policy in both New Zealand and Canada. The pair initially weakened in early March, reaching a low of 0.806 on March 29th, as the RBNZ paused its rate hiking cycle, but has since strengthened as the Canadian dollar has come under pressure from rate cut expectations.
Upcoming Pivotal Events
Wednesday, August 21, Week 34: Release of the minutes from the July RBNZ meeting, which could provide further insights into the central bank's thinking on interest rates and the economic outlook.
Wednesday, September 4, Week 36: BoC interest rate decision, which will provide insights into the central bank's assessment of the Canadian economy and its potential policy response.
Thursday, September 12, Week 37: Release of the August Business NZ PMI data, a key gauge of manufacturing activity in New Zealand.
Conclusion: A Week of Data and Central Bank Focus
The global forex market is currently navigating a period of heightened uncertainty, driven by a confluence of factors including slowing global growth, persistent inflation, and shifting monetary policy stances by major central banks.
The US dollar has weakened against most major currencies in recent weeks, as traders anticipate a potential shift towards rate cuts by the Federal Reserve.
The euro has been the main beneficiary of this dollar weakness, while the Canadian dollar has also strengthened, supported by firm oil prices. The Australian dollar has held its ground, but the New Zealand dollar has been more volatile, reflecting uncertainty about the outlook for the New Zealand economy.
Key takeaways for forex traders include closely monitoring economic data releases, central bank communications, and geopolitical developments, as these factors will continue to drive currency market volatility in the short term.
The upcoming week is particularly important, with the release of the FOMC minutes, Fed Chair Powell's speech at Jackson Hole, and key economic data releases from the US, Canada, and the Euro Area. These events will provide further insights into the global macroeconomic outlook and the potential for shifts in monetary policy, which will have implications for currency markets.
Sources
Bloomberg
Trading Economics
Reserve Bank of Australia
Bank of Canada
European Central Bank
Reserve Bank of New Zealand
Statistics Canada
Australian Bureau of Statistics
Statistics New Zealand
National Australia Bank
ANZ Bank New Zealand
Business NZ