Post-BoJ Indifference: Traders Eye French Elections and US PCE Inflation
Tuesday, 25 June, Week 26: This report analyses the recent performance and upcoming outlook for key currency pairs, focusing on the influences driving potential support, indifference, or pressure. The Bank of Japan's (BoJ) recent policy decision has left markets largely indifferent, while traders are now positioning for the upcoming French elections and the release of US PCE inflation data. This report provides a concise analysis of these key events and other market-moving factors, offering actionable insights for Forex traders.
USDJPY
The USDJPY has been on an appreciating trend for the past five weeks, driven by a combination of factors, including the Fed's hawkish stance on interest rates, the US economy's relative resilience, and the BoJ's commitment to its ultra-loose monetary policy. While verbal intervention from Japanese officials last week briefly slowed the pair's ascent, the underlying upward momentum remains intact.
Long-term (five-weeks) outlook: Upward support for the USDJPY could stem from a hawkish shift by the Fed following a hotter-than-expected PCE inflation reading, further widening the interest rate differential with the BoJ. Indifference may prevail if the BoJ signals a concrete plan to taper its bond-buying program at its July meeting, potentially offsetting the Fed's hawkishness. Downside pressure could emerge if the US economy shows further signs of slowing, prompting the Fed to reconsider its tightening path or if the Japanese government intervenes more forcefully in the currency market.
Short-term (five-days) outlook: Upward support for the USDJPY could come from strong US economic data, particularly the PCE inflation figures, which could reinforce the Fed's hawkish stance. Indifference may prevail if the data comes in line with expectations, suggesting a continuation of the current trend. Downside pressure could emerge if risk aversion intensifies due to geopolitical events, boosting the Yen's safe-haven appeal.
Analysis: The USDJPY is likely to face ▲ upward support in both the long and short term as the divergence in monetary policy between the Fed and the BoJ continues to widen. This outlook aligns with Trading Economics' forecast for the pair. ▲
Upcoming Risk Events:
June 27 (Thursday): US Core PCE Price Index (May), US GDP Final (Q1), US Initial Jobless Claims
June 28 (Friday): Japan Unemployment Rate (May), Japan Industrial Production (May), US Personal Income (May), US PCE Price Index (May)
EURUSD
The EURUSD has been trading in a relatively tight range over the past five weeks, influenced by a mix of positive and negative factors. The Euro has been supported by easing inflation in the Eurozone and the ECB's recent interest rate cut, but concerns about the bloc's economic outlook and political uncertainty in France have limited its upside potential.
Long-term (five-weeks) outlook: Upward support for the EURUSD could come from a decisive victory for President Macron's centrist coalition in the French legislative elections, easing political uncertainty. Indifference may prevail if the elections result in a hung parliament, prolonging uncertainty and keeping investors on the sidelines. Downside pressure could emerge if the far-right or left-wing parties gain significant ground, raising concerns about France's fiscal policy and potentially impacting the Eurozone's stability.
Short-term (five-days) outlook: Upward support for the EURUSD could come from positive Eurozone economic data, particularly the German Ifo Business Climate index and preliminary inflation figures for France, Spain, and Italy. Indifference may prevail if the data is mixed, offering no clear direction for the Euro. Downside pressure could emerge if risk aversion intensifies due to geopolitical events, boosting the US dollar's safe-haven appeal.
Analysis: The EURUSD is likely to face ► indifference in the short term as markets await the outcome of the French elections. However, in the long term, the pair could come under ▼ downward pressure if the elections result in a fragmented National Assembly or a far-right victory, potentially leading to increased political and economic uncertainty in the Eurozone. This goes against Trading Economics' forecast for the pair. ▼
Upcoming Risk Events:
June 27 (Thursday): German GfK Consumer Sentiment (July), Eurozone Money Supply (May), Riksbank Interest Rate Decision, Eurozone Economic Sentiment (June), Eurozone Consumer Confidence (June)
June 28 (Friday): French CPI (June), Spanish CPI (June), Italian CPI (June)
GBPUSD
The GBPUSD has been on a depreciatory trend over the past five weeks, primarily driven by uncertainty surrounding the upcoming UK general election and concerns about the potential impact of a Labour victory on the economy. The pair fell to a six-week low last week, despite the Bank of England's decision to keep interest rates unchanged and data showing that UK inflation has fallen to the BoE's 2% target.
Long-term (five-weeks) outlook: Upward support for the GBPUSD could come from a Conservative victory in the general election, providing policy continuity and easing market uncertainty. Indifference may prevail if the election results in a hung parliament, prolonging uncertainty and keeping investors on the sidelines. Downside pressure could emerge if the Labour Party wins and implements policies perceived as negative for the economy, such as increased public spending and higher taxes on corporations.
Short-term (five-days) outlook: Upward support for the GBPUSD could come from positive UK economic data, particularly the second estimate of Q1 GDP growth and retail sales figures. Indifference may prevail if the data is mixed, offering no clear direction for the Pound. Downside pressure could emerge if the "Gamble-gate" scandal intensifies, further damaging the Conservative Party's image and increasing the likelihood of a Labour victory.
Analysis: The GBPUSD is likely to face ▼ downward pressure in both the long and short term as uncertainty surrounding the general election weighs on sentiment. This aligns with Trading Economics' forecast for the pair. ▼
Upcoming Risk Events:
June 27 (Thursday): UK BoE Financial Stability Report
June 28 (Friday): UK GDP (Q1), UK Current Account (Q1)
Geopolitics and Market Themes
Russia-Ukraine War
Synopsis: The ongoing war in Ukraine continues to create geopolitical uncertainty and volatility in financial markets. The conflict has disrupted global supply chains, contributed to higher energy prices, and fueled inflationary pressures.
Key Developments:
Russia's offensive in eastern Ukraine continues, with both sides suffering heavy casualties.
Western countries are providing ongoing military and financial support to Ukraine.
The conflict has strained relations between Russia and the West, leading to increased sanctions and geopolitical tensions.
Market Impact:
The war has contributed to risk aversion in financial markets, boosting safe-haven assets like the USD and JPY.
Higher energy prices have fueled inflationary pressures, supporting the Fed's hawkish stance.
The conflict's impact on global supply chains has contributed to supply-side inflation.
US-China Tensions
Synopsis: Tensions between the US and China remain elevated, with ongoing disputes over trade, technology, and security. The two countries are engaged in a strategic competition for global influence, creating uncertainty and potential for market volatility.
Key Developments:
The US has imposed tariffs on Chinese goods, and China has retaliated with tariffs of its own.
The US is restricting Chinese access to advanced technologies, citing national security concerns.
The US is strengthening alliances in the Indo-Pacific region to counter China's growing influence.
Market Impact:
Trade tensions have disrupted global supply chains and contributed to uncertainty in financial markets.
The technology rivalry is impacting investment decisions and innovation in both countries.
The geopolitical competition is creating a risk premium in financial markets, supporting safe-haven assets like the USD.
Global Economic Slowdown
Synopsis: The global economy is facing a slowdown, with growth projections being revised downwards due to factors such as high inflation, rising interest rates, and geopolitical uncertainty. This slowdown is creating headwinds for major economies, potentially impacting central bank policy decisions.
Key Developments:
The IMF has downgraded its global growth forecast for 2024, citing persistent inflation and tighter monetary policy.
Europe is facing an energy crisis due to the war in Ukraine, impacting economic activity.
China's economy is slowing due to COVID-19 lockdowns and a property market downturn.
Market Impact:
The global slowdown is weighing on demand for exports, potentially widening trade deficits.
The weaker global growth outlook is contributing to risk aversion in financial markets, supporting safe-haven assets like the USD and JPY.
The slowdown is creating uncertainty about central banks' ability to achieve a soft landing for their respective economies.
French Legislative Elections
Synopsis: France will hold the second round of its legislative elections on July 7, following President Macron's decision to dissolve the National Assembly in May. The elections will determine the composition of the lower house of parliament and will have significant implications for the country's political and economic direction.
Key Developments:
President Macron's centrist coalition is facing a strong challenge from a left-wing alliance led by Jean-Luc Mélenchon.
The far-right National Rally, led by Marine Le Pen, is also expected to make gains.
Polls suggest that the elections could result in a hung parliament, making it difficult for Macron to pass legislation.
Market Impact:
Uncertainty surrounding the election outcome is weighing on the Euro and French government bonds.
A fragmented National Assembly or a far-right victory could further undermine confidence in the Eurozone and lead to increased market volatility.
UK General Election
Synopsis: The upcoming general election on July 4 is a major source of uncertainty for the GBP. A Labour victory could lead to significant changes in economic policy, potentially impacting the currency's trajectory.
Key Developments:
Polls currently show the Labour Party leading, but the race remains tight.
Labour has pledged to increase public spending and raise taxes on higher earners.
The Conservative Party has warned that Labour's policies would damage the economy.
Market Impact:
The GBP has been volatile in recent weeks, reflecting uncertainty about the election outcome.
Options markets are pricing in a higher risk of GBP volatility around the election date.
OTHER NEWS
Nvidia's Decline: Nvidia (NVDA) has fallen 16% from its peak reached last week when it briefly surpassed Apple and Microsoft as the world's most valuable company. This decline has weighed on technology stocks globally, including in Japan, where companies like Disco Corp, Tokyo Electron, and SoftBank Group have experienced sharp losses.
US Presidential Debate: The first US presidential debate between Joe Biden and Donald Trump is scheduled for Thursday. The debate is expected to be closely watched by markets, as it could provide insights into the candidates' economic policies and their potential impact on the US dollar.
China-EU EV Tariff Talks: China is reportedly seeking to persuade the EU to scrap proposed tariffs on Chinese electric vehicle imports. Chinese officials are trying to find a compromise in talks in Brussels this week, potentially offering concessions on tariffs for large-engine cars in exchange for the EU dropping its planned EV levies.
EU Sanctions on Russia: The EU has imposed new sanctions on Russia, targeting its energy sector and financial institutions. The sanctions include a ban on the transshipment of Russian liquefied natural gas (LNG) from EU ports to third countries and sanctions on Russia's so-called shadow fleet of tankers.
Conclusion
The Forex market is currently navigating a complex landscape characterized by shifting monetary policy stances, heightened geopolitical risks, and upcoming elections in France and the UK. The USD is likely to remain supported in the near term, driven by the Fed's hawkish stance and the US economy's relative resilience. However, the Euro and the Pound face significant headwinds from political uncertainty and potential policy shifts. The Yen remains vulnerable to further weakness due to the BoJ's dovish stance, though intervention from Japanese authorities remains a possibility. Traders should closely monitor upcoming economic data releases, central bank commentary, and geopolitical developments to adjust their positions accordingly.
References
Newsquawk: https://newsquawk.com/
Reuters: https://www.reuters.com/
Bloomberg: https://www.bloomberg.com/
Stratfor: https://worldview.stratfor.com/
Trading Economics: https://tradingeconomics.com/
Federal Reserve: https://www.federalreserve.gov/
European Central Bank: https://www.ecb.europa.eu/
Bank of England: https://www.bankofengland.co.uk/
Bank of Japan: https://www.boj.or.jp/en/
U.S. Bureau of Economic Analysis: https://www.bea.gov/
EUROSTAT: https://ec.europa.eu/eurostat/
Office for National Statistics: https://www.ons.gov.uk/
Cabinet Office, Japan: https://www8.cao.go.jp/english/index.html
Ministry of Finance, Japan: https://www.mof.go.jp/english/