Yen Strength Persists as Forex Traders Eye US PCE Inflation (June 28th)
Monday, June 24th, Week 26: The US dollar is strengthening, reaching a two-month high, as robust US economic data fuels expectations that the Federal Reserve will maintain higher interest rates for longer. Meanwhile, the Japanese yen continues to appreciate, approaching 34-year highs against the dollar, as the Bank of Japan maintains its dovish stance. Forex traders are now keenly focused on the upcoming US PCE inflation data, due on June 28th, for further clues on the Fed's monetary policy trajectory.
EUR/USD
Over the past five weeks, the EUR/USD has traded within a range of 1.0650 to 1.0780, initially weakening before finding support and rebounding. The pair is currently trading near the upper end of this range, suggesting a potential for further upside in the near term.
Long-term (five-weeks) outlook: Support for the EUR/USD could come from a more dovish-than-expected Federal Reserve, particularly if the upcoming US PCE inflation data on June 28th suggests that inflationary pressures are easing. Additionally, any signs of a slowdown in the US economy could also weigh on the USD and benefit the EUR. Conversely, continued hawkish rhetoric from the Federal Reserve, coupled with robust US economic data, would likely strengthen the USD and pressure the EUR. Furthermore, escalating geopolitical tensions, particularly in the Middle East, could trigger a flight to safety, benefiting the USD at the expense of the EUR.
Short-term (five-days) outlook: The EUR/USD is likely to be driven by US economic data releases this week, particularly the PCE inflation data on June 28th. A weaker-than-expected PCE reading could trigger a sell-off in the USD and support the EUR, potentially pushing the pair towards the 1.08 level. Conversely, a stronger-than-expected PCE reading would likely strengthen the USD and pressure the EUR, potentially pushing the pair towards the 1.06 level. Additionally, the outcome of the Biden/Trump debate on June 27th could also influence the pair, with a perceived Trump victory potentially weighing on the USD due to concerns about his economic policies.
June 25th (Tuesday): US Consumer Confidence, US Richmond Fed Manufacturing Index
June 26th (Wednesday): German GfK Consumer Sentiment, US New Home Sales
June 27th (Thursday): US GDP (Final), US Durable Goods Orders, US Initial Jobless Claims, US Pending Home Sales Index, US President Biden & Presidential Candidate Trump debate on CNN
June 28th (Friday): French CPI, Italian CPI, German Unemployment Rate, Euro Area Consumer Confidence (Final), US Personal Income, US PCE Price Index, US Michigan Consumer Sentiment (Final)
GBP/USD
Over the past five weeks, the GBP/USD has depreciated from a high of 1.28 on June 3rd to around 1.26 currently. This downward trend reflects growing concerns about the UK's economic outlook and political uncertainty ahead of the general election on July 4th.
Long-term (five-weeks) outlook: Support for the GBP/USD could come from a surprise Conservative victory in the upcoming general election. This outcome, while less likely based on current polls, would provide certainty for businesses and investors, potentially leading to a stronger economy and a more hawkish BoE. Conversely, a Labour victory could trigger a sell-off in the GBP, as investors price in the potential for higher taxes, increased government spending, and a more dovish BoE. Additionally, a stronger-than-expected US economy and a more hawkish Federal Reserve could also weigh on the GBP.
Short-term (five-days) outlook: The GBP/USD is likely to be driven by UK economic data releases this week, particularly the final Q1 GDP data on June 25th and the current account data on June 28th. Stronger-than-expected GDP and current account figures could provide some support for the GBP, but the overall impact on the pair is likely to be limited, as the market remains focused on the upcoming general election. Additionally, the release of the BoE's Financial Stability Report and Financial Policy Summary and Record on June 27th could also influence the pair, with any hawkish signals from the BoE potentially providing some support for the GBP.
June 25th (Tuesday): UK GDP (Final), UK CBI Distributive Trades
June 26th (Wednesday): UK Nationwide House Prices
June 27th (Thursday): UK BoE Financial Stability Report, UK BoE Financial Policy Summary and Record
June 28th (Friday): UK Current Account
USD/JPY
The USD/JPY has been on a depreciating trend over the past five weeks, falling from around 160 to its current level near 158. This Yen strength comes despite the BoJ's recent shift towards policy normalisation, suggesting that other factors, such as safe-haven demand and repatriation flows, are playing a more dominant role.
Long-term (five-weeks) outlook: Support for the USD/JPY could come from a widening interest rate differential between Japan and the US, with the Federal Reserve expected to maintain its hawkish stance while the BoJ remains committed to its ultra-loose monetary policy. Conversely, safe-haven demand for the Yen amid heightened geopolitical risks, particularly the escalating tensions in the Middle East, could weigh on the USD/JPY. Further, Japan's persistent current account surplus and the potential for repatriation flows ahead of the fiscal year-end in September could bolster the JPY.
Short-term (five-days) outlook: The USD/JPY is likely to be driven by the release of key Japanese economic data this week, including retail sales, industrial production, and unemployment data for May, as well as Tokyo's inflation figures for June. Stronger-than-expected data could provide some support for the Yen, potentially pushing the USD/JPY lower. However, the overall impact on the pair is likely to be limited, as the market remains focused on the upcoming BoJ meeting on June 28th. The outcome of the BoJ meeting will be crucial in determining the short-term direction of the USD/JPY. A hawkish surprise from the BoJ, signalling a faster pace of policy normalisation, could trigger a sharp appreciation of the Yen. Conversely, a dovish statement from the BoJ, indicating a slower pace of policy normalisation, would likely weigh on the Yen.
June 24th (Monday): Japan Retail Sales
June 27th (Thursday): Japan Industrial Production, Japan Unemployment Rate
June 28th (Friday): Japan Tokyo CPI, BoJ Monetary Policy Meeting
Geopolitics and Market Themes
Russia-Ukraine War
Synopsis: The ongoing war in Ukraine continues to weigh on global sentiment, creating uncertainty and volatility in financial markets.
Key Developments:
Russia is making tactical gains in eastern Ukraine, but a strategic breakthrough remains unlikely.
Western support for Ukraine is waning, particularly in the United States, where the upcoming presidential election is shifting priorities.
Assessment of how financial markets are being affected:
The war has contributed to volatility in financial markets, particularly in the EUR and other European currencies.
The conflict has also driven up energy prices, which has had a negative impact on global growth.
US-China Tensions
Synopsis: Tensions between the United States and China remain elevated, particularly over Taiwan and trade.
Key Developments:
The United States has imposed tariffs on Chinese electric vehicles, batteries, semiconductors, and other strategic goods.
China has threatened retaliation, potentially targeting US agricultural products and vehicles.
The US and China have agreed to hold consultations on EV tariffs.
Assessment of how financial markets are being affected:
Trade tensions are contributing to a risk-off environment in financial markets, which is generally supportive of the USD.
However, any escalation in tensions that threatens to disrupt global trade could have a negative impact on the USD and other major currencies.
Middle East Tensions
Synopsis: The Middle East remains a region of high geopolitical risk, with Israel's conflict with Hamas escalating and Iran's nuclear program continuing to cause concern.
Key Developments:
Israel's conflict with Hamas has expanded into Lebanon, with Israeli forces targeting Hezbollah positions.
Yemen's Houthi rebels have launched attacks on commercial shipping in the Red Sea and the Arabian Sea.
Iran has warned of retaliation if its interests are threatened.
Assessment of how financial markets are being affected:
Middle East tensions are contributing to uncertainty in oil markets and global supply chains, which could have a negative impact on global growth and risk sentiment.
Safe-haven currencies, such as the JPY and CHF, could benefit from increased demand amid heightened geopolitical risks.
US Presidential Election
Synopsis: The upcoming US presidential election is creating significant uncertainty in financial markets, as investors assess the potential implications of each candidate's policies.
Key Developments:
The first Biden/Trump debate is scheduled for June 27th.
Trump's policies, which include higher tariffs and potential changes at the Fed, are widely seen as inflationary and could undermine the USD.
Assessment of how financial markets are being affected:
The election is likely to be a major driver of USD volatility in the coming months.
A Trump victory could lead to a sell-off in the USD, while a Biden victory could be more supportive of the currency.
OTHER NEWS
UK Airport Disruption
Synopsis: Manchester Airport in the UK experienced a major power cut on June 23rd, causing widespread disruption and the cancellation of numerous flights.
Analysis:
The power cut has caused significant inconvenience for travellers and could have a negative impact on the UK's tourism industry.
The disruption is likely to be temporary, but it highlights the vulnerability of critical infrastructure to unexpected events.
French Election Polls
Synopsis: An Ipsos poll published on June 23rd shows that Marine Le Pen's far-right National Rally (RN) party is leading in voter confidence on economic issues ahead of the upcoming French legislative elections.
Analysis:
The poll suggests that the RN could make significant gains in the elections, potentially leading to political instability in France.
A strong showing by the RN could also have implications for the Euro, as investors may perceive the party's policies as detrimental to the Eurozone economy.
Conclusion
The Forex market is currently navigating a complex landscape characterized by diverging monetary policies, escalating geopolitical tensions, and uncertainty surrounding the US presidential election. The US dollar remains supported by a robust US economy and expectations that the Federal Reserve will maintain higher interest rates for longer. However, the upcoming US PCE inflation data on June 28th will be pivotal in determining the next direction for the USD. Meanwhile, the Japanese yen continues to appreciate, driven by safe-haven demand and expectations of a gradual shift towards policy normalisation by the BoJ. The upcoming BoJ meeting on June 28th will be closely watched for further clues on the Bank's policy trajectory. The GBP is facing headwinds from a weakening UK economy and political uncertainty ahead of the general election. The outcome of the election will be crucial in determining the long-term outlook for the GBP.
References
U.S. Bureau of Economic Analysis: https://www.bea.gov/
U.S. Census Bureau: https://www.census.gov/
Federal Reserve: https://www.federalreserve.gov/
Trading Economics: https://tradingeconomics.com/
European Central Bank: https://www.ecb.europa.eu/
European Commission: https://ec.europa.eu/info/
Eurostat: https://ec.europa.eu/eurostat/
Bank of England