Week Ahead for Popular Currency Pairs

  •  USD remained near its highest level since March. We expect the USD to firm further after the Federal Reserve’s regular policy meeting on Wednesday.
  • EUR/USD will weaken and remain in the lower end of this month’s range.
  • AUD/USD will grind lower because of a recovery in the USD and if Australian Q2 underlying CPI is weak (Wed).
  • NZD/USD will partly rebound from last week’s 2% fall now that the RBNZ’s ‘economic assessment’ has been digested by market participants. 
  • USD/JPY is susceptible to a sharp fall on Friday if the Bank of Japan ‘fails’ to live up to heightened expectations of further policy easing. 

USD Outlook

USD remained near its highest level since March. We expect the USD to firm further after the Federal Reserve’s regular policy meeting Wednesday. We expect the Fed to keep policy on hold but be more optimistic about the US economic outlook given the limited fall-out from Brexit and improvement in the US economic data. This will support a modest increase in US interest rate expectations and support the USD. But the USD will stay below its post-rate hike high reached in December 2015.

USD/JPY consolidated earlier in line with mixed Asian equity market performance. USD/JPY is susceptible to a sharp fall on Friday if the Bank of Japan ‘fails’ to live up to heightened expectations of further policy easing. If the BoJ cuts the policy interest rate from ‑0.1% to ‑0.3%  we expect the JPY to weaken modestly (at best) but only temporarily.  In our view, Japan’s large current account surplus will eventually re-strengthen the yen. Today’s Japan customs trade data for June showed a snap-back in the trade surplus. This suggests Japan’s current account surplus will remain large near 4% of GDP.

EUR/USD Outlook

EUR/USD will weaken and remain in the lower end of this month’s range. Eurozone business surveys pre-Brexit and activity data suggest GDP expanded by 0.4% QoQ in Q2 (Fri).  This is in line with the ECB’s projections.  Base effects and the pass-through from past EUR depreciation point to a modest pick-up in headline Eurozone CPI inflation (Fri).

GBP/USD Outlook

We expect GBP/USD to remain stable-to-weaker this week. GBP/USD will find some support because UK GDP growth (Wed) probably rose by 0.5% QoQ in Q2.  This is stronger than the 0.3% in the Bank of England’s May Inflation Report.  According to the BoE activity indicators for 2016 had been reasonably solid in the run-up to the referendum.  Nonetheless, expectations the BoE will announce more aggressive easing measures on 4 August will continue to weigh on GBP.

AUD/USD Outlook

AUD/USD recovered slightly in Asian trade on a 1% lift in iron ore future prices. But in my view, AUD/USD will grind lower this week because of a recovery in the USD and if a weak Australian Q2 underlying CPI (0.4% QoQ or less) lifts the pricing for a RBA rate cut next week (and November).

NZD/USD Outlook

NZD/USD remained under modest downside pressure in Asian trade. However, we anticipate NZD/USD to partly rebound from last week’s 2% fall now that the RBNZ’s ‘economic assessment’ has been digested by market participants.  Foreign demand for New Zealand assets is strong despite pricing for two more rate cuts. As a result, AUD/NZD will ease after last week’s sharp lift.