FX Weekly Update – July 24th, 2023
Posted Under: Weekly updates
The economic data and the central banks will keep the dollar on edge this week. The market expects the Fed and the ECB to raise rates by 25 bps, which suggests that the central bankers’ comments will be scrutinized. The most interesting central bank is the BOJ. Their currency policy, yield curve control (YCC), will most likely remain unchanged. Pushing USD/JPY higher and providing more buyers of yen crosses (EUR/JPY, CAD/JPY, etc.). U.S. durable goods, PCE and GDP, will round out the economic data. Of the three, focus on PCE, which the Fed scrutinizes. The previous month’s PCE was 4.1%, and the market expects a lower print. This data will support the Fed’s goal that its rate hikes are working. There will likely be a pause by central banks across the globe. This should provide support to the dollar over the next quarter.
EUR (1.1130): Last week’s high print of 1.1275 will serve as the first resistance line. We are looking at last week’s rally as a failed attempt by the single-currency and expect the euro to fall back toward 1.0800. The ECB is expected to increase its rates by 25 bps this week. Like the Fed, the data is lining up, suggesting the ECB may pause at the next meeting.
GBP (1.2850): The lack of movement by the pound sterling does provide insight that the market has priced in further BoE rate hikes while being defensive about a dollar rally. Trend-line support is at 1.2650. This week we expect that level to be tested. The EUR/GBP currency pair fell to 0.8518 (GBP strength) but then jumped to the current 0.8650. Classic cross-currency movement impacts individual currencies without allowing them to move out of their ranges.
JPY (141.75): The yen fell hard last week. The market was gaining confidence in buying the currency, but the BoJ has kept its rates unchanged. The market assumes that the BoJ will not increase its YCC. This has created volatility in the currency, making medium-term positions challenging to hold for any period. 145.00 was high on June 29th. Getting back to that level will require large USD/JPY buyers. That will be difficult given the concern of the market regarding BoJ intervention.
CAD (1.3220): Trend-line support at 1.3000 keeps USD/CAD from falling further. Oil prices have risen to $75/bbl, which has kept the pressure on the U.S. dollar, but until oil prices move above $80/bbl, this currency pair will remain in a range of 1.3400 to 1.3000.
MXN (17.0000): 16.5000 held the dollar from falling further. Now, its strength is going to challenge resistance at 17.2000. This rally is not changing the overall direction of the dollar. We remain supportive of the peso. Of course, any company with expenses in Mexico should welcome any jump in USD/MXN. Be prepared to buy pesos / sell dollars, utilizing the forward market, which offers a good return.
CNH (7.1850): The trade “war” continues, reflected in the lack of volatility. The dollar will test the 7.2850 (June 25th high) and then back to 7.1000.