FX Majors Weekly Outlook (18-22 July)

UPCOMING
EVENTS:

Monday: NAHB
Housing Market Index.

Tuesday: US
Housing Starts and Building Permits.

Wednesday: UK
CPI, Canada CPI.

Thursday:
BoJ Policy Announcement, ECB Policy Announcement.

Friday:
S&P Global US, EZ and UK PMIs.

The FOMC
entered its blackout period ahead of the July meeting next week. We left the
markets with a positive tone as Fed’s Waller (Voter, Hawk) dismissed a 100-bps
hike and long-term inflation expectations in the UMich survey, which as Powell
himself stated made him favour a bigger hike at the last meeting, came out
surprisingly below expectations at 2.8% from 3.1% prior. All of that reversed
the negative sentiment that favoured the USD after the surprisingly hot US CPI
report.

We may see a
continuation of the positive sentiment this week with the USD losing a bit into
the FOMC meeting. Some relief rally out of the recent developments shouldn’t
distract from the bigger picture in my opinion. We need to come down from very
high and entrenched inflation readings and the Fed will not pivot unless it has
clear evidence that the disinflation will take it back to its 2% target. So,
the Fed will keep tightening even if the US is in recession, which in a normal
cycle would see it easing, but again the difference here is that inflation was
let to rise so high and become so broad that will require the Fed to stay the
course or else risking to fail in accomplishing its goal of price stability.

Even Fed’s
Waller stated that he wants to see Core PCE at 2.5%-3-00% before thinking about
slowing rate hikes or pause. This will all lead to a prolonged slowdown in
growth, which is bad for risk assets and good for the US Dollar. So, I think we
will see the market swinging back and forth between inflation and growth data
maybe taking some relief on inflation part but not on the growth side. We are
already seeing a pickup in weekly jobless claims, a deterioration in housing
market indicators and leading growth indicators like PMIs. If we shouldn’t
fight the Fed when it’s easing, it’s hard to do it when it’s tightening amid a
recession.

On Monday
and Tuesday, we will get the leading indicators for the US Housing Market. They
are expected to keep on contracting as the deterioration in affordability this
year dampened demand for housing and home building amid tightening monetary
conditions and recession fears.

On Wednesday
we will get the UK and Canada CPI report. For UK the headline inflation
readings are expected to rise due to high energy and food prices. The Core
measures are also seen ticking higher. Same story for Canada as its inflation
report is seen to show more upside in inflation readings.

On Thursday
the BoJ is expected to keep its policy unchanged as the bank judges the
National Core CPI slightly above its target as being driven by a weakening Yen
and rising material costs and not by positive economic cycle. Next, we have the
ECB Policy Announcement. The ECB is expected to finally deliver its first 25
bps hike lifting the main depo rate from -0.50% to -0.25%. We could see some
dissenters from the most hawkish members preferring a bigger 50 bps hike. The
ECB is also expected to signal a 50-bps hike at its September meeting as widely
anticipated by various ECB speakers. The focus will be also on the
fragmentation tool and how the ECB intends to limit the rise of the spreads
from the periphery (Italy, Spain, Portugal and Greece).

On Friday we
will get the S&P Global PMI report for the Eurozone, the UK and the US.
They will most likely show further deterioration in activity as the slowdown in
the economies gathers pace.

This article
was written by Giuseppe Dellamotta.