Currency Market Analysis


Uncover the trends impacting currency markets and our 2020 forecasts

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Jul 13, 2020 | Currency Market Analysis

Global Themes

Critical data dump, central banks and politics; the week ahead

• Dollar down ahead of busy week
• Central banks in spotlight
• EU summit could steal the show
• A busy week of UK data
• Attention also on corporate earnings

USD

Dollar down ahead of busy week

Last week, the US Dollar index registered its largest weekly percentage loss in a month with the dollar losing its safe-haven appeal due to rising hopes of a potential vaccine for Covid-19. The dollar has suffered three weeks of successive losses as investors continue buying into risk-sensitive currencies instead, betting that the worst of the pandemic is over.

Despite Friday seeing the largest daily increase in Covid-19 cases in the US and over the weekend a record daily increase in cases globally, the positive news surrounding a potential vaccination has helped drive US stocks higher and the US Dollar lower. EUR/USD has reclaimed the $1.13 handle to maintain the positive trend the pair has endured since mid-June. A rapid rebound in economic data has also helped boost hopes of a V-shaped recovery, which has tainted demand for the world’s reserve currency. The week ahead sees further vital economic data releases for the US with focus on June’s inflation figure on Tuesday and retail sales on Thursday.

• As the data is expected to show a rebound in recent economic activity, the dollar may weaken further with investors looking to take profit on safe-haven bets.

Central banks

Central banks in spotlight

The week ahead brings with it a few monetary policy announcements from major central banks with the Bank of Japan (BOJ) and Bank of Canada on Wednesday, and the European Central Bank (ECB) on Thursday.

Central banks have played a pivotal role in supporting economies during the coronavirus pandemic, and as economies look to reopen, any change in tack from central banks will be key in determining the future macroeconomic outlook. Focus this week will be on the BOJ’s updated economic forecasts and any questioning over the ECB’s Pandemic Emergency Purchase Programme, which was enlarged and prolonged in June.

EU summit

EU summit could steal the show

An extraordinary 2-day EU summit takes place on Thursday and Friday this week where EU leaders hope to agree on a recovery package to support the economy through this pandemic. There is a risk that a compromise may not be found at this meeting though, which would likely weaken the Euro this week.

The summit is the first major conference since Germany took presidency of the EU council and it is Germany and France that support the €750bn recovery fund. However, the so-called frugal four – Sweden, Denmark, the Netherlands and Austria – are yet to support the idea. Another EU summit will have to be arranged if an agreement is not reached, ramping up the pressure on EU leaders also battling with Brexit talks with the UK.

• Should the Euro weaken this week, GBP/EUR could climb through the €1.12 mark and on towards the €1.13 handle - a key resistance level over the past six weeks.

Corp earnings

Attention also on corporate earnings

Market participants will keep a close eye on what is expected to be the weakest corporate earnings season since the global financial crisis. Big banks and corporate firms will release their quarterly reports and could trigger a wave of worry across financial markets.

Analysts expect that earnings for America’s S&P 500 plummeted nearly 45% with retailers, energy companies and industrial firms likely to have suffered most. Financial firms are also in the spotlight this week to see how some major banks have fared. Hopes for a rapid V-shaped recovery in earnings have been one of the main reasons why the overall market has bounced back so quickly from its March lows. This has translated into elevated risk appetite in the FX market too, benefiting risk-sensitive currencies like the AUD, NZD, GBP and the NOK to name a few.

• Should the earnings season be a bigger disappointment than forecast, then riskier currencies may suffer and demand for safe haven assets may gain traction.

UK data

A busy week of UK data

On Tuesday, May GDP data is revealed and expected to show a healthy spring back from the 20.4% decline witnessed in April. A 5% rebound in May is forecast and will help partially reverse that unprecedented drop. Critical UK jobs data is also due on Thursday whilst inflation drops in on Wednesday.

The British Pound has enjoyed a two week climb against most major currency peers, thanks largely to the sustained improvement in risk appetite despite a rise in coronavirus cases worldwide. Attention now shifts to important economic data though, with the jobs market likely to be a key focus. The government’s furlough scheme has helped limit joblessness in the UK so far, but the unemployment rate is expected to climb, and average earnings are expected to turn negative.

• GBP/USD is chasing the 200-day moving average located near $1.27 at present but may bump into stiff resistance here. The currency pair is up over 2% this month but may falter if risk appetite deteriorates.

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