FX Majors Weekly Outlook ( 20-24 June )

UPCOMING EVENTS:

• Monday: US market holiday.
• Tuesday: Fed’s Mester and Barkin speak.
• Wednesday: Fed Chair Powell testifies before Senate, Fed’s Evans, Harker and Barkin speak, UK and Canada inflation reports.
• Thursday: EZ, UK and US flash PMIs, Japan CPI report.
• Friday: Fed’s Daly speaks.

On Monday the week begins with a US market holiday and PBoC (People’s Bank of China) decision on LPR changes. Expectations are mixed and the actual decision shouldn’t change the current  market sentiment  Market Sentiment Market sentiment is a psychological attitude that captures the mood and attitude of investors, usually towards a specific security or asset. This sentiment can be segregated into a bullish or bearish mood in the market. As such, certain trading activity or price behavior will also impact market sentiment.For example, bullish sentiment indicates a growth in the price of securities, whereas a bearish sentiment sees falling prices. Many traders use broader market sentiment or sentiment data to help identify trends that may not seem apparent to many other investors.This can give way to investor sentiment indices or contrarian signals surrounding assets, which helps inform investors to make more educated decisions.Using Market Sentiment Market sentiment is not always grounded in fundamentals and for this reason is seen as inferior to other methods trading. This form of investing instead deals with emotion and feelings of traders.However, many traders, specifically shorter-term investors, will rely on market sentiment. Sentiment traders put a lot of merit into these trends, just as other investors look for specific signals or fundamental barometers to inform their decision making.This is due to the powerful impact of sentiment on short-term indicators or attitudes. Many investors also prefer taking contrarian views and positions, actively trading against an engrained market consensus.In this instance, if the broader market is buying a security, a contrarian investor would instead sell, and vice versa.This is a popular technique in the stock market, which can characterize stocks as either over or undervalued, based in large part by market sentiment. Market sentiment is a psychological attitude that captures the mood and attitude of investors, usually towards a specific security or asset. This sentiment can be segregated into a bullish or bearish mood in the market. As such, certain trading activity or price behavior will also impact market sentiment.For example, bullish sentiment indicates a growth in the price of securities, whereas a bearish sentiment sees falling prices. Many traders use broader market sentiment or sentiment data to help identify trends that may not seem apparent to many other investors.This can give way to investor sentiment indices or contrarian signals surrounding assets, which helps inform investors to make more educated decisions.Using Market Sentiment Market sentiment is not always grounded in fundamentals and for this reason is seen as inferior to other methods trading. This form of investing instead deals with emotion and feelings of traders.However, many traders, specifically shorter-term investors, will rely on market sentiment. Sentiment traders put a lot of merit into these trends, just as other investors look for specific signals or fundamental barometers to inform their decision making.This is due to the powerful impact of sentiment on short-term indicators or attitudes. Many investors also prefer taking contrarian views and positions, actively trading against an engrained market consensus.In this instance, if the broader market is buying a security, a contrarian investor would instead sell, and vice versa.This is a popular technique in the stock market, which can characterize stocks as either over or undervalued, based in large part by market sentiment. Read this Term of risk aversion given that the US is headed into a recession, which may be already confirmed by the next GDP Q2 report.

Over the weekend Fed’s Waller (Voter, Hawk) said that he would back another 75 bps rate hike at the next 26-27^th July meeting and that the Fed is “all in” on fighting inflation. Fed’s Mester (Voter, Hawk) said that they will need “compelling evidence” of  inflation  Inflation Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market. Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market. Read this Term easing. That should come in the form of two or three lower M/M inflation readings in my opinion before the Fed starts to look into a less aggressive path.

On Tuesday we have again Fed’s Mester (Voter, Hawk) that shouldn’t add anything new to her previous remarks and Fed’s Barkin (Non-Voter, Hawk) that shouldn’t be a market moving event given that Barkin is not a voter until 2024.

On Wednesday Fed Chair Powell testifies before Senate and he shouldn’t add anything new given that he already spoke the last week at the Fed’s meeting Press Conference. Nonetheless it’s always better to be aware of it. There will also be Fed’s Evans (Non-Voter, Dove), Fed’s Harker (Voter, Hawk) and again Fed’s Barkin (Non-Voter, Hawk). I labelled some of them as “Doves” to differentiate from the Hawks, but we are at a point where there are only hawkish and less hawkish members.

Canadian CPI report will most likely be a barometer for next BoC (Bank of Canada) July 13^th meeting. A hot print should confirm a more aggressive 75 bps hike after Governor Macklem suggested that they may need to make a larger than 50 bps hike. On the other hand, a soft reading should confirm a 50 bps hike as the BoC will need more than just one soft report before making some changes to their plans.

UK CPI report is expected to come at 9.1% Y/Y for the headline number and remain at 6.2% for the core reading. The BoE (Bank of England) last week forecasted inflation at 11% by year-end and then hiked by just 25 bps. Bold…

On Thursday we get Eurozone, UK and US flash PMIs which should further confirm a slowing economy and Japan CPI. The latter could be a mover for the JPY if we see a notable jump in inflation readings after the BoJ kept its monetary policy unchanged and remained on the dovish side. For now, the BoJ doesn’t feel the pressure like its peers, but the market keeps on expecting them to fold at some point and follow the other central banks into a tighter policy.

On Friday we conclude the week with Fed’s Daly (Non-Voter, Dove) and it shouldn’t be a market moving event unless she go extremely aggressive on the monetary policy front.

This article was written by Giuseppe Dellamotta.