US data awaited amid overly dovish Fed rate cut bets. July PMIs to reveal how economies entered H2. BoC decides on monetary policy, may cut rates again.
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Welcome to another episode of Global Market Insights, brought to you by XM.com, where we provide meaningful and informative content about the events that affect market trends and shape global markets. Hello, and welcome to the weekly forex outlook at XM.com. Next week, we'll get a barrage of data out of the U.S., which dollar traders will be sure to keep an eye on. In addition, flash PMI data from the Eurozone and the UK may impact the ECB and BOE's policy paths. And will the BOC deliver a back-to-back rate cut? I'm Maria Beshar-Daze, and joining me to discuss all this is senior investment analyst Harold Limbo-Spi-Sudos. So Harold Limbo's after the softer than expected CPI data in the U.S. last week, Fed officials indicated that price pressures seem to be on a path to remain low. Next week on Wednesday, we'll get the flash PMIs for July, on Thursday, the first estimate of GDP, and on Friday, the core PCE index. How might all the data impact Fed rate cut bets and the dollar? Hello, Maria. Yes, we have a barrage of data coming out from the U.S. The PMIs on Wednesday are the more up-to-date information, and thus revealing further improvement in economic activity and some stickiness in prices charged by firms could make investors have second thoughts regarding a third Fed rate cut by the year, especially if the GDP data on Thursday revealed that the economy accelerated by more than expected in the second quarter. Now, the Atlanta Fed GDP now, and New York now has GDP models, are suggesting that indeed the risks may be tilted to the upside, and with investors now fully pricing in a third rate cut by January, improvement may serve as a reality check, prompting them to scale back some basic points worth of reductions, even if the core PCE index slows some sudden Friday something supported by the slowdown in the core CPI rate for the month. Now, the improvement in economic activity could help yields rise, treasury yields rise somewhat, and perhaps the dollar could gain some ground. Turning to other PMI data now, we'll get Eurozone and UK flash PMIs on Wednesday. What should we expect there, and how might the euro and the pound be affected? Getting the ball rolling with the Eurozone, yesterday the ECB kept interest rates unchanged, with President Langard saying that a rate cut in September is wide open, so investors kept the probability for such a move elevated at around 65%, keeping on the table a strong chance for another quarter point reduction by the end of the year. So the June PMI revealed some softness, and it remains to be seen where the July prints will paint a similar picture. If so, the probability for a September rate cut may increase, extending the latest downside correction in EUR/USD, especially if the dollar gains some ground on the US data we mentioned. Now in the UK, the probability of a rate cut by the Bank of England in August, slid to around 40% from around 60% in just a week, following remarks by Bank of England chief economist Pete that services inflation and wage growth remains uncomfortably high, and after this week's CPI data confirmed that services inflation remains extremely hot. With all that in mind, if the PMI's reveal economic improvement and more stickiness in prices charged by firms, the probability for an August rate cut by the Bank of England may decline even more, thereby offering support to the pump. OK, maybe not that much against the US dollar, if the greenback also proves strong on the day that we mentioned, but perhaps against the Euro, if the common currency remains for the back foot after the Eurozone PMI's. And finally, over in Canada, the last time the Bank of Canada met, it cut interest rates by 25 basis points. This week, Canadian CPI numbers show that inflation eased further in June. So what are the chances that the BOC will cut again when it meets next week on Wednesday? And do you think the Canadian dollar will suffer? Yes, as it's late as gathering, the Bank of Canada cut interest rates by 25 basis points, sitting in inflation and sluggish economic growth, with Governor Mark Lem noting that it would be reasonable to expect further cuts if inflation continues to put down. As you mentioned this week, the Canadian CPI numbers bolstered the case for a back-to-back rate cut, and the investors are now assigning a nearly 85% chance for that to happen. Therefore, a rate cut on its own is unlikely to shake the Canadian dollar because it's mostly priced in. So traders may quickly turn their attention to any hints on whether the existing cycle will continue in September as well. If they get enough dovish signals, their loan is likely to suffer. Carlamas, thanks so much. This was the Weekly Forex Outlook, here at XM.com. Thank you for listening to another episode of Global Market Insights brought to you by XM.com. For more in-depth technical and fundamental analysis, be sure to visit www.xm.com/research. [BLANK_AUDIO]
