Weekly Economic & Financial Commentary: Higher for Longer

Recent policy actions and comments by central bank officials have convinced market participants that rates are heading higher and that they will remain elevated for longer than previously thought.

Dollar Shows First Signs of a Bottoming

On FX markets, the dollar shows first signs of a bottoming after the June setback. DXY closed at 102.38. The test of EUR/USD 1.10 earlier this week seems rejected (close 1.0956). As indicated, EUR/GBP closed only marginally softer at 0.8595 despite the 50 bps BoE rate hike.

USD/JPY Rallies, Japanese Inflation Remains Above Target

The Japanese yen has stabilized on Friday after falling close to 1% a day earlier.  In the European session, USD/JPY is trading at 143.05, down 0.04%. Earlier, USD/JPY touched a high of 143.45, the highest level since early November 2022.

Accumulation in Bitcoin, Ethereum

Market picture Crypto market capitalisation has adjusted 0.65% in the past 24 hours to 1.17 trillion, remaining near the highs since early May. The correction is primarily due to a 0.55% dollar strengthening over the same period. The current dynamic is still a halt after a 16% rally but not a correction. Bitcoin is frozen […]

Sunset Market Commentary

European June PMIs disappointed on all accounts. The manufacturing rout continued, unexpectedly easing from 44.8 to 43.6. Services have long compensated but are now also showing a loss of momentum, retreating more than expected from 55.1 to 52.4. The composite series fell to 50.3 (-2.5 points) as a result.

Economic Activity Has Cooled Euro

The Euro suffered a setback after the June PMIs revealed a slowdown in economic activity. Analysts were caught off guard by the contraction in French services, which dropped from 52.5 to 48.0 – far below the forecast of 52.2. Manufacturing also disappointed, staying below 50 for the tenth time in twelve months.

Week Ahead – Euro and Bleeding Yen Brace for Inflation Tests

With all the major central bank decisions behind us, the spotlight next week will turn to a new round of inflation releases. The euro has been riding high this month, but whether it still has some miles left in the tank will depend on what the inflation data spells for ECB policy. Meanwhile, the yen has been demolished and since FX intervention seems unlikely, it might take a serious acceleration in Japanese inflation to stop the bleeding.   

Weekly Economic & Financial Commentary:

Chair Powell noted this week in Congressional testimony that economic activity has been resilient in the face of higher interest rates, suggesting there is more work to be done by policymakers in order to achieve their 2% inflation target. Housing was the dominant theme this week and intimated the housing market is holding up reasonably well in the face of higher interest rates and the potential for recession early next year.

The Weekly Bottom Line: Consumer Updraft Supports Hawkish BoC

Next week's inflation data for May will be key. The BoC's preferred core inflation metrics – CPI trim and CPI median – had not eased as much as the Bank had hoped in recent months, another key factor in their rate hike. We expect the measures to decelerate to an average 3.7% year/year in May (Chart 2). If inflation cools far more than we expect, our confidence that the BoC is likely to hike again will be reduced.

Forex and Cryptocurrencies Forecast

Just a reminder, the Federal Open Market Committee (FOMC) of the US Federal Reserve decided on Wednesday, June 14 to pause the process of monetary tightening and left the interest rate unchanged at 5.25%. The following day, on Thursday, June 15, the European Central Bank (ECB) raised the euro interest rate by 25 basis points from 3.75% to 4.00%. ECB President Christine Lagarde noted that the tightening of credit and monetary policy would continue in July.