Macroeconomic forces rarely lie and they influence national currencies more than you’d expect. A strong cocktail of high inflation, upcoming interest rate hikes and geopolitical conflict hang over the Eurozone’s prospects. The EURUSD subsided to 0.99997 on July 12 as sentiment turned bearish towards the Eurozone’s single currency.
That’s not to say that the USD doesn’t face similar macroeconomic headwinds. The conflict in Ukraine, high inflation and a looming recession are straining sentiment and clouding the outlook. It’s just that the currency has strengthened on earlier hawkish actions by the Federal Reserve to tame inflation, and as a safe-haven asset, USD-denominated assets compete with gold, the Swiss Franc and the JPY. On top of that, the US job market continues to show resilience.
On the brighter side for the EURUSD, European exports are likely to be competitive given the favourable exchange rate for EUR currency pairs.
So, what’s next for the EURUSD? A few possibilities come to mind:
- An extended period of parity or near parity in the short-to-medium term.
- A short-term period of weakness prior to the ECB interest rate hike.
- After the ECB interest rate hike expected on July 21, the EUR may see support.
The macroeconomic trends discussed started in the middle of the first quarter. High inflation triggered by the Ukraine conflict and COVID-19 recovery led to interest rate hikes in the US, which led to recession fears and a GDP contraction later in the second quarter.
The USD’s short-term course could also be impacted by GDP growth in the second quarter. If there are two quarters of negative growth, it means a technical recession. The GDP release for the US is set for July 28, one week after the ECB’s monetary policy meeting.
The US releases its latest inflation benchmarks today. The monthly Consumer Price Index (CPI), excluding food and energy, is expected to have trimmed from 6 percent in May to 5.8 percent in June. Any unexpected results could move the USD currency pairs.
In other trading news, the Reserve Bank of New Zealand (RBNZ) raised its key interest rate guidance to 2.5 percent as expected. The Bank of Canada (BoC) is expected to raise its current key interest rate guidance from 1.5 percent to 2.25 percent later today.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
