EUR/USD Flat In Low 1.02s Ahead of Risk Event Packed Week, USD/CAD Drops 0.5%

Key Points

• FX markets began the week in risk-on fashion, with risk-sensitive currencies outperforming and rate-sensitive havens underperforming.
• EUR/USD was flat as traders await key US and Eurozone macro events later this week.
• These include the Fed policy announcement, US GDP and Eurozone CPI.

Risk-on Start to Week for FX Markets

Despite a cautious tone to global equity markets ahead of a busy week of big macro events, currency markets began the week in fairly risk-on fashion. Risk-sensitive G10 currencies like AUD, NZD and CAD outperformed, gaining between 0.3% to 0.5% on the day versus the buck, while the also somewhat risk-sensitive pound sterling also rallied by a similar margin.

AUD/USD was last changing hands in the 0.6950 area, with upside for now capped by the 50-Day Moving Average around 0.6970 ahead of key Q2 inflation data out on Wednesday. NZD/USD, meanwhile, pivoted within the mid-0.6200s and was eyeing a test of last week’s highs at 0.6300, while USD/CAD saw a sharp reversal from a test of its 21DMA at 1.2940 and was last trading just under its 50DMA at 1.2850, the loonie performing well amid strength in oil prices. CAD traders will be watching monthly Canadian GDP figures out on Friday.

A jump in US (and global yields) saw rate-sensitive currencies like the Swiss franc and Yen slump, with USD/JPY last trading close to its 21DMA in the 136.70s, having now erased about half of last Friday’s 1.0% drop (which was caused by a sharp drop in global yields on recession bets post weak US, Eurozone and UK PMI data).

Hawkish ECB Commentary Fails to Give Lasting Boost to Euro

EUR/USD was flat on Monday in the low 1.0200s and well within recent ranges, with the 21DMA (currently at 1.0240) continuing to act as a ceiling. The euro got a modest intra-day boost after European Central Bank policymakers delivered some hawkish commentary on Monday.

President Christine Lagarde said that the ECB is prepared to raise interest rates for as long as required to get inflation under control and that the magnitude of the rate rise in September would depend on the data that comes out in the interim. Fellow ECB policymaker Martins Kazaks teased that the ECB might not be done with “big” interest rate rises, keeping the door open for another 50 bps rate hike.

With the ECB having abandoned forward guidance at last week’s meeting (where it hiked rates for the first time since 2011 by 50 bps), markets will be closely scrutinizing upcoming Eurozone data. The euro could thus be choppy on Thursday and Friday when Eurozone countries start releasing the preliminary estimate of July inflation rates, with upside surprises likely to support bets for a 50 bps rate hike at the central bank’s next meeting. Money markets currently imply a roughly 65% chance of such a move at the next meeting, Reuters said on Monday.

Capping the euro’s intra-day gains was weak German IFO survey data that showed business sentiment in the Eurozone’s largest economy fell more than expected in July, with businesses complaining about high energy costs and the overhanging threat of a gas shortage. The ugly German business morale figures follow a survey released over the weekend that showed 16% of German industrial companies have already cut back on production due to energy costs, and after PMI data last Friday showed that the German manufacturing and services sectors likely shrank in July.

Buck Traders Eye Fed Meeting, Q2 GDP

While Eurozone inflation data this week will be a key input into the ECB tightening story, it looks set to be overshadowed by events stateside. US money markets are currently pricing around a 90% chance that the US Federal Reserve lifts interest rates by 75 bps on Wednesday and a slim 10% chance of a larger 100 bps move. A 75 bps rate hike would bring the target interest rate range to 2.25-2.50% and back above its pre-pandemic level.

Meanwhile, the first estimate of US GDP growth figures for the second quarter are scheduled for release on Thursday and will confirm whether or not the US entered into a technical recession in H1 2022. US Treasury Secretary Janet Yellen gave some pessimistic commentary over the weekend, noting that growth in the US economy is slowing. Yellen added that inflation remains “way too high”.

Underscoring US recession fears is the fact that the 2-year and 10-year part of the US government bond yield curve is currently in the midst of its most sustained inversion since 2006. 10-year yields were last nearly 20 bps lower than 2-year yields, with inversion of this part of the curve historically an excellent recession predictor.

With US recession fears in focus and evidence pointing towards US price pressures having perhaps peaked (core CPI/PCE has been falling in recent months, as have inflation expectations and commodity prices), Fed Chair Jerome Powell’s remarks on Wednesday at the post-FOMC meeting press conference will be closely scrutinized. Any indications of a more cautious approach to rate hikes in the coming quarters could weigh on the buck as Fed tightening bets are unwound.