In this week’s FX update, Senior Market Analyst Craig Erlam discusses the the most notable market events over the next week and gives his analysis on EURUSD (17:05), GBPUSD (18:14), EURGBP (19:41), AUDUSD (20:59), USDCAD (27:31), NZDUSD (29:30), USDJPY (31:00), GBPJPY (32:19) and EURJPY (34:06).
The last week has been dominated by central banks, with the Bank of Canada raising interest rates for the first time in seven years, having spent the weeks previously raising market expectations for such a move. The question for traders now is whether this is a “one and done” event or does the central bank have further hikes planned this year. Governor Stephen Poloz didn’t give too much away on the pace of future tightening but it’s clear that he does anticipate further hikes in the future. The Canadian dollar has benefited greatly from the sudden shift in policy stance from the BoE, the question is can it keep it up?
Federal Reserve Chair Janet Yellen appeared before the House Financial Services Committee on Wednesday, followed by the Senate Banking Committee on Thursday, testifying on the semi-annual Monetary Policy Report. While the event was largely – as it typically is – a snooze-fest dominated by question dodging and political diversions, we did get some insight from Yellen when she claimed that the neutral rate was low and persistent subdued inflation would be monitored, supporting her view that future tightening will be gradual.
With CPI inflation and retail sales data for the US due tomorrow, the focus won’t shift from the US just yet. The dollar remains under pressure, with other central banks seen becoming more active as the Fed looks to take more of a back seat. How much weaker will the dollar get?
Next week we’ll hear from the ECB and the Bank of Japan, two central banks that appear on two entirely different paths at the moment. The euro has been on a solid upward trajectory as of late, as traders price in further reductions in bond purchases from the ECB – a form of tightening – while the yen has been struggling as the BoJ steps up its bond buying in order to keep the 10-year JGB yield around 0%. The ECB may use next week’s meeting to warn about new policy announcements in September, three months before the current bond purchases expires.