GemForex - weekly analysis

Quite an interesting week is unfolding upon us, and it could be quite a volatile week for the dollar due to the FOMC meeting minutes, key economic reports as well as scheduled speeches from Fed officials. In the currency arena, the safe-haven dollar drew ample strength from global recession fears while oil prices tumbled to levels not seen in six months on growing signs of an economic downturn and prospects of rising supply on an Iran deal. 

When it comes to currencies, the EUR would feel most heat – especially in Europe as a sign of recession approaching faster than in the US, the local stock markets are trading at considerably lesser multiples of forward-looking earnings, and the bond spreads between Germany and countries such as Italy are widening. In the US, the skies aren't getting too cloudy yet. With European energy prices soaring, it may take more of a concession on the currency to entice investors into European asset markets and keep the balance of payments balanced. A sub-parity EUR/USD may be in store, and this weeks economic data will be an indicator of the trajectory of the currency value. 

At the time of writing, GBP/USD recovered its losses, and the ILO unemployment rate got released, seen to be steady at 3.8% in June. The last jobs report came in strong and therefore lifted odds for a 50 bps BOE rate hike in September. Ever since the energy crisis in the UK and Europe has worsened while the global economic outlook has turned sour. Besides the UK jobs data, Wednesday‘s inflation data will hold the key for the BOE’s next rate hike trajectory.

From the Asian front, a surprise loosening of monetary policy by the Peoples Bank of China (PBOC) and a string of softer than anticipated macro data sets served to remind markets of the headwinds plaguing the global economy, driving demand for the safe haven dollar and Japanese yen. A backdrop of lower global rates coupled with a sustained rise in European energy prices. 

The Australian dollar retraced recent gains through trade on Monday following a surprise Peoples Bank of China (PBOC) monetary policy adjustment and softer than anticipated activity data. The US dollar advanced more than 1% against the yuan while the AUD, often seen as a proxy for yuan performance, tumbled toward intraday lows near US$0.7020.

On a similar tone, NZD/USD bulls retreated after China flashed downbeat statistics for July during Monday‘s Asian session. That said, the Kiwi pair renews its intraday low near 0.6430 by the press time. According to economics at ANZ, the market would react positively to a hawkish Reserve Bank of New Zealand, but the impact could be potentially short-lived. It’s too soon to say if its a factor, but we may just be in the early stages of the USD coming back into favor for safe-haven reasons amid concerns around global growth.

In the energy sector, the price of a barrel of the WTI oil extended a leg lower, amidst declining open interest, and a rumored nuclear deal between Iran and the West. If Irans nuclear deal is approved, oil from Iran would be seen as a relief from high energy prices, particularly consumers, which had been dealing with skyrocketing petrol and gasoline prices, with countries like the US battling inflation at 4-decade highs.

Gas futures rose a further 7% through trade on Monday adding more pain to an already embattled Euro economy. Having given up US$1.02 the single unit gave up 1% dipping toward intraday lows near US$1.0150.

For the important events of the day, we now turn our attention to a Canadian CPI inflation update ahead of tomorrows all-important US retail sales print. With recession fears rising in the US, consumer sentiment will prove a critical marker in governing any potential FOMC policy shift.