FX Update: USD bear market status in play. JPY thrashed again.

Week ahead: Incoming data and G3 central banks lined up Wed-Fri
Next week sees the G3 central banks lined up like ducks in a row. At Wednesday’s FOMC meeting, the Fed is seen hiking and will likely want to retain “optionality” on the potential to hike again, given it doesn’t need to encourage already frothy financial conditions. It can surprise hawkish by guiding more firmly for further tightening as the market is mostly convinced that this will prove the last rate hike of the cycle, with about 125 basis points of easing priced through the end of next year. Interesting data next week from the US includes the July Consumer Confidence survey on Tuesday after the June survey saw the best Present Situation reading since January of 2022 (normally correlated with labor market sentiment) and a solid jump in Expectations. We’ll also see the first estimate of Q2 GDP on Thursday and June PCE inflation data on Friday, which is more interesting than usual as a material drop in the Y/Y PCE core is expected, to 4.2% after six consecutive months of 4.6-7% core inflation readings.

For Europe, we get a look at the preliminary July PMI for France, Germany and the Eurozone on Monday. The story last month was of still ugly manufacturing PMI, while Services PMI is also struggling to show convincing growth – France’s was even below 50. Weak data could weigh on the euro, as the ECB has already been backing off its commitment to rate tightening beyond the expected 25 basis point move next week. If US yields are surging and we have weak Eurozone PMI data and a likely dovish ECB (remember my Wednesday update arguing that the ECB likely has its eyes on very stretched EURJPY and EURCNH as a factor), could we even see a full reversal in EURUSD? That requires we close next week below 1.1000.

I was leaning for a possible tweak at next Friday’s BoJ meeting, but stories circulated today give little confidence that Ueda and company are ready to move just yet, which could mean an aggravated extension of JPY weakness if US treasury yields end higher. This does little to alter the 3-month and longer term view that EURJPY and other JPY crosses are over-stretched. We get policy convergence eventually is the operating assumption.

Table: FX Board of G10 and CNH trend evolution and strength.
The US dollar is resurgent, and the CNH is tagging along for the ride for the moment after the PBOC moved to support the renminbi this week. The greenback has much more to do to indicate a full bullish reversal. The JPY is on tilt back lower ahead of an important BoJ meeting and as US yields are suddenly perking up.

Table: FX Board Trend Scoreboard for individual pairs.
Among G10 USD pairs, NZDUSD has been the first one to suggest a full reversal in the USD sell-off is underway, and GBPUSD could be soon to follow if it fails the 1.2800-50 area, while USDCAD could be looking at a change of trend on a single large rally bar today or next week after recently rejecting new lows. USDCNH is only interesting above 7.24 or below perhaps 7.12.