Weekly FX Chartbook: September Rate Cuts and the Rising Trump Trade

Key points:

• USD: Economic momentum could spell further dollar downside, but political risks will be in focus
• JPY: Intervention risks could be off the radar
• EUR: ECB meeting could be a non-event
• GBP: Medium-term upside remains intact despite inflation and wage tests
• NZD, SEK and NOK: Increasing rate cut pricing could fuel downside pressures

USD: Politics Garnering More Attention

It was an eventful last week where confirmation of the US disinflation trend bolstered hopes of rate cuts from the Fed to begin in September. This has brought risk assets in favour and pushed the US dollar lower. Focus now turns to Fed Chair Jerome Powell’s comments on Monday and retail sales on Tuesday to confirm the market’s assumptions on rate cuts. Powell, in his recent testimony before lawmakers, has signalled some concern on the weakness in labor market as well being a key catalyst for rate cuts. US economic data, therefore, remains in the driving seat to get further conviction on a September rate cut. The bias on the US dollar as such remains bearish, and we wrote last week about who could be the potential winners in G10 FX from a cyclical US dollar weakness.

However, political stakes are rising as we approach the US presidential elections in November. After a woeful performance from Biden at the first presidential debate, the weekend assassination attempt on Trump have boosted the chance of a Republican sweep and ‘Trump Trades’ are back in vogue. This usually means a short-term dollar positive, while weighing on the Mexican peso, Chinese yuan, Euro or the Australian dollar. Our note earlier discussed the impact of Trump 2.0 on forex markets as well as other asset classes. The Republican National Convention will draw extra attention this week, with focus on policy details and the announcement of the vice-presidential candidate. Most notably, it will highlight the stark contrast to the fragmentation within the Democratic Party.

GBP: Making Its Way to 1.30 Could See Data Bumps

Economic resilience and political stability continue to fuel gains in sterling, and a pushback from Bank of England’s MPC members last week added further fuel to the firing rally. GBPUSD is now in close sight of its 2023 highs at 1.30+, but for that to materialize, sterling faces key data tests this week from both inflation and wages. As noted previously, policymakers are looking to see services inflation and wage pressures soften before policy restrictiveness in eased. Latest prints for both of these key metrics will be released this week, and these are the last major releases before the BOE meets in August.

Markets have currently priced in 40% chances of a rate cut on August 1, and these data releases could make or break the case for an August rate cut. However, as discussed in this article, even if this week’s data comes in softer and the BOE is pushed closer to an August rate cut, GBPUSD will likely remain a buy-on-dips and can potentially recover from some early weakness given that a BOE rate cut cycle is not coming from growth concerns and could remain shallow.

EUR: ECB Meeting Could Be a Non-Event

While the ECB has begun cutting rates in June, the next move remains in doubt amid lingering inflation pressures. This means there are no changes to interest rates expected at the July 18 meeting, but there will also be little for the ECB to confirm on the rate path given that the next meeting will be two months away which will be plenty of time to assess incoming data as well as the Fed’s actions.

Any hints on policy direction will, therefore, remain subtle with a September rate cut unlikely to be confirmed at this stage. This means the ECB meeting this week is unlikely to have any significant impact on euro. Focus will be relatively more on Lagarde’s comments about the situation in France and the fragmentation in the Eurozone. EURGBP could remain a key pair to watch as ECB meeting comes on the same day as UK prime minister Starmer hosts EU leaders.

JPY: Uptrend Could Return Post-Intervention

Japanese authorities are suspected to have been in the markets last week to boost the Japanese yen. USDJPY has moved down from 161.50 to sub-158 but key support at 157 has held up. EURJPY also hit its support but traded sideways. However, as we have mentioned in previous notes, an intervention attempt can only be successful if it is coordinated with other countries and comes together with fundamental support. While the slide in US yields last week did bode well for the yen, the increasing case of a Trump 2.0 could keep long-end yields pinned higher and the yen on a backfoot.

Meanwhile, any potential tweaks from the Bank of Japan at this week’s meeting is unlikely to bring a significant closing of the large yield gap between US and Japanese yields, which is the key catalyst for sustained yen weakness. As such, USDJPY could be ready to turn higher again this week if US political noise continues to reverberate through markets and Fed Chair Powell stays away from confirming a September rate cut.