News, insights and analysis from the global FX markets
GBP: Sterling's surge and a looming BoE decision
In July, the pound soared, surpassing 1.31 against the dollar and nearly breaching the 1.3150 mark. Over six consecutive days, sterling surged by 3.7%, reaching levels not observed since April 22. This surge was propelled by a significant 0.5% interest rate hike from the Bank of England (BoE), attracting bullish investors eager to capitalise on the UK’s highest interest rates since the 2008 financial crisis.
However, in August there’s expectation of another rate hike, the pound faced a sell-off towards July’s end. Concerns about the potential impact on everyday individuals and persistent high inflation readings made it favorable for those offloading foreign currency. As we move into the latter half of the year, markets are keenly awaiting the Bank’s next press conference for further guidance.
EUR: Shaky grounds for the strong Euro
The Euro was one of the best-performing currencies in July due to higher bond yields in the first half of the month. Recession risks continue to intensify as the latest S&P Manufacturing & Services PMI data showed new lows in June. The decline was broad-based with Europe’s two biggest economies – Germany and France.
Despite the economic weakness, the European Central Bank (ECB) raised interest rates by 25 basis points for the ninth consecutive time in July. ECB President Christine Lagarde ditched her usual practice of guiding markets creating uncertainty which sent the Euro tumbling with a dovish flourish near the end.
In July, inflation fell from 5.5% YoY in June to 5.3% in July however the core rate remained at 5.5%. Inflation in Germany, France & Spain also fell significantly from previous readings. It is worth recalling that the ECB had forecasted that inflation would stay above its 2% target through the end of 2025.
AUD: Fluctuations amongst China’s economic concerns
In July, the AUD experienced significant fluctuations, rising from 0.6650 to 0.6893 against the USD by mid-month. However, it faced a decline to 0.6760 due to concerns about China’s economic slowdown (Australia’s largest trade partner) and global equity markets. In response, the Reserve Bank of Australia (RBA) maintained its cash rate at 4.10%.
Additionally, the Australian economy reported an addition of 32,600 jobs in June, surpassing the projected 15,000, with the unemployment rate dropping to 3.5%. The inflation rate for Q2 2023 dropped to 0.8%, giving a year-on-year rate of 6.0%. The downbeat inflation figures might prompt the RBA to delay further policy-tightening measures for the second time, but rate hikes are still anticipated later this year.
NZD: Initial highs countered by market shifts
The NZD’s performance in July mirrored the AUD as it reached a 5-month high against the USD at 0.6411 but later receded to 0.6211 amid market volatility. The Reserve Bank of New Zealand (RBNZ) decided to keep its cash rate unchanged at 5.50%.
The inflation rate for Q2 2023 was recorded at 1.1%, compared to predictions of 6.7% and 1.2%. The downside potential for the NZD appears limited, as the RBNZ is projected to adopt a more hawkish stance in the upcoming months.
JPY: BoJ's shift on yield targets stirs market reactions
In July, the Bank of Japan (BoJ) adjusted its Yield Curve Control (YCC) policy for greater flexibility and long-term sustainability. The 10-year Japanese Government Bond (JGB) yield target remains around 0%, but it’s no longer strictly limited to 0.5%. Instead, 0.5% is now a reference, allowing yields to move more freely.
Every business day, the BoJ will buy 10-year bonds at a 1% rate, setting a new effective upper boundary. Governor Kazuo Ueda emphasized that this isn’t a move towards policy normalization. It remains unclear if the BoJ will cut bond purchases in the future. This change spurred a strong market response: bond yields hit their highest since 2014, exceeding the BOJ’s 0.5% reference. This also led to Yen value fluctuations, with investors unsure if it indicates broader shifts in Japan’s monetary approach.
USD: Rate increase meets cooling inflation head-on
In July, the Federal Reserve raised interest rates, following indications of one to two rate hikes for the second half of 2023. The USD wasn’t the month’s top performer due to rapid decreases in US inflation and uncertainties about the Federal Reserve’s plans for the rest of 2023.
Although there was no rate hike in June, the Fed had hinted at one to two more hikes for the latter half of 2023. The market anticipated this, and the rate increase happened in July. So why wasn’t the USD the standout currency for the month? We believe there are two main reasons:
- US inflation is dropping fast. The Fed thinks that even with the current interest rates, inflation will keep decreasing.
- The Fed’s recent announcements, along with the July rate decision, didn’t provide a clear picture for the upcoming five months. The market had hoped for hints of another rate hike in the third or fourth quarter, but that now seems uncertain.
CNH: Yuan strengthens with PBOC's recovery actions
The CNH had a standout month, appreciating over 1.5% against the USD. This positive momentum was driven by a series of announcements to boost investor confidence in Chinese assets from the Chinese PolitBureau and the PBoC. In a public statement, the PBoC declared: “The stability of the Chinese Yuan is key to China’s economic recovery” and “The PBoC still has plenty of gadgets in its policy toolbox to stabilize any unwanted exchange rate fluctuations.” In line with these announcements, the PBoC took decisive action, easing the limits on foreign funding for Chinese companies. This move resulted in an immediate uplift for the Yuan, facilitating a greater influx of USD into China. The market interprets these combined statements and actions as unwavering support for the Yuan. Presently, the Yuan is stable in the 7.1 to 7.2 range against the USD, a bracket some analysts view as the PBoC’s comfort zone.
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