USD: Holding onto gains… for now

Disappointment from weaker wage growth was fleeting, and the USD reversed the initial reaction to carry higher on Friday – a trend that has bled into the start of the week. Will we see follow-though for the USD through the rest of the week?

Fed Chair Janet Yellen has a two-day testimony before Congress beginning mid-week. Investors have many of the same questions that we expect lawmakers to have surrounding monetary policy. Yet those looking for guidance on balance sheet reduction and further rate hikes may not get the scraps they’re begging for. The Fed chair does not often deviate from the accounts of the Federal Open Market Committee, and may well stick to the script of their most recent meeting in June. There’s not been any material change in fundamental data, leaving little room to move the needle on policy prescriptions.

We instead expect retail sales and inflation on Friday to carry more weight for the USD outlook. Annually measured CPI inflation has declined since touching a five-year high in February, and core inflation has been contracting year-on-year since January. May’s core reading was the lowest print in two years, but the Fed has been looking past this weakness, seeing the decline as a result of “temporary factors.”

EUR: Whirring in the background

It’s a quieter week for European data, with just a few highlights on the calendar.

Monday, ECB President Mario Draghi will participate in the Eurogroup meeting to discuss the insolvency framework and the euro area fiscal stance.

Industrial production Wednesday is projected to show a pickup in the volume of production across factories and manufacturing in the euro area in Q2. Final inflation for Germany, France, and Spain are all due Thursday. The readings are expected to keep in line with the initial figures, although Germany and Spain’s June prints are projected to be revised somewhat higher.

Euro held steady against most currencies last week and the outlook continues to look fairly solid. The US Commodity Futures Trading Commission (CFTC)’s weekly report shows that traders continue to view the euro in a positive light. Long positions, which signal a bet for a stronger currency, increased for a third week in a row.

GBP: Three things to look for

The UK is due to push their EU membership repeal bill this week. Prime Minister May’s deputy said Monday they are confident in their ability to pass the bill through Parliament. The bill aims to affect a smooth transition as Britain decouples from the European Union.

We will hear from two Bank of England policymakers on Tuesday: Chief Economist Andy Haldane and Deputy Governor for Monetary Policy Ben Broadbent. Haldane’s speech is especially interesting to us given his recent lean towards raising interest rates this year.

Employment data Wednesday will include wage figures. We are keeping a close eye on this print as the recent rise in inflation has depressed real wages, hurting consumer purchasing power.

CAD: BoC to join the rate hike race

Canadian dollar is looking through weaker oil prices on Monday as market fixate on the Bank of Canada’s policy meeting on Wednesday. Investors are pricing in over a 90% probability of a hike in the July meeting and a total of two full hikes by end of the year. This would unwind two rate cuts delivered in 2015 to counteract plummeting oil prices.

Given the all-but guaranteed rate rise, we shift our focus on the language of the statement. Even a modestly cautious tone would likely disappoint investors, risking a weaker Canadian dollar.

Canadian dollar has been the strongest performer among major currencies since the beginning of May – up 6.25% against the dollar. Additionally, CAD has gained in seven of the past ten weeks.

AUD: From the corner of your eye

Australian data is fairly light in the week ahead, so focus may shift to developments abroad and overall risk-appetite.

NAB business confidence on Tuesday is expected to decline in June, whereas consumer confidence is slotted to recover in July. Westpac’s Consumer Sentiment Index has been on a decline since March, falling -1.8% in June from a month prior. Analysts are looking for more measured declines in July of around -0.7%.

Chinese trade data on Thursday will be minded as a peripheral driver for AUD.

JPY: Treading water

Machinery orders and the current account surplus both disappointed Monday morning, keeping a lid on the yen after the Bank of Japan’s surprise announcement to keep ultra-loose monetary policy in play.

The dollar is holding tight to a two-month high against the Japanese yen. Combined with firmer risk appetite, the yen could continue to trade lower this week.

Data out of Japan is very light this week, and we expect USD/JPY to trade on developments on the US side of things.