Dollar wobbled near one-year low: Euro climbs to 17-month peak

Reuters: The dollar wobbled near an over one-year low against its major peers on Tuesday, as investors awaited fresh catalysts to gauge if the greenback has further downside in the wake of last week’s cooler-than-expected U.S. inflation report.

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U.S. DOLLAR WOBBLED NEAR A NEW LOW

The U.S. dollar index , which measures the greenback against a basket of six currencies, fell 0.15% to 99.753 in Asia trade, languishing near Friday’s trough of 99.574, its lowest since April 2022. The index had clocked its worst week of 2023 last week, after data showed U.S. inflation subsided further with consumer prices registering their smallest annual increase in more than two years, taking pressure off the Federal Reserve to continue raising interest rates. “I think the dollar can stay under selling pressure,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “Markets are focused on the end of the FOMC tightening cycle.”

Against the greenback, the euro hit a fresh 17-month high of $1.1256, while sterling gained 0.16% to $1.30945, not far from last week’s top of $1.3144, also its highest since April 2022. Money markets have largely priced in a 25-basis-point rate hike from the Fed at its policy meeting later this month, though see rates coming down as early as December. Conversely, investors expect the European Central Bank and the Bank of England to have further to go in their rate-hike cycle. Elsewhere, the Japanese yen rose about 0.2% to 138.46 per dollar, as investors look to the Bank of Japan’s monetary policy meeting next week for clues on whether the central bank will begin phasing out its ultra-dovish policy stance. “More market participants have priced in chances of BOJ widening its yield curve control policy’s trading band by 25 bps in the next meeting,” said Ryota Abe, an economist at SMBC.

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In other currencies, the Australian dollar was last 0.21% higher at $0.6831 after minutes of the Reserve Bank of Australia’s July policy meeting released on Tuesday provided no major surprises on the rate outlook. “The RBA minutes did not contain much new information from Governor Lowe’s recent speech, where he seemed less definitive on the need for further rises and more attuned to potential growth risks,” said Tapas Strickland, head of market economics at National Australia Bank. “This tone was arguably reflected in the minutes, though there was a strong case presented for further tightening.”

The New Zealand dollar rose 0.27% to $0.63425, with both Antipodean currencies nursing losses from the previous session after China’s second-quarter gross domestic product data on Monday showed the economy growing at a frail pace as demand weakened at home and abroad. “Everyone is just waiting for the Chinese authorities to come out with concrete measures,” said Khoon Goh, head of Asia research at ANZ. “The rhetoric coming out from the government has been, in a sense, saying they want to support growth, but I think for the markets, they actually want to see the follow up, concrete action, to back up those words.”

China’s top economic planner pledged on Tuesday that it would roll out policies to “restore and expand” consumption without delay as consumers’ purchasing power remained weak. The onshore yuan eked out a small gain and last bought 7.1696 per dollar, after the People’s Bank of China set a firmer-than-expected daily mid-point.

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GLOBAL MARKETS

Reuters: Asian stocks fell on Tuesday as weak Chinese economic data released the previous day continued to weigh on sentiment, while investors were waiting to see if U.S. retail sales data would shine a light on the path for U.S. interest rates. MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.63% in the morning session. Investors are waiting for stronger signs of inflation cooling, with the readings on U.S. retail sales and U.S. industrial production to be released later on Tuesday. Economists reckon retail sales in June will show a 0.5% rise from May. “People think of the tug of war between growth and inflation still. This week we have a number of US economic data that will give a clear indication on whether further rate hikes are needed,” said Gary Ng, senior economist at Natixis Corporate and Investment Bank.

The U.S. Federal Reserve, European Central Bank and Bank of Japan are holding policy reviews next week. After the cancellation of trading on Monday due to a typhoon, Hong Kong stocks were catching up with the fall in Chinese stocks triggered by data showing the post-pandemic bounce in China’s economy was over, with quarter-on-quarter growth of 0.8% in the second quarter. Ng said Asian investors were struggling to find some positivity after the “very poor Chinese economic data”. The benchmark Hang Seng index dropped 1.74%% while the technology sector fell 1.89%. China A shares were down 0.4% during early session on Tuesday. Japan’s Nikkei, however, eked out a gain of 0.18%.

A possible divergence of U.S. Federal Reserve and European Central Bank on rate hikes has recently caused dollar to weaken. Money markets have largely priced in a 25-basis-point rate hike from the Fed at its policy meeting later this month, though there are expectations that rates will come down as early as December. Conversely, investors expect the European Central Bank and the Bank of England to extend their rate-hike cycle. The Bank of Japan holds its monetary policy meeting next week, with investors on the lookout for whether it will start phasing out its ultra-dovish policy stance.

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The U.S. dollar index dipped slightly to 99.85 in early Asia trade, having struck its lowest since April 2022 on Friday. The euro firmed 0.11% to $1.1246. Benchmark 10-year notes were flat, with a yield of 3.7989%. U.S. crude rose 0.22% to $74.31 per barrel and Brent was at $78.64, up 0.18%. Spot gold added 0.1% to $1,957.50 an ounce. U.S. gold futures were up by 0.26% at $1,960.19 an ounce.

SOUTH AFRICAN RAND

Reuters: The South African rand was slightly stronger on Monday after Fitch affirmed South Africa’s “BB-” credit rating with a “stable” outlook, despite an ongoing power crisis. This week’s major focus will be local inflation data out on Wednesday and an interest rate announcement on Thursday. At 1541 GMT, the rand traded at 18.0650 against the dollar, about 0.1% stronger than its previous close. The rand gained around 4% against the U.S. currency last week, bolstered by bets that the U.S. Federal Reserve will increase interest rates only once more because of cooling inflation in the world’s largest economy. “Locally, everyone is looking ahead to Thursday’s MPC,” said Rand Merchant Bank in a note.

A majority of economists polled by Reuters predict the South African Reserve Bank will leave its main interest rate ZAREPO=ECI unchanged at 8.25%, although it is still a close call with a significant minority expecting another 25-basis-point hike. Wednesday’s June Consumer Price Index data, could influence the SARB’s thinking. Rand Merchant Bank predicts a deceleration in headline inflation to 5.4% year on year in June from 6.3% in May, which would take inflation back within the SARB’s 3%-6% target band for the first time since April 2022. “A figure on our forecast would help the view of no hike from the SARB and affirm our forecast that inflation will average 5.9% this year, i.e., within the target band,” RMB analysts said.

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Shares on the Johannesburg Stock Exchange ended the day down, with the blue-chip Top-40 index closing 0.68% lower and the broader all-share index 0.64% lower. South Africa’s benchmark 2030 government bond was marginally stronger, with the yield down 3 basis points at 10.445%.

BRITISH POUND

FXStreet: The GBP/USD pair attracts some dip-buying during the Asian session on Tuesday and for now, seems to have stalled a two-day-old corrective slide from its highest level since April 2022, around the 1.3140 region touched last week. Spot prices, however, struggle to capitalize on the move and retreat a few pips from the vicinity of the 1.3100 mark, or a fresh daily peak touched in the last hour. Bets that the Federal Reserve will soften its hawkish tone and keep interest rates steady after the widely anticipated 25 bps lift-off in July continues to act as a headwind for the US Dollar. Apart from this, a positive risk tone is seen as another factor undermining the safe-haven Greenback, which, in turn, assists the GBP/USD pair to regain positive traction. That said, speculations that the US central bank could stick to its forecast for a 50 bps rate hike this year hold back traders from placing fresh bearish bets around the USD and keep a lid on any meaningful upside for the major.

The downside for the GBP/USD pair, however, remains cushioned in the wake of firming expectations that the Bank of England will be far more aggressive in tightening its monetary policy to curb stubbornly high inflation. Hence, the market focus will remain glued to the latest consumer inflation figures from the UK, due for release on Wednesday. The crucial CPI report should influence the British Pound and provide some meaningful impetus to the major. In the meantime, the US monthly Retail Sales data will be looked upon for short-term trading opportunities on Tuesday. From a technical perspective, last week’s sustained breakout through a resistance marked by the top end of a nearly one-month-old ascending channel was seen as a fresh trigger for bullish traders. That said, the Relative Strength Index on the daily chart is flashing slightly overbought conditions and capping gains for the GBP/USD pair. Nevertheless, the aforementioned fundamental backdrop seems tilted in favour of bullish traders and suggests that the path of least resistance for spot prices is to the upside. This, in turn, suggests that any meaningful pullback might still be seen as a buying opportunity.

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The overnight low, around the 1.3050 area, now seems to act as immediate support. This is followed by the 1.3000 psychological mark, which if broken decisively could prompt some technical selling. The GBP/USD pair might then accelerate the slide towards the next relevant support near the 1.2930 horizontal zone, though any subsequent fall is more likely to get bought into near the 1.2900 round figure. This should help limit any further losses for spot prices near the 1.2850 horizontal resistance breakpoint. The latter should act as a strong base for the major and a key pivotal point for short-term traders.

On the flip side, bulls might now wait for a sustained strength back above the 1.3100 mark before positioning for any meaningful intraday appreciating move. The momentum might then lift the GBP/USD pair back towards the 1.3140 region, or the multi-month peak. Some follow-through buying should pave the way for a move towards reclaiming the 1.3200 mark. The upward trajectory could get extended towards the 1.3250-1.3260 intermediate hurdle, above which spot prices seem poised to climb further towards the 1.3300 mark.

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