By Stuart Talman, XE currency strategist
The Swiss National bank delivered a surprise rate cut while a dovish hold from the Bank of England, suggested that an August cut may be brewing. Meanwhile, French political turmoil drove the yield differential between French and German 10-year bonds to their widest level (80 bps) in a dozen years.
It was a week that highlighted the rate gap between the Fed and other major central banks will protract given Jerome Powell and his FOMC colleagues are in no rush to lower the target rate.
The dollar index (DXY), a weighted measure of the dollar against a basket of six currencies, with the euro the heaviest weighted at close to 58%, climbed for a third consecutive week. Having found support at the confluence of the widely observed 100- and 200-day moving averages, earlier in the month, strong DXY price action and technicals portend a re-test critical resistance near 106.50.
A topside breakout through the April/May 106.50 double top would be a notable bullish development for the dollar.
The obvious catalyst for further upside as 1H concludes?
A further deterioration of France's political stability.
The first round of legislative elections is held this coming weekend. Should Marine Le Pen's National Rally party put in a strong showing at the expense of President Macron's Renaissance party, peripheral spreads likely further widen, inducing risk off flows for eurozone assets.
In this scenario the euro would extend lower against the dollar, EUR/USD potentially testing major support at 1.0600. The pair has not traded below here since early November.
Sub-1.0600 EUR/USD would propel DXY through 106.50.
Despite the dollar's assertiveness in recent weeks, the New Zealand dollar remains rangebound, although last week's -0.37% week-on-week decline has pushed NZD/USD towards the lower bound of the current 5-week range.
Having rejected levels in the low 0.62's in the prior two weeks, the Kiwi spent all of last week trading in the mid to low 0.61's, with a very brief dip below 61 US cents - unsustained following the weak US retail sales report (TUE. evening).
Logging a weekly trading range of circa 50 pips, it was the tightest, year-to-date.
The Kiwi looked likely to end the week near 0.6150, trading in the 0.6130's early in US trade, however sellers emerged following the release of S&P Global's PMIs - both the manufacturing and services comfortably beating their respective consensus.
The Kiwi ultimately ended the week a few pips below 0.6120.
Printing at 55.1 (vs 53.7, expected), activity in the service sector expanded at its fastest pace since April 2022, underpinned by new work inflows rising the most in over 12 months and employment levels climbing the most in 5 months. The manufacturing PMI stepped up from 51.3 to 51.7 (vs 51.0, expected), a three month high and the fifth consecutive month of expansion.
In contrast the eurozone PMIs were significantly weaker than expected, confirming the impressive run of PMI beats has ended as eurozone activity levels slow. Manufacturing (43.4 vs 46.4, expected) fell to a 6-month low whilst services (52.6 vs 53.5, expected) was at its lowest rate of expansion in 3 months.
Whilst it is one month of data and the eurozone economy is performing notably better than in 2023, conditions may continue to soften in the months ahead.
Having ascended to within a pip or so of 0.5750 a couple of weeks back, NZD/EUR has consolidated gains below the 13 June high, yet to break through a critical 0.5730/50 resistance zone. Should eurozone deleveraging continue this week, the pair will likely advance beyond 0.5750 to mark fresh 12-month highs.
Looking to the week ahead, it’s a relatively condensed economic calendar with just a handful of potential market moving events. The headliner is core PCE, the Fed's preferred inflation gauge. Following the soft CPI and PPI reads, PCE is projected to print at 0.1% MoM, pushing the annualised rate down from 2.8% to 2.6%.
A downside miss would raise expectations for a cut at the September FOMC. Rates markets currently assign a circa 70% implied probability the target rate is lowered to 5.00% - 5.25% on 18 September.
Other data points to note include the monthly CPI index, across the Tasman and CPI for Tokyo.
Following on from the RBA's hawkish hold, another CPI beat will add further weight to the case for additional tightening despite some underlying weakness in Australia's economy.
Both the RBA and RBNZ are in unenviable positions: activity is notably cooling, yet domestic inflation remains uncomfortably high.
The Bank of Japan (and the Ministry of Finance) also faces its unique challenges - rallying 10 of the past 11 days has lifted USD/JPY back towards 160.00, a level that prompted a second round of MoF intervention on 29 April.
The Kiwi continues to log fresh 17-year highs against the yen, climbing just shy of 97.80, last week.
The yen will continue to underperform until the Fed commences cutting.
Tokyo CPI, a leading indicator for the national reading printed at 2.2% (core, ex food and energy) last month. The BoJ and MoF will be hoping for an upside beat to alleviate JPY selling pressure.
French politics and peripheral bond yield spreads will also be an important influence through the week.
Price action from the past fortnight leans mildly negative given the rejection of 62 US cents and last week's close in the low 0.61's. Given the light calendar and edginess ahead of next weekend's French elections (round 1), we suspect bearish risk sentiment to prevail, supporting the dollar.
The Kiwi to explore levels in the mid to high 0.60's.
Stuart Talman is Director of Sales at XE. You can contact him here.
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