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FX Markets Monthly Outlook – July 2017

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The month of June was remarkably quiet with the exception of the UK’s snap elections. The so-called strategy backfired against the Theresa May’s Conservative party. Despite getting a majority, the political party was still short of getting a majority in the parliament. Political deal making continues. Alongside, the EU – UK Brexit negotiations have also started although no major inroads were made so far.

Elsewhere, the US Federal Reserve hiked the short-term interest rates by 25 basis points as expected. The rate hike came amid doubts on the future prospects for monetary policy tightening. The Fed also signaled its intentions to unwind the massive $4 trillion balance sheet that it has amassed during its QE operations.

Further details are expected, while at the same time the markets are still doubtful on how long the Fed’s tightening will continue given the weakness in the US economy.

Oil prices continued to slump despite the May’s OPEC decision to keep production levels from last November. The fact that the US shale oil industry continues to make up for the production cuts has given rise to concerns that the OPEC’s production cut could be ineffective.

USD Relative Performance (As of 30/06, 0600 GMT)
USD Relative Performance (As of 30/06, 0600 GMT)

The month ahead: July 2017

The month of July is likely to be a slow month in the markets. No major central bank decisions are expected during this month. Trading is also likely to slow down with the markets heading into the summer months.

ECB Monetary Policy Meeting – No Changes Expected (July 20th)

The European Central Bank will be meeting on July 20th for its monetary policy meeting. The central bank is expected to keep monetary policy steady at the July meeting.

Still, the number of dissents is growing significantly with the German Bundesbank President Jens Weidmann recently telling reporters that the ECB should begin to tighten its policies. This was later reflected by the surprisingly hawkish comments from the ECB Chief Mario Draghi who said that the central bank could introduce another tapering to its QE including adjusting its monetary policy tools as well.

The month of July is likely to be quiet from the central bank officials. Weakness in inflation, due to be released later today will be aptly reflected by the ECB in its July meeting, but the ECB could prepare the markets for a potential QE tapering. Any major changes could possibly come in September with the months of August usually slow as far as policy decisions are concerned.

FOMC Meeting – Central Bank to hold steady (July 26th)

The US Federal Reserve will be holding its monetary policy meeting on July 26th. Officials will have enough data by then to assess the US economic situation, starting with today’s payrolls report for June.

Inflation is likely to remain a key sticky point for Fed officials. Continued decline in inflation could potentially put the Fed’s plan on hold and could possibly make central bank officials to take a dovish tone thereafter. The prospects of another rate hike, expected in September or December could also come under the scanner.

By the July meeting, Fed officials will have received data on the June’s labor market performance as well as consumer prices and retail sales data. This will provide enough information for the Fed officials to tweak their language for any possible future changes to the central bank’s outlook.

The UK heads into a quiet period

The month of July is likely to be quiet and less tumultuous for the United Kingdom. No central bank meeting is lined up this month, which means that traders will get a chance to focus on the economy.

Manufacturing, construction, and services PMI will kick off the month with the tentative schedule for the inflation report hearings. With falling oil prices, there could be a chance for the UK’s inflation to also ease in June.

A continued rise in inflation will no doubt put pressure on the remaining five MPC officials who have voted to keep interest rates steady.

BoE Governor Mark Carney suggested that the policymakers will debate on the timing of interest rates. This could possibly happen anytime from the September meeting onwards. Forward guidance will, of course, be key for the markets.

July will also see the monthly jobs report where the focus will be on the average earnings index, which has become a key point for policy makers. Later in July, the second quarter preliminary GDP figures will be released.

The question on everyone’s mind will, of course, be how good or bad the UK economy performed during the three months ending June.

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