FX Markets Monthly Outlook – July 2018

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The month of June stood out with two major central banks taking monetary policy decisions. The U.S. Federal Reserve hiked interest rates by 25 basis points while the European Central Bank announced a modest taper to 15 billion euro starting from September and eventually ending its QE program by December 2018.

The U.S. dollar continued to maintain its strong gains from the previous month. The gains came on the back of improving economic outlook and the hawkish monetary policy guidance.

June 2018 – FX Market Performance
June 2018 – FX Market Performance

In the currency markets, the U.S. dollar was seen posting strong gains for another month. The biggest drop against the U.S. dollar came with gold prices falling 3.51% on the month while the Norwegian krone managed to gain 0.47% against the U.S. dollar.

The month ahead: July 2018

The month of July is expected to remain broadly quiet with most of the major central banks already having hiked rates or setting the expectation on future monetary policy decision. Amid this backdrop, the European Central bank is expected to remain on the sidelines.

The Federal Reserve Bank will not be holding any monetary policy meeting this week having hiked interest rates just the month before. The Bank of Japan’s monetary policy meeting could also be drawn to the sidelines but given the recent weak pace of inflation, there is always a big room for surprise.

The month of July will mark the start of the third quarter. Here’s a quick preview of the main events to look forward to in the month of July.

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Bank of Canada – To hike rates or not

The Bank of Canada will be meeting in the month of July for its monetary policy decision. While interest rates have remained steady over the past few months, that could change as the markets divided on whether the BoC will hike rates or not.

At the recently held monetary policy meeting in May, the Bank of Canada policy makers signaled that rates would start to rise soon. While this initially sent the prospects of a July rate hike from the BoC soaring, investors were disappointed by the recent economic data.

Retail sales slumped while inflation remained steady. Consumer prices, although higher than the BoC’s 2.0% inflation rate was seen to have increased at a subdued pace. Combined, the disappointing patch of data saw investors quickly scaling back their bets for a July rate hike.

Still, the markets assign a 50% probability for a rate hike in July. This would depend on the upcoming jobs data. Canada’s economy has been steadily shedding jobs as well and another disappointment on the labor market could potentially cement expectations of a no rate hike from the BoC in July.

Further clouding the outlook is the fact that the trade uncertainty brought forth by the U.S. administration is also expected to impact the policy makers decision making. With the trade uncertainty looming which is expected to hit the Canadian exporters, officials are likely to bid for more time before proceeding with more rate hikes.

All said and done, the BoC’s monetary policy decision in July will be a close one to call.

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Markets turn to second quarter data

The month of July will mark the release of the preliminary GDP reports across various G7 economies which also include the UK and the United States. With the first quarter GDP report showing that most of the economies advanced at a somewhat moderate pace, expectations are high heading into the month ahead.

Around the final week of July, the second quarter GDP reports will be coming out. With the U.S. economy registering a 2.3% increase on the quarter and the UK’s economy posting a 0.1% increase, investors will be closely watching for any rebound in the respective economies.

The Eurozone’s GDP figures will also be coming out this month and it is left to be seen if the respective economies, especially that of the Eurozone and the UK have managed to rebound from the soft patch of gains logged in the first quarter of the year.

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