FX Markets Monthly Outlook – August 2018

The month of July was seen to be relatively quiet. With most of the central banks announcing major decisions in June, the markets were seen trading off the broader themes.

The U.S. trade wars continue with threats from the U.S. administration against China. The U.S. dollar was also seen trading rather flat over the month with no notable gains coming along. The USD briefly slipped after comments from President Trump about how overvalued the U.S. dollar was.

Trump also commented that the Federal Reserve should not be hiking rates while labeling China, Germany, and a few other countries as currency manipulators.

For the month of July, the Canadian dollar managed to emerge as the top leading currency. The CAD gained 1.05% on the month. On the tail end, gold prices shed 2.21% followed by the Japanese yen.

The month ahead: August 2018

The currency markets are expected to slow down in the month ahead with the summer holidays. Volumes are expected to remain low and there are no major market moving events that are likely to occur during the month.

Here’s a brief outlook on some of the important events to look out for on the economic calendar for August.

Bank of England: To hike rates or not

The Bank of England will be the first central bank to kick off the month of August with its monetary policy meeting. As investors look to the monetary policy meeting, expectations are divided for a rate hike.

The BoE had previously signaled its intentions for a second rate hike in May 2018. However, the surprise decline in the economy which saw the UK’s quarterly GDP growth rate barely a percentage point above stay flat kept policymakers from hiking interest rates.

Subsequent revisions to the UK’s first quarter GDP, however, saw a modest revision to a 0.2% growth rate on the quarter. While the UK’s economy has been rising at a slow pace, forward-looking indicators suggest a pickup in business activity.

Recent inflation data also showed that price pressures remained flat during the month of June. Still, the UK’s annual inflation rate remains above the BoE’s 2.0% inflation target rate.

Wage pressures continued to remain weak as well, which make some question whether the central bank will follow through with an interest rate hike this week.

The markets are broadly divided. However, given that there has been an increase in the number of dissenting votes among the policymakers in the Bank of England, this week’s monetary policy meeting is going to be a close call.

Australia wage price index

The Australian Bureau of statistics will be releasing its quarterly wage price index data this month. The report comes amid a boost in employment in June. The Australian unemployment rate was seen holding steady at 5.4% in June.

There was, however, an increase in the participation rate. Still, the report showed that there was a significant amount of slack remaining in the economy. This is expected to dampen the wage growth outlook.

Inflation has also remained weak over the quarter.

On an annual basis, inflation was seen rising 2.1% on the year ending June 2018. This was a modest pick up from 1.9% increase from the previous quarter’s end.

The wage price index data could help to boost the inflation prospects. The March quarter’s wage price index missed estimates. Data showed that the hourly wage growth increased by 0.47%. This was the same pace of increase compared to the previous quarter.

Wages in the public sector increased by 0.5% during the same period.

The March quarter’s wage price index showed a 2.07% increase. According to the RBA, wage pressures are expected to rise 3.5% in order to put pressure on consumer prices. The data could potentially shape expectations for the RBA’s monetary policy for the period ahead.