FX: Earnings Season To Test Risk-On Mood

US banks and tech companies report earnings this week, which could have an impact on the FX markets.

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USD: Earnings in focus, with an eye on Williams

Mixed Chinese data failed to set a clear tone for global market sentiment overnight. While GDP growth decelerated to multi-decade lows, retail sales, industrial production, and fixed asset investment managed to beat estimates in June. Overall, it seems that more time is needed to fully assess the impact of trade wars on the Chinese economy and for now, markets can preserve the risk-on mood. This mood will inevitably be tested this week as the US corporate earnings season kicks in. Particular attention will be on major US banks today and tomorrow - along with some tech giants - with any surprise likely to reverberate in the FX market as well. Today’s calendar in the US includes the New York manufacturing survey, which should recover from the sharp drop in June. Some focus will also be on a speech by NY Fed President John Williams. In his latest remarks, he showed a mostly balanced stance, particularly downplaying concerns of a forthcoming recession. We see limited market-moving potential from his comments and expect the dollar to stay broadly range-bound today.

EUR: ECB-related uncertainty lingers

EUR investors may take a wait-and-see attitude today ahead of the ZEW survey tomorrow and, most importantly, the inflation report on Wednesday. Implied volatility on EUR/USD remains quite sluggish (1M vols below 5%) ahead of the European Central Bank meeting, signaling some reluctance in the market to see a major shift in policy stance just yet. EUR/USD may be trapped in a narrow range today, with the 1.1255 100-day moving average likely to be solid support. As highlighted in the latest FX Talking, a dovish ECB may continue to keep EUR gains broadly capped ahead.

GBP: Holding gains

This week, the tone for sterling will likely be set by tomorrow’s jobs report, which may partly keep attention away from Brexit. Today, a quiet calendar data-wise should allow GBP/USD to consolidate Friday’s gains and EUR/GBP to keep its distance from the 0.90 level.

NZD: Inflation unlikely to revive NZ rates

The release of the 2Q inflation at 2345 GMT will be pivotal in directing the market uncertainty when it comes to the monetary policy outlook. The Reserve Bank of New Zealand cut rates in May and is broadly expected to cut again by the end of the year (22 basis points is currently in the price). Market expectations for today’s release are for an advance in the year-on-year headline CPI from 1.5% to 1.7%. Unless the print shows a more marked increase towards the 2.0% inflation target mid-point, we suspect that New Zealand rates may remain depressed. This should assist a gradual decline in NZD/USD, which may revert to the below-0.670 area today.