G10 FX Week Ahead: As Hot As It Gets?

10 and 20 us dollar bill

We expect the dollar to remain gently offered next week, when May inflation numbers in the US may come in at 4.8% and further dampen the USD real rate. Central bankers will take centre stage in the rest of G10: the ECB will struggle to sound any more dovish amid rising tapering speculation, while the BoC should keep it quiet while preparing to taper again in July.

USD: As hot as it gets?

 

Spot

Week ahead bias Range next week 1 month target

DXY

90.1000

Mildly Bearish 89.5000 - 90.5000 89.0000

Friday’s slightly softer-than-expected US May employment numbers stand to set the tone for the weeks ahead. This provides the excuse for the Fed to say that substantial progress towards its goals has not been achieved and to defer the tapering debate a little longer. All will be revealed at the June 16th FOMC meeting. Before that, however, this week sees the May US CPI release. We expect headline and core to jump to 4.8% and 3.3% year-on-year respectively. This may well be the peak in YoY rates, however, as peak base and bottleneck effects might be seen in these figures. Last month FX and Rates markets looked through the jump in inflation and we suspect the same may be true this month. In effect the combination of higher US inflation and a Fed prepared to do little about it is a negative environment for the dollar.

Assuming dollar bears can pass through Super Thursday of US CPI and the ECB policy decision unscathed, the dollar could stay gently offered into the major event risk of the month which is the FOMC decision. The week ahead also sees a G7 summit in Cornwall, Chinese trade data and what could be another 50bp front-loaded hike from the Central Bank of Russia on Friday. On balance we are sticking with our call for the dollar to stay gently offered this summer.

EUR: Super Thursday

 

Spot

Week ahead bias Range next week 1 month target

EUR/USD

1.2170

Mildly Bullish 1.2100 - 1.2310 1.2300

The highlight for the EUR this week will be Thursday’s ECB meeting. Our team sees the main objective of the day being to avoid taper talk. Rates markets have backed away from the idea that the ECB will slow down PEPP purchases – potentially meaning there is little downside for the EUR from this meeting. Yes, the ECB will not want to do anything to encourage a stronger EUR, yet it seems hard for them to adopt any more of a dovish position than they have already.

The week also sees German ZEW investor expectations as well as German industrial production for April. In reality, the trade-weighted EUR has not moved much for the last ten months and it seems hard for policy makers to express too much concern over a stronger EUR right now. The continued opening up of the European economy – and another leg higher in European bond yields and demand for European equities – should keep EUR/USD supported this summer.

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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