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FX Insights Summary - 01 August 2018

Core Content

This document provides an analysis of the foreign exchange market on 01 August 2018, covering key economic data, central bank actions, and currency pair movements. It highlights the overall market sentiment, monetary policy expectations, and technical levels for major currency pairs.

Main Views

US Equities and Dollar

• US equities ended the session with modest gains despite a busy market.
• The US dollar remained firm, especially against the yen.
• US Treasuries were not significantly impacted by the core PCE deflator miss, with the 3-month annualized inflation rate at 1.8% and the 6-month rate at 2.2%.
• Personal spending rose 0.4% m/m, and real personal disposable income increased by 0.3% m/m.
• The employment cost index rose 0.6% q/q, with annual growth reaching a near 10-year high of 2.8%.
• The FOMC is expected to maintain its policy of hiking once every quarter, with a 93% chance of a September hike and a low 18.6% chance for an August hike.

Euro Area and EUR/USD

• The Euro area inflation rate edged up to 2.1% y/y, with core inflation at 1.1% y/y.
• Italy and France saw unexpected inflation rises, while Euro area GDP growth disappointed at 0.3% q/q.
• EUR/USD reached a high of 1.1745 before a sharp pull-back, with the immediate bias tilted to the downside.
• The expected consolidation range for EUR/USD is 1.1655/1.1720, with a strong support at 1.1620.
• EUR is expected to trade sideways within a broader range of 1.1620/1.1790.

UK and GBP/USD

• The UK manufacturing PMI was slightly lower than expected, with a slight dip in GBP/USD.
• GBP/USD traded within a range of 1.3089/1.3173, with a neutral outlook and expected sideways movement.
• The next support level is at 1.3060, and the next resistance is at 1.3180.

Japanese Yen and BOJ Policy

• The Bank of Japan introduced forward guidance and allowed more flexibility in JGB yields.
• The BoJ emphasized that it does not believe in a limit to monetary easing and may ease further if needed.
• The JPY is expected to weaken against the USD and EUR due to policy divergence.
• The 10-year JGB yield dropped to 0.053% after the BoJ's decision.

Commodity Currencies

• USD continues to drive commodity currencies, with CAD recovering due to strong GDP data.
• AUD edged ahead of NZD after weak NZ data, with the expected consolidation range of 0.7380/0.7430.
• NZD is expected to trade in a lower range of 0.6780/0.6830, with a minor support at 1.5895 and resistance at 1.5955.

Asian Currencies and Market Expectations

• Asian currencies traded generally higher against the USD, with PHP, KRW, and THB rising.
• The SGD NEER is expected to trade between 1.0% and 1.5% above the midpoint, implying a USD/SGD range of 1.3645 - 1.3578.
• The Reserve Bank of India is expected to raise rates by 25bps, with the reverse repo rate at 6.25% and the repurchase rate at 6.50%.

Key Information

US Data Highlights

• Core PCE deflator: +0.1% m/m, 1.9% y/y (third consecutive month)
• Personal spending: +0.4% m/m, +5.1% y/y
• Real personal disposable income: +0.3% m/m, +3.1% y/y
• Employment cost index: +0.6% q/q, 2.8% y/y (10-year high)

Euro Area Data Highlights

• HICP inflation: 2.1% y/y
• Core HICP inflation: 1.1% y/y
• Euro area GDP growth: 0.3% q/q, 2.5% y/y
• Italy GDP: 0.2% q/q, 1.1% y/y
• Spain GDP: 0.6% q/q, 2.7% y/y

Central Bank Actions

• FOMC: Expected to maintain a neutral stance with a 93% chance of a September rate hike.
• BOJ: Introduced forward guidance, allowing JGB yields to move more freely, and emphasized the need for further easing if necessary.
• RBI: Expected to raise rates by 25bps due to inflation above 4%, oil prices, and a depreciating INR.

Currency Pair Expectations

• USD/SGD: Expected to trade within a range of 1.3600/1.3650, with a neutral outlook.
• EUR/USD: Likely to trade sideways within 1.1620/1.1790.
• GBP/USD: Expected to trade within 1.7770/1.8000, with a neutral stance.
• AUD/USD: Consolidation expected within 0.7310/0.7485.
• NZD/USD: Expected to trade within 0.6740/0.6880.
• USD/JPY: Expected to consolidate within 111.30/112.15, with a neutral outlook.
• EUR/SGD: Likely to trade sideways within 1.5780/1.6030.
• GBP/SGD: Expected to trade within 1.0050/1.0130.
• AUD/SGD: Consolidation range of 0.9975/1.0155.
• JPY/SGD: Expected to trade sideways within 1.2100/1.2350.

Summary of Market Outlook

• The US dollar remains firm, with limited upside and potential for consolidation.
• EUR/USD and GBP/USD are expected to trade sideways, with no clear directional movement.
• JPY is likely to weaken further against the USD and EUR due to divergent monetary policies.
• Commodity currencies like CAD, AUD, and NZD are influenced by economic data and central bank actions.
• Asian data releases, including inflation and PMI, are expected to influence market sentiment.
• The FOMC's decision and the RBI's potential rate hike are key upcoming events.