August 2021 - Monthly Economic Outlook

Post Picture
Post Picture

Publication date

Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.
High: 1.1908 Low: 1.1757 Change: +0.25%

The monthly EUR/USD performance was +0.25%. This is a small increase which conceals considerable end-of-month volatility. Within seven days, the EUR/USD cross went from a monthly low of 1.1757 to a monthly high of 1.1894. Forex market participants moved back into buying positions after the Fed signalled that it will stick with its ultra-accommodating monetary policy for a little longer in an effort to bring the job situation to full health. It is therefore unclear whether the Jackson Hole symposium in late August, featuring a speech from the Fed chairman, will yield further details on the path of US monetary policy. In the medium term, we expect the EUR/USD to remain in a range between 1.16-1.20. As for the ECB, a closer look at its asset purchase programme (also known as QE) is expected to take place in the autumn according to recent comments by the Governor of the Banque de France. In concrete terms, this means that the next ECB meeting, scheduled for 9 September, should have little at stake. It will be the October meeting that will be important.

High: 0.8674 Low: 0.8509 Change: -0.74%

The EUR/GBP pair is still anchored in its three-month range between 0.85 and 0.87. For several weeks now, the pair has been trading at the lower end of the range and has recently attempted to break the 0.85 support level. To no avail. Over the medium term, the trend remains bearish in our opinion. A few weeks ago, Forex market participants were wondering about the consequences of the new wave of the pandemic in the UK. From an economic point of view, this new episode of the COVID-19 should not hinder the rebound of the activity, judging by the high frequency indicators which are abundantly used by economists since March 2020 in order to estimate accurately the possible evolution of growth. Note that the Bank of England is due to meet on 5 August. This is likely to be a fairly unremarkable meeting with the status quo of monetary policy (both in terms of market buybacks and policy rates).

High: 132.44 Low: 128.88 Change: -1.58%

In July, demand for the JPY rose sharply, especially in the first part of the month, driving the EUR/JPY to a monthly low of 128.88. Forex market participants were drawn to the JPY and other defensive assets amid concerns about the variant delta and the potential negative economic fallout that could result from its spread. It is worth noting that the pair bounced back slightly towards the end of the month around the 130 area. Technical indicators, which are used by currency market specialists, point to a continuation of the pair’s decline in the short to medium term, towards 128.

High: 1.0983 Low: 1.0739 Change: -2.02%

The EUR/CHF lost significant ground in July (-2.02% month-on-month) mainly due to concerns about the rapid spread of the variant delta, which is already present in over 98 countries. Even though it seems unlikely that we will see another widespread lockdown like the ones experienced in previous waves (with a few exceptions such as Australia), Forex market participants preferred to opt for safe havens, which automatically favoured the CHF. In particular, many institutional investors (such as large banks and investment funds) have been seen buying the CHF in recent weeks.

High: 1.5101 Low: 1.4611 Change: +0.65%

The Bank of Canada’s July decision was fully in line with expectations. The main policy rate was maintained at 0.25% while the asset purchase programme was again adjusted downwards to CAD 2 billion per week. This reflects the economic improvement in the country, against the backdrop of a health situation that is under control, and the fact that financing conditions remain very good. The central bank’s press release expressed optimism about the short and medium-term prospects for the Canadian economy. It is therefore easy to conclude that the asset purchase programme will be further reduced by the end of the year. The impact on the foreign exchange market was small as the decision was fully in line with the consensus.

High: 1.6190 Low: 1.5751 Change: +1.54%

A new RBA meeting is scheduled for 3 August. Due to the recent lockdowns announced in several major Australian cities, economic activity in the third quarter will be strongly impacted. In these conditions, it is highly likely that the RBA will reverse its decision to reduce the weekly pace of asset purchases. We expect asset purchases to return to AUD 5 billion per week, which would provide timely support to economic activity. There will still be time to discuss a gradual withdrawal of support once the pandemic is under control and the economy returns to near normal. Note that the FX market has already fully priced in the possibility of the Australian central bank backing off on asset purchases.

High: 7.7226 Low: 7.6137 Change: +0.12%

There was a lot of volatility in the EUR/CNH pair in July, but it ended the month close to its starting level. The recent turmoil in the Chinese market (directly related to the government’s takeover of several sectors of activity in the fields of new technologies and education) could induce a risk of strong depreciation of the CNH if it persists. This scenario is by no means certain, but it is increasingly being put forward by analysts in the trading rooms. It is therefore important to be aware of this and to adopt the most appropriate currency hedging strategy to prepare for the worst.

High: 362.48 Low: 350.55 Change: +1.46%

The Hungarian central bank raised rates more sharply than expected in July – by 30 basis points to 1.20% against a consensus of 1.10%. This is certainly just the beginning. Given that all indications are that inflation will remain above the upper limit of the central bank’s target until at least the end of the year, one or more further rate hikes are likely in the coming months. In particular, the central bank’s September meeting will be the occasion for an update of the economic forecasts. For the time being, the process of tightening monetary policy does not seem to be a supportive factor for the HUF. This was to be expected. The worsening of risk appetite in July, as a direct result of the pandemic fears, favoured the EUR and USD more than the HUF.

High: 307.77 Low: 294.94 Change: +1.22%

As we mentioned in relation to the EUR/HUF, the USD/HUF performed so strongly in July (+1.22%) mainly due to the reduced risk appetite in the FX market as a result of the return of pandemic fears and the different variants. We strongly doubt that in the short to medium term we will see a sustained reversal of the trend seen in July. Even if risk appetite were to strengthen, it is likely that other factors would continue to push the US dollar higher (e.g. the strong US fiscal stimulus which is a definite driver of the USD).