July 2023 - Monthly Economic Outlook

Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.

It’s not over

Each year, the world’s leading policymakers meet in Sintra, a medium-sized town in Portugal known for the beauty of its castles and its proximity to breathtaking locations. This is the perfect place to reflect about the future of the world and monetary policy changes. Usually, this meeting is not a headline event, but this year was different. The message conveyed by central bankers was unambiguous: the post-Covid world is more complicated, correlations seen in the past no longer apply and inflation is not going away, with the result that the cost of money will have to be raised sharply. There is no getting away from it: rate hikes are not over yet. 

The pair of the month

EUR/CNH

High: 7.9483 Low: 7.5854 Change: +4.10%

As is starting to become customary, the Chinese yuan will need monitoring over the summer, a period of often significant fluctuations. During the past week, Chinese state-controlled banks intervened no fewer than three times in the onshore market (yuan traded in China) and offshore market (yuan traded outside China) to sell dollars in a bid to curb the yuan’s depreciation. This has not had any immediate effect on the EUR/CNH pair to date, as it remains on an upward trajectory. However, questions can legitimately be asked today about Beijing’s true commitment to having a weak exchange rate to stimulate its economy. The yuan may be the currency that surprises us this summer.

EUR/USD

High: 1.1085  Low: 1.0737 Change: +1.64%

The euro has bounced back. But the ball is in the US dollar’s court. We struggle to see what catalyst could drive the euro back towards its recent highs of around 1.125. Conversely, the backdrop is fairly supportive for the US dollar. The currency is aided by the fact that the market has underestimated the persistence of inflation (and hence the need to raise policy rates). It has also underestimated the resilience of the US economy, pushing back a little further the possibility of a recession. Added to this, the dollar has become highly attractive again in carry trade strategies (which seek to capitalise on interest-rate differentials between different economic regions). Conditions are ripe for an appreciation of the greenback.

EUR/GBP

High: 0.8677 Low: 0.8517 Change: -0.35%

Our long-term target of 0.8400 is unchanged. We are convinced that sterling will outperform the euro over the coming months because of the Bank of England’s need to raise interest rates significantly. In the UK, inflation is becoming largely structural, and we know from the past that only decisive action on interest rates can bring about a return to normal. This is a major support for sterling.

GBP/USD

High: 1.2852 Low: 1.2327 Change: +1.69%

The pair is currently hovering around the 1.26 range. Our short-term positioning is neutral. As long as the GBP/USD does not return to the range above 1.27, the market should continue to consolidate. In the longer term, the trend is still upwards, notably because the Bank of England will surely have no choice but to tighten its monetary policy more than planned, a clear support factor for sterling.

EUR/CHF

High: 0.9823  Low: 0.9688 Change: +0.47%

Make no mistake about it: the euro’s monthly rally has little chance of lasting. Institutional investors still have sell positions on the EUR/CHF, with a target of around 0.96. What’s more, the Swiss National Bank, which raised its policy rate by 25 basis points in June, has confirmed that it will have to do more in the months ahead to tackle inflation. It does not want to make the same mistake as its peers, some of which acted too late to curb inflation and now face partly structural price rises. All this is a decisive support factor for the Swiss franc.

EUR/CAD

High: 1.4614 Low: 1.4290  Change: -0.87%

The wind is turning. The market is starting to take buy positions on the Canadian dollar because of the Bank of Canada’s hawkish tone (in favour of prolonged monetary tightening) and the Canadian economy’s high exposure to solid demand from the US economy. However, the oil price is not yet a support factor for the Canadian currency, which continues to fluctuate within a far narrower range than forecast. It is still too soon to know if buy positions on the Canadian dollar are sustainable. But there is little doubt that the EUR/CAD has downside potential in the short term.

EUR/AUD

High: 1.6554 Low: 1.5877 Change: -0.43%

The big meeting this week is at the Reserve Bank of Australia (RBA). There is a high probability that it will decide to leave its policy rate unchanged at 4.1%. At its June meeting, the RBA decided to raise its policy rate following the unexpected inflation spike in April. Figures for May suggest that inflation is easing (down from 6.8% to 5.6% year-on-year). This should be a solid argument for a short pause. That said, the RBA has surely not finished with rate hikes. We are expecting at least one additional increase in September after the July inflation figure is published. This is expected to show a fresh rise after the explosion in electricity prices (+20% year-on-year). It is at that moment that the increase is set to become visible in inflation figures.

EUR/JPY

High: 158.01 Low: 148.59 Change: +4.71%

Ever higher. The euro continues to soar against the Japanese yen because of the Bank of Japan’s decision to maintain an ultra-accommodative monetary policy (in contrast with other central banks). However, the yen’s weakness is starting to concern the Japanese authorities. It is not impossible that this concern will be reflected in direct interventions in the currency market in the short term (as was the case in September 2022). Vigilance will therefore be necessary this summer.

EUR/HUF

High: 376.86 Low: 367.63 Change: +0.36%

We expect the monetary policy normalisation process to continue in Hungary. In June, the central bank lowered its policy rate by 100 basis points to 16%. It may reach 13% in September. As always, the depreciation of the HUF in the wake of rate cuts was seen as an opportunity for the market to buy the Hungarian currency. Despite the rate-cutting cycle underway, the HUF is still very attractive for carry trade strategies (which seek to capitalise on interest-rate differentials between different economic regions). During a large part of the summer, the pair should fluctuate within a range of 368-378.

USD/HUF

High: 348.29 Low: 335.56 Change: -0.85%

The currency market is hesitating about the direction the US dollar could take over the coming months. The analysts’ consensus forecast is that the dollar will enter a downward cycle this autumn (partly explaining the currency’s depreciation against the HUF in June). But this is far from certain, as market forecasts are based on the likelihood that the US economy will slow sharply, paving the way for rate cuts in the US. This is not the message conveyed at present by economic data. We will need to wait a while to gain more visibility on the trajectory of this pair.

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