Weekly Forecast – July 17
The dollar is likely to remain on the defensive in the short term following last week’s disappointing data releases, although further selling should be limited given that the shift in expectations that has already been seen.
Further Sterling volatility is inevitable in the week ahead with little scope for significant further gains.
The US data releases are not likely to have a major impact, although the business surveys and data on housing starts will provide useful evidence on underlying trends within the economy.
There should be no comments from Federal Reserve officials during the week as they will be observing the blackout period ahead of the Fed meeting the following week.
What does this mean?
Most central banks operate a policy whereby officials do not comment on the economy or monetary policy in the week ahead of an interest rate decision. This policy is aimed at reducing the risk of currency volatility, to avoid being as volatile as in 2016.
The latest UK consumer inflation data will be very important during the week.
Why is it so important?
The headline CPI inflation rate has already increased to 2.9% compared with the 2.0% target level within the 1.0-3.0% range. Any move to above 3.0% would increase pressure on the Bank of England to increase interest rates, as opposed to Bank of England Governor Carney’s comments last month. This pressure would be higher especially as there would be fears that higher inflation levels would start to become entrenched in the economy and make it much more difficult to control inflation over the medium term.
Higher inflation would tend to put upward pressure on Sterling while a weak data release would ease pressure for immediate action.
The latest retail sales data will also be released on Thursday.
ECB monetary policy will again be a key focus during the week with the latest ECB monetary policy decision and press conference from bank President Draghi.
Although a change in interest rates is very unlikely at this meeting, any clues surrounding future policy will be a key focus.
There is also likely to be a small change to the language in the statement with a shift in forward guidance to drop the potential for policy to be eased further.
The Bank of Japan will announce its latest monetary policy decision with no change expected and the bank will tend to protest against any expectations of tightening.
Canadian inflation data will be released on Friday, although the potential impact will be lessened to some extent by the Bank of Canada decision to raise interest rates.
The latest New Zealand inflation data will also be released during the week and could have an important impact on the next Reserve Bank of New Zealand interest rate decision.
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