Foreign Exchange Prediction Highlights
USD FX forecast: The dollar overall is likely to lose ground given a dovish Fed and lack of confidence in fundamentals, although there will be interim corrections.
EUR FX forecast: The Euro can correct weaker after strong gains, but underlying confidence in the currency is likely to remain stronger amid expectations of long-term capital inflows.
GBP FX forecast: Sterling sentiment will remain fragile, especially given trade fears, but dollar vulnerability will provide an important cushion.
JPY FX forecast: The Japanese yen should continue to be protected by a lack of confidence in the dollar, especially if gold posts record highs.
Low liquidity maintains volatility risk
There will again be low liquidity in global markets this week. Overall trading volumes will remain low due to the summer holiday period in North America and Europe.
This lack of liquidity will increase the risk of volatile moves in currency markets.
Markets continue to monitor US coronavirus developments
US coronavirus developments will continue to have an important impact on sentiment across all asset classes. The US registered fresh record highs in new cases during the latest week with a figure of 77,000 on Friday while the overall death toll has moved to above 140,000.
If cases continue to increase in states such as California, Florida and Texas, there will be additional pressure to enact fresh lockdown measures.
At the Federal level, however, political pressure to continue with easing measures will continue with a particular focus on re-opening schools after the summer holiday period.
In this context, there will be fresh concerns over the economic outlook with the recovery liable to stall after the June retail sales increase of 7.5%.
There will be very strong expectations that the major central banks will maintain extremely expansionary monetary policies which should provide some protection to overall risk appetite.
US Dollar foreign exchange prediction
The Federal Reserve will announce its latest policy decision Wednesday with no change in interest rates expected. Forward guidance from the bank will be watched closely in the statement. The main focus will be on whether the central bank decides to introduce yield control. This would mean that the bank buys bonds in order to put a ceiling on bond yields.
Such a measure would tend to put downward pressure on yields and tend to undermine the dollar.
Comments from Fed Chair Bernanke in the press conference will also be watched closely.
The advance reading for the second-quarter GDP data will be released on Thursday. Following a 5.0% decline for the first quarter, consensus forecasts are for a decline of around 32.0%.
It should be noted that this data is presented as an annualised figure. If the actual economy contracts 8%, the figure would be reported as an annualised figure of 32%.
Markets will be monitoring developments on another fiscal support package with many support packages due to expire at the end of July.
If support measures expire, there will be fears over renewed weakness in the economy which would tend to undermine the dollar. At this stage, there looks to be a high risk that new stimulus will not be in place by the end of July.
Sterling foreign exchange prediction
There are no major data releases during the week, although the figures on consumer lending will be significant to assess whether there is any recovery for June.
The scale of government support for the economy will be seen in the latest government borrowing data with a further deficit surge likely.
Euro foreign exchange prediction
The latest German unemployment data will be released on Thursday, although the impact is liable to be limited.
GDP data is likely to have a bigger impact with the German second-quarter release on Thursday and Euro-zone release on Friday. Markets expect a 9.0% decline for Germany and 12.0% for the Euro-zone. Very weak data should be priced in amid expectations of a third-quarter recovery.
The Euro made strong gains last week as the EU recovery fund was agreed after a marathon Summit. Markets will be monitoring reactions to the deal with the possibility that national electorates will be less enthusiastic, although market sentiment is likely to remain firm.
International foreign exchange factors
The Australian inflation data is due on Wednesday with prices expected to decline 2.0% for the second quarter.
The Chinese PMI data is due on Friday which will be important for underlying sentiment towards the global economy.
Trends in gold will be important with the dollar vulnerable if precious metals continue to gain ground.
Currency FX Forecast for Next Week
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