Next Week’s FX Forecast & Events May 25, 2020

USD FX forecast:  The dollar overall is likely to lose ground amid a reduction in defensive demand, although there will be gains at times when market fears over a weak recovery increases. 

EUR FX forecast: The Euro will be more resilient if European politicians can provide a unified stance, although overall sentiment will inevitably remain fragile. 

GBP FX forecast: Sterling will continue to be hampered by speculation over negative interest rates and underlying concerns over trade policies, although further losses should be limited.

JPY FX forecast: The yen should be resilient given that none of the other major currencies are attractive from Japan’s perspective. 

Slow start to the week

Activity will be limited on Monday by holidays in the UK and US.

Trends in risk appetite likely to be dominant

Overall trends surrounding risk appetite are again likely to dominate during the week. When confidence is high and equity markets made headway, the dollar and yen will tend to lose ground while the Euro, Sterling and commodity currencies will be supported.

When fear dominates, however, the dollar and yen will gain fresh support on defensive grounds while the Euro and commodity currencies will tend to be under pressure.

There are several factors which will drive overall tens in risk appetite.

US-China relations remain in focus

Underlying tensions between the US Administration and China will continue to be an important market element during the week and have a crucial impact on market sentiment.

The stakes have been increased by further tensions surrounding Hong Kong after China proposed to impose new security laws.

Political trends important 

Markets will also be monitoring wider political trends closely during the week as countries attempt to ease lockdown measures. The issue of government competence will be an important underlying factor for market confidence in currencies.  

In general, unity would be a positive factor for currency markets while division would undermine confidence.

Central banks still under pressure to do more 

Developments surrounding coronavirus and the potential move towards a vaccine will be important for sentiment. Increased fears over a fresh increase in infections rates in countries where restrictions have been lifted would undermine confidence.  

US Dollar foreign exchange prediction

The US data releases have reinforced expectations of a very substantial GDP contraction for the second quarter and a gradual recovery thereafter.

The consumer confidence data will be released on Tuesday and personal spending release on Friday. Revised first-quarter GDP data and jobless claims figures on Thursday, but the data releases overall are unlikely to have a major impact on the US currency.

Comments from Fed Chair Powell are likely to have a larger impact on interest rate expectations and currency markets. Hints of more aggressive central bank action would undermine the dollar.

Sterling foreign exchange prediction

There has been increased speculation that the Bank of England will cut UK interest rates into negative territory and UK yields have declined which has sapped Sterling support. This debate will continue to be important for Sterling in the week ahead with no major data releases. 

Euro foreign exchange prediction

The Euro-zone inflation data is due for release on Friday and any move into negative territory would reinforce expectations that the ECB would sanction further easing.

Comments from ECB President Lagarde are, however, likely to have a larger market impact. 

After the Franco-German proposal for a EUR500bn recovery fund, political comments will also be monitored closely with the Euro gaining support if the positive trend continues.

Currency FX Forecast for Next Week