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In July, the dollar experienced a significant decline, falling from its peak of 103.5 to a low of 99.5. This was influenced by various factors, including the moderation of non-farm payroll and CPI growth, which came in at 3% but below consensus expectations. Furthermore, the dollar was weighed down by discouraging flash manufacturing and services PMI data, indicating poor business conditions. Despite the Federal Reserve's decision to raise rates by 25bps, bringing the Federal Funds Rate to 5.25%-5.50%, the dollar's strength remained subdued. Nevertheless, positive figures for advance GDP q/q and lower-than-expected unemployment claims in July provided some support to the dollar, helping it recover some of its losses. Interestingly, despite the Fed's previous indication of two more rate hikes according to June's dot plot, the market is currently pricing in an almost 80% likelihood of a rate pause during September's FOMC meeting.
Taking advantage of the dollar's weakness, the euro surged above $1.12 against the dollar initially. However, these gains were later pared due to uncertainty surrounding the ECB’s future rate decision. Economic indicators for the Eurozone, such as manufacturing and services PMI, showed a more significant slowdown than expected by the markets. The final CPI for the year showed a higher-than-expected rate of 5.5%, well above the ECB's goal of 2%. Conflicting data made even traditionally hawkish member Klaas Knot doubt rate hikes beyond July's meeting. Despite the uncertainty, the ECB decided to raise the main refinancing rate by 25bps, bringing it to 3.75%. However, the ECB currently maintains a data-dependent stance and adopts a cautious approach in light of the weakness in the Eurozone's economy.
July proved to be a turbulent month for the Pound Sterling, as it relinquished nearly all its gains against the dollar by mid-month, mainly due to lower-than-forecasted CPI y/y. The concerning aspect was that inflation remained considerably higher than the desired levels. In response, BOE Governor Andrew Bailey reaffirmed the Bank of England's commitment to reducing the inflation rate to optimal levels by implementing necessary interest rate increases. The current expectations for Bank Rates stand between 6.25% to 6.5%, contributing to negative market sentiments regarding the likelihood of additional rate hikes.
During July, the loonie reached highs of 1.34 against the US dollar. However, positive employment news led to a decline in the currency pair, strengthening the loonie to its peak for the month. Furthermore, news about the BOC’s rate statement and the overnight rate meeting market expectations at 5% provided an additional boost to the loonie. BOC Governor Tiff Macklem's speech reminded the markets that early expectations of a rate cut were unfounded. This was followed by the release of higher-than-expected CPI figures. The aussie touched the high of $0.69 but failed to surpass it, closing near $0.66 against the dollar due to a slowdown in tightening regime. RBA governor Lowe's suggestion of "further tightening" and better-than-expected employment change in July initially boosted the Aussie. However, a slowdown in CPI growth at 0.8%, below market consensus, led to concerns of a potential halt in the tightening regime, resulting in the Aussie's weakness. The kiwi surged above $0.64 against the US dollar, but it retraced most of its gains to close at $0.62 by the end of the month due to inactivity in its monetary regime. Despite the CPI q/q surpassing estimates with 1.1% growth compared to the expected 0.9%, the RBNZ officials reiterated their commitment to keeping the Official Cash Rate (OCR) at 5.50% for the rest of the year. The decision to halt rate hikes resulted in capital outflows to other economies offering higher interest rates, exerting bearish pressure on the kiwi's value.
Brent crude experienced a significant rally, reaching above $84 per barrel, driven by several economic events. Saudi Arabia and Russia implemented supply cuts of over 500,000 barrels per day (bpd) for the upcoming months, reducing the overall supply of crude oil. Additionally, the U.S. Energy Information Administration (EIA) projected that global oil demand would outpace supply, further boosting crude oil prices. Furthermore, China's announcement of proactive economic stimulus and supportive policies to strengthen its recovery, along with the expectation that the U.S. would avoid a recession, led to increased optimism regarding crude oil demand. Gold prices experienced an ascent, concluding the period near $1970 per ounce. The interest of central banks in gold as an alternative to the dollar and continued gold-buying activities by China served as supporting factors. However, the strength of the dollar influenced gold prices, particularly in light of favorable U.S. economic data and reduced recession concerns. Looking ahead, the potential for future rate cuts could potentially uplift bullion prices, as the Federal Reserve nears the conclusion of its monetary tightening cycle.
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