August FX outlook – more UK monetary policy focus

Major FX markets in July were comparatively range-bound following the sharp late June moves after the UK Brexit decision. The narrow range in EUR/USD seems unlikely to be sustained through August, with expectations of Fed action in September likely to come to the fore by the end of the month

Main market movements in July

• Majors largely traded within June’s range, but GBP/USD made new lows below 1.28 before recovering back above 1.30 helped by the formation of the new Conservative government and the Bank of England decision to leave policy unchanged at the July meeting. GBP/USD finished only slightly below opening levels.
• The USD generally gained in the early part of the month, particularly against the JPY, helped by much better than expected US June employment data which removed the fears of significant slowdown that had been suggested by the weaker May data. Subsequent forward looking data from the US was also encouraging. However, a lukewarm response to the FOMC meeting and statement late in the month pushed it lower against most currencies until the USD weakened sharply on July 29 in response to a weaker than expected Q2 GDP release. This sent the USD index to new lows for the month.
• After weakening in the middle of the month following the US employment data, the JPY recovered strongly in the second half of the month. Part of the reason was disappointment at the lack of further significant monetary policy action from the BoJ. Although the BoJ did announce increased buying of ETFs at the end of month meeting, they said they would not undertake monetary financing of the government.
• Commodity currencies were mixed, with the oil related currencies (CAD and NOK) under pressure for most of the month as the oil price fell back to late April levels. However, the AUD was better supported helped by a better performance from the commodities that make up its export basket.

Outlook for August – Key Issues

(1) UK Monetary Policy – Key event Bank of England MPC meeting on August 4th:

• GBP to react to MPC decision. A rate cut is now expected, so this alone is unlikely to be enough to push the pound much lower, though a modest decline would seem likely. Other easing likely to be required to trigger further significant GBP weakness. GBP likely to rally, at least initially, if the Bank surprises by not cutting rates. Click here for the full report.

(2) The US employment report and FOMC Expectations – Key event US employment report August 5th

• US employment report once again key for the USD risk appetite after weak US Q2 GDP data.
• FOMC not expected to raise rates in September, but chances of a rate hike would increase with another outsize rise in employment.
• Prospects of US rate rise this year still suggest it is well supported against riskier currencies, but downside risks against EUR and JPY if risk appetite wanes and expectations of Fed tightening evaporate. Click here for the full report.

(3) Equities and oil 

• Equities proving resilient to bad news – suggests risk positive bias
• Weakness in oil price may bring emerging market concerns back into focus. Combination suggests favouring non-oil commodity currencies. Click here for the full report.

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