All eyes will be on the July ECB meeting next week, and its possible shift towards a dovish bias. While this would be negative for the euro, the cautious ECB would give some helping hand to cyclical FX. We don’t see the dollar extending its recent good broad-based momentum next week

USD: The dollar momentum not to be extended

Dollar Index

Week Ahead Bias: Mildly Bearish

Range this week: 92-93

1 month target: 92.50

Following the cautious tone adopted by Jerome Powell last week, Overall, we still see the latest risk correction as exaggerated. We do not see the dollar extending its good momentum into the coming months, so pro-cyclical currencies can still profit from the global reflation story and those backed by hawkish central banks from the search for carry (CAD, NZD, NOK in G10, BRL, MXN and RUB in EM).

EUR: All eyes on the ECB


Week ahead Bias: Mildly Bearish

Range Next week: 1.1700-1.1910

1 Month Target: 1.2000

The July ECB meeting next Thursday is the main event of the week. What was supposed to be a non-event has turned into a key focus point of the week following the release of the ECB’s strategic review.

This means the distribution of probabilities is skewed to lower EUR/USD next week. No change in the ECB bias is unlikely to be enough to send the euro higher. At the same time, any ECB shift towards the dovish interpretation of the strategic review would underscore the recent downward EUR/USD trend. While not a discussion for next week, the ECB dovish bias would suggest that the total reduction of the monthly purchases in 2022 will be less than previously expected. Beyond the ECB meeting, the focus will be on the July PMI manufacturing and services readings due on Friday.

JPY: Helped by the strongest correlation with UST in a year


Week Ahead Bias: Mildly Bullish

Range Next Week: 109.70-110.10

1 Month Target: 111.00

The Bank of Japan meeting today was, as usual, largely ignored by the currency market. Policymakers adjusted their growth forecasts, revising the 2021 fiscal year numbers lower and the 2022 fiscal year higher. However, most of the focus was on the announcement of a green lending plan and the allocation of some of the foreign holdings to foreign-currency-denominated green bonds. Next week, the Japanese calendar includes June’s CPI report, which is expected to show the headline YoY figure having moved into mildly positive territory (+0.2% from -0.1%). That’s unlikely to change much for JPY given the immovable BoJ policy stance, and US Treasury dynamics should remain the main driver for the yen. Some slight improvement in risk sentiment could prompt some JPY weakness, especially in the crosses.

GBP: Dovish ECB may impact GBP/USD


Week Ahead Bias: Mildly Bearish

Range Next week: 1.3690-1.3940

1 Month Target: 1.4000

We have seen a shift in the communication from some of the BoE officials with MPC member Saunders and Deputy Governor Ramsden both indicating that the need to taper asset purchases may come earlier than expected. However, the impact on GBP was limited, partly because the next step in the eventual policy normalisation process (rate hikes) remains still some way off. Despite the increasing Covid-19 cases, the UK government will deliver the final part of the reopening / end of restrictions on 19 July.

On the domestic data front, the focus will be on June retail sales and July PMI manufacturing and services (both on Friday).

AUD: Not only negatives


Week Ahead Bias: Mildly Bullish

Range Next week: 0.7400-0.7530

1 Month Target: 0.7500

Another solid jobs report saw unemployment move back below 5.0%. Next week will be quiet in Australia data-wise, with some attention on the RBA minutes from the July meeting where the central bank remained very dovish and developments on Victoria’s contagion situation. AUD can surely rebound in the short term if market sentiment stabilises (also thanks to a net-short positioning), but in the longer run, the unattractive carry compared to NZD, NOK and CAD may make it a laggard among activity currencies.

AUD/USD however, failed to break above 0.7500 level last week while global sentiment appeared favourable. External factors seem to be driving the AUD currently.

CAD: BoC to keep it quiet while gearing up for more tapering in July


Week Ahead Bias: Mildly Bearish

Range Next week: 1.2430-1.2620

1 Month Target: 1.2300

The Bank of Canada did what markets were expecting this week: cut the bond purchase programme by a further C$1bn. There might have been some expectations for more tapering or for a shift in the forward guidance, which ultimately might have contributed to the spike in USD/CAD after the meeting. But we think that was mostly a profit-taking event: after all, the market was extensively long the loonie according to the latest CFTC positioning data

External drivers should dominate this week as we an empty News calendar.

CHF: Sluggish

EURCHF: Is 1.08 the bottom of the recent downtrend in EURCHF?

Week Ahead: Mildly Bullish

Range Next Week: 1.0820-1.0950

1 Month Target: 1.1000

EUR/CHF dropped very close to the 1.0800 level this week, before bouncing back to the 1.0850 level yesterday. Indeed, the choppy risk environment is continuing to put downward pressure on the pair, and the SNB is likely stepping in with an increasing amount of FX interventions to curb the franc’s strength.

There have not been any domestic factors driving CHF of late, with only some comments by the central bank President Thomas Jordan worth noting, where he reiterated the lack of need to adjust the Bank’s inflation-targeting framework and monetary policy mix.