A week of two halves in FX market

The euro and sterling both retreated from Wednesday’s highs against the dollar – of about $1.0950 and $1.3045 respectively – over the second half of last week, as the US currency benefited from a slide in international equity markets, while the pound also fell back from its best levels of the week versus the euro, of just over 83.8p set on Wednesday as well. Meanwhile, news of Joe Biden’s decision to withdraw from the US presidential election has had little impact on markets overnight. EURUSD and GBPUSD are not much changed from Friday’s close, trading at around $1.0880 and $1.2920 respectively this morning, while EURGBP is hovering in and around £0.8420. Looking to the week ahead, second-quarter GDP and June PCE inflation in the US on Thursday and Friday respectively are probably the key economic releases of the week, as they could help shape market expectations for Fed rate cuts over the coming months with potential consequences for the dollar.

Equity markets had a tough time of it last week. European stocks closed lower for a fifth straight session on Friday, shedding more than 4% over the week, while the Nasdaq led a decline in US indices – falling almost 4% from the previous Friday’s close – ahead of earnings results from some of the so-called Magnificent Seven companies this week. It was a mixed week in government bond markets meanwhile, with US and UK yields ending slightly higher overall but German yields finishing marginally lower.

ECB member Simkus said on Friday he has “no doubt that the issue of cutting (interest rates) will be put up for discussion” at the central bank’s next meeting in September, adding that he agrees with current market pricing for circa two further quarter-point rate cuts over the remainder of this year.

In terms of economic data for the week ahead, as mentioned, GDP and inflation data are due in the US on Thursday and Friday respectively. Before that, flash PMIs for July are published on Wednesday, which will give an indication on how the main economies are faring at the start of Q3. There are also a number of ECB members scheduled to speak over the course of the week.

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