Market Overview
The US dollar extended its rise against major currencies on Friday, buoyed by above-forecast PMI data, indicating robust economic growth in the US. The USD/JPY pair, in particular, drifted towards the key 160 level, marking significant movement in the forex market. The strong US PMI data not only highlighted the strength of the US economy but also set the stage for potential future rate hikes, further solidifying the dollar’s position.
Key Market Briefs
US Market Highlights
- Record High Prices & Rising Mortgage Rates: These factors continue to depress US home sales.
- US June S&P Global Manufacturing PMI: Rose to 51.7, above the forecast of 51.0 and previous 51.3.
- US June S&P Global Services PMI: Increased to 55.1, exceeding the forecast of 53.7 and previous 54.8.
- US June S&P Global Composite Flash PMI: Reached 54.6, slightly above the previous 54.5.
- US May Existing Home Sales: Slightly below forecast at 4.11 million, marking a 0.7% decrease.
- US May Leading Index Change: Fell by 0.5%, below the forecast of -0.3%.
- Investor Inflows: Investors poured $25.6 billion into stocks, the largest inflow since March, and $6.4 billion into bonds. Conversely, $300 million was pulled from gold, $400 million from crypto, and $15.8 billion from cash, according to Bofa citing EPFR data.
Global Market Developments
- Euro Zone Business Recovery: Slowed sharply in June, as indicated by PMI data.
- German Business Activity: Also showed signs of slowing.
- UK Business Growth: Hit a seven-month low due to election uncertainty.
- Canada: May Producer Prices were flat, missing the forecast of a 0.5% increase. April Retail Sales matched the forecast at 0.7%.
- Bank of Japan: Deputy Governor Uchida signaled readiness to raise rates further, with upcoming BOJ Tankan expected to show confidence among major manufacturers.
Macro Themes in Play
US Dollar Strength
The dollar’s rise was fueled by strong PMI data, which reinforced the view of a firm US economic footing. Despite signs of waning inflation pressures in the PMI report, with input prices dropping and output prices hitting a five-month low, the dollar maintained its strength. Political uncertainty ahead of the French elections provided additional support for the safe-haven currency, particularly amid disappointing Euro Zone PMIs.
USD/JPY Movement
The USD/JPY pair rallied to a high of 159.63, its strongest level since the 34-year peak struck in late April, driven by the widening US-Japan rate divide. Market anticipation of Japanese intervention to support the yen remains a limiting factor as USD/JPY approaches the 160 level. Historically, Japan last intervened when USD/JPY fell to 151.86, making the current level of 160 a critical threshold.
Euro and Sterling Trends
- EUR/USD: Diverging data with stronger US PMIs and weaker European PMIs led to the euro’s decline. German-US yield spreads widened, further pressuring the euro. Technical indicators remain bearish, with potential further downside risks if key support levels are breached.
- GBP/USD: Sterling fell to a five-week low of 1.2622, pressured by softer UK PMI data and dovish BoE rate expectations. The pair found support near the 55-DMA at 1.2619, but a close below this level could lead to further declines towards the 200-DMA at 1.2557.
Commodities and Stock Market
- Commodities: WTI crude oil fell 0.82% but remained on course for a second weekly rise amid improving demand and falling inventories. Copper dropped 2.74% due to surplus concerns and sluggish demand in China. Gold declined by 1.77%.
- Stock Market: The S&P 500 was slightly lower in afternoon trading, reflecting mixed sentiments amid strong economic data and inflation concerns.
Looking Ahead
Upcoming Economic Data and Events
- ECB’s Schnabel: Scheduled to speak in Kiel, Germany.
- BOJ: To release a summary of opinions from its June 13-14 policy meeting
- BOC’s Macklem: To speak at the Winnipeg Chamber of Commerce.
- San Francisco Fed’s Daly: To discuss monetary policy and the economy at the San Francisco Press Club.
Market Implications
The dollar’s strength is likely to continue influencing the forex market, particularly with key US economic data and Fed speakers lined up for the week. Investors will closely monitor consumer confidence, GDP data, jobless claims, and the core PCE price index for further clues on the Fed’s rate outlook. Additionally, developments in the Euro Zone, UK, and Japan will be pivotal in shaping market dynamics.
Risk-On and Risk-Off Sentiments in Macro Outlook and Future Market Dynamics
Risk-On Sentiment
-
Strong US Economic Data:
- The above-forecast US PMI data, with the Manufacturing PMI at 51.7 and Services PMI at 55.1, suggests robust economic growth, reinforcing investor confidence in the US economy. This positive sentiment supports risk-on trades, particularly in equities and high-yielding currencies.
-
Investor Inflows into Stocks and Bonds:
- The recent inflow of $25.6 billion into stocks, the largest since March, and $6.4 billion into bonds indicates a strong risk appetite among investors. This trend is likely to continue if economic data remains favorable, further boosting equities and corporate bonds.
-
Oil and Commodities:
- Despite a slight dip, WTI crude oil’s overall upward trajectory amid signs of improving demand and falling inventories reflects a positive outlook for the energy sector. This, in turn, supports broader market sentiment, especially for commodity-linked currencies like the AUD and CAD.
-
US Dollar Strength:
- The USD’s rise against major currencies highlights confidence in the US economic outlook. While typically a safe-haven currency, in the current context, a strong dollar is viewed as a sign of economic health, encouraging risk-on positions in US assets.
Risk-Off Sentiment
-
Euro Zone and UK Economic Weakness:
- Slowing business activity in the Euro Zone and the UK, as indicated by below-forecast PMIs, raises concerns about regional economic stability. This uncertainty could drive investors towards safer assets, such as the US dollar and government bonds.
-
Political Uncertainty in Europe:
- The upcoming French elections and associated political risks create an environment of caution, particularly impacting the euro. Investors might seek refuge in safe-haven assets amid fears of potential economic disruptions.
-
Potential Japanese Intervention:
- The USD/JPY pair nearing the key 160 level heightens the risk of intervention by Japanese authorities to support the yen. Such actions can introduce volatility into the forex market, prompting a shift towards risk-off sentiment.
-
Weakness in Commodities:
- The decline in copper prices, driven by concerns over surplus supplies and sluggish demand in China, signals potential headwinds for global economic growth. Additionally, gold’s decline reflects reduced safe-haven demand but could also indicate broader market uncertainty.
-
Election-Related Uncertainty in the UK:
- With the UK elections approaching, business growth hitting a seven-month low due to political uncertainties, and potential BoE policy changes, market participants might adopt a cautious stance, favoring safer investments.
Future Market Dynamics
-
US Economic Indicators:
- The upcoming US PCE price index, consumer confidence data, and Fed speakers’ remarks will be crucial in shaping market expectations. Positive data will likely sustain the risk-on sentiment, while any signs of economic slowdown could shift the dynamics towards risk-off.
-
Central Bank Policies:
- Diverging monetary policies between the Fed, ECB, and BoJ will continue to influence market dynamics. The Fed’s hawkish stance compared to potential rate cuts by the ECB and cautious BoJ policies will drive currency and bond market movements.
-
Global Geopolitical Events:
- Ongoing geopolitical events, including US-China trade relations and tensions in the Middle East, will add layers of complexity to market sentiment. Any escalation could prompt a swift shift towards risk-off assets.
-
Commodity Prices:
- Movements in oil, gold, and industrial metals will be closely watched as indicators of global economic health. Sustained demand for oil and recovery in copper prices would support risk-on sentiment, while continued declines might suggest economic headwinds.
-
Market Volatility:
- As markets react to data releases, policy decisions, and geopolitical developments, volatility will play a key role in investor sentiment. Elevated volatility typically aligns with risk-off behaviors, while stable, positive data flow supports risk-on strategies.
In conclusion, the current macro outlook presents a mixed bag of risk-on and risk-off sentiments. Strong US economic data and investor inflows into equities and bonds support a risk-on environment. However, regional economic weaknesses, political uncertainties, and potential market interventions highlight the persistent undercurrents of risk-off sentiment. The interplay of these factors will shape future market dynamics, demanding vigilance and adaptability from investors.
The USD’s rise following stronger-than-expected PMI data underscores the resilient nature of the US economy compared to its global counterparts. As USD/JPY approaches the critical 160 level, market participants remain cautious of potential Japanese intervention. Meanwhile, the euro and sterling face downward pressures from weaker regional economic data and diverging monetary policy expectations. The upcoming week will be crucial, with significant economic releases and central bank communications set to guide market sentiment.
Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.
