Key points to watch out for:
- US data on hold amid overly pessimistic Fed rate cut bets
- July PMI indices to show how economies have started the second half of the year
- BoC makes policy decision, may cut rates again
Will Investors Strengthen Their Fed Rate Cut Forecasts?
With investors increasing their Fed rate cut bets, the US dollar suffered during the first half of the week, despite recovering some ground last Thursday. After the softer-than-expected CPI data, Fed officials, including Chairman Jerome Powell, expressed confidence that price pressures are on a path to further declines. Powell also indicated that they will not wait for inflation to reach 2% before cutting interest rates.
Additionally, the June employment report’s labor market weakness and recent developments have led market participants to heavily bet on a rate cut by September, with a roughly 50% chance of a third cut by 2024, fully expected in January.
These bets will be tested next Thursday, July 25th, when the first estimate of US GDP will be released, not to mention Friday, July 26th, when both the underlying PCE and personal income and spending data will be released.
The Atlanta Fed’s GDPNow model predicts the economy will grow to 2.4% from 1.4% in the first quarter, while the New York Nowcast predicts a smaller increase to about 1.8%. Both models suggest potential growth. However, the slowdown in June’s core CPI might also reflect in the core PCE index, which may limit traders’ ability to significantly adjust their expectations, even if GDP increases.
The outlook could change with the release of July’s preliminary PMIs on Wednesday, July 24th. If the PMIs show economic improvement and tightening in corporate pricing, investors might reconsider a third rate cut by year-end. This could help the dollar recover some losses and extend the recovery if the numbers are positive.
Will the PMIs Influence ECB and BOE Monetary Policy?
PMI indices for the Eurozone, along with the UK, will also be released on Wednesday, July 24th. Starting with the Eurozone, at Thursday’s meeting last week, the ECB kept interest rates unchanged, with President Lagarde stating at the press conference that a September rate cut is wide open.
Investors held the possibility of such a move at around 65%, maintaining a considerable possibility of another quarter-point cut by the end of the year. The June PMI showed slight weakness, and it remains to be seen whether the July PMIs will paint a similar picture. If so, the possibility of a rate cut in September could increase, extending the latest EUR/USD correction.
In the UK, the likelihood of a rate cut by the BOE for August was lowered to around 45% from around 60% in just one week, following statements by BOE chief economist Huw Pill that services inflation along with wage growth remain considerably high, and after last week’s CPI data confirmed that services inflation remains extremely high.
With all of this in mind, if the PMI indices show economic improvement coupled with a tightening of corporate pricing, the likelihood of the Bank of England cutting interest rates in August could fall further. This would give the pound a chance to rise, albeit not so much against the dollar, should US data be strong, but against the euro, if the single currency feels the pressure from weak Eurozone PMI indices.
Bank of Canada to Cut Rates In a Row
On the same day, Wednesday July 24th, the Bank of Canada will release its monetary policy decision. At its last meeting, the BoC cut interest rates by 25 basis points due to easing inflation and sluggish growth. Governor Macklem suggested more cuts could follow if inflation continues to cool.
Last week, Canadian CPI figures showed continued inflation decline in June, reinforcing the likelihood of a back-to-back rate cut this week. Money markets estimate an 85% chance of this happening. A rate cut alone won’t likely shake the Canadian dollar, but traders will watch for signals on the easing cycle continuing in September. Dovish signals could cause the Canadian dollar to suffer in the forex market.
Elsewhere, Japan’s CPI data will be released during the Asian trading session on Friday, July 26th. For those looking at the likelihood of the Bank of Japan raising rates this month, you may want to pay close attention as the Tokyo data is an excellent indicator of the domestic CPI figures. Finally, several major technology companies will be releasing their results. Microsoft, Alphabet, and Tesla will do so on Tuesday July 23rd, while Thursday, July 25th will be Amazon’s time.
