Weekly FX chartbook: September rate cuts and the rising Trump trade

Key points

• USD: Economic momentum could spell further dollar downside, but political risks will be in focus.

• JPY: Intervention risks could be off the radar.

• EUR: ECB meeting could be a non-event.

• GBP: Medium-term upside remains intact despite inflation and wage tests.

• NZD, SEK and NOK: Increasing rate cut pricing could fuel downside pressures.

USD: Politics garnering more attention

It was an eventful last week where confirmation of the US disinflation trend bolstered hopes of rate cuts from the Fed to begin in September. This has brought risk assets in favour and pushed the US dollar lower. Focus now turns to Fed Chair Jerome Powell’s comments on Monday and retail sales on Tuesday to confirm the market’s assumptions on rate cuts. Powell, in his recent testimony before lawmakers, has signalled some concern on the weakness in labor market as well being a key catalyst for rate cuts. US economic data, therefore, remains in the driving seat to get further conviction on a September rate cut. The bias on the US dollar as such remains bearish, and we wrote last week about who could be the potential winners in G10 FX from a cyclical US dollar weakness.

However, political stakes are rising as we approach the US presidential elections in November. After a woeful performance from Biden at the first presidential debate, the weekend assassination attempt on Trump have boosted the chance of a Republican sweep and ‘Trump Trades’ are back in vogue. This usually means a short-term dollar positive, while weighing on the Mexican peso, Chinese yuan, Euro or the Australian dollar. Our note earlier discussed the impact of Trump 2.0 on forex markets as well as other asset classes. The Republican National Convention will draw extra attention this week, with focus on policy details and the announcement of the vice-presidential candidate. Most notably, it will highlight the stark contrast to the fragmentation within the Democratic Party.

GBP: Making its way to 1.30 could see data bumps

Economic resilience and political stability continue to fuel gains in sterling, and a pushback from Bank of England’s MPC members last week added further fuel to the firing rally. GBPUSD is now in close sight of its 2023 highs at 1.30+, but for that to materialize, sterling faces key data tests this week from both inflation and wages. As noted previously, policymakers are looking to see services inflation and wage pressures soften before policy restrictiveness in eased. Latest prints for both of these key metrics will be released this week, and these are the last major releases before the BOE meets in August.

Markets have currently priced in 40% chances of a rate cut on August 1, and these data releases could make or break the case for an August rate cut. However, as discussed in this article, even if this week’s data comes in softer and the BOE is pushed closer to an August rate cut, GBPUSD will likely remain a buy-on-dips and can potentially recover from some early weakness given that a BOE rate cut cycle is not coming from growth concerns and could remain shallow.

The US dollar extended its decline for a second week amid rising odds of a September rate cut, while suspected yen intervention made JPY a big winner.

Our FX Scorecard shows momentum staying positive in AUD and GBP. NOK and NZD saw increasing bets for rate cuts, and were at the bottom of our momentum tracker.

CFTC positioning data for the week of 9 July saw speculators cut the long positioning in US dollar while the EUR and AUD turned to a net long. GBP also saw further longs being added while shorts were covered in CAD. Only CHF saw the addition of further shorts.

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