Paul Robson’s quick take: 30 July 2024

Paul Robson, Head of FX Strategy, EMEA, shares his views on currencies and FX markets for the week ahead.

30 Jul 2024 . 3 minutes

What’s happening with currencies and FX markets this week?

This week in FX at a glance

The summer Olympic games may have kicked off this past weekend, but for markets there’s a slew of central bank meeting before the summer break.
For the Bank of England, this decision feels on a knife edge with markets torn between policymakers voting to keep interest rates on hold or a 25 basis point cut.
This week brings the Federal Open Market Committee meeting, although no change in policy rate is widely expected. However, labour market data released on Friday may be more important for the USD.
It’s a busy week for the euro area too, with Consumer Price Inflation data and GDP figures.

Hanging in the balance

It’s a big week for sterling, with attention squarely on the Bank of England’s (BoE) interest rate decision on Thursday. For currency markets, the decision feels as “finely balanced” as I can remember for what could be the first interest rate cut from the central bank in about 4 years. Markets are pricing a coin toss between policymakers voting to keep interest rates unchanged or for a 25 basis point cut.

BoE policymakers have been divided, with some members, including Chief economist Huw Pill highlighting the “uncomfortable strength” in service price inflation. NatWest UK economics team expect the central bank to leave the main policy rate at 5.25% on Thursday and see the probability of a rate cut at around 35%. For sterling, the decision not to cut interest rates may impact the market’s expectation for cuts from the BoE this year. In my view, if realised this may be supportive of sterling given historic correlations between the currency and interest rate differentials. The extent of this support may be driven by the vote count and hints about what should be expected in the future.

It’s a packed US data calendar with interest rate decisions and key employment data

No change in interest rate is expected from the Federal Reserve (according to interest rate futures) on Wednesday. But with markets already anticipating virtually 100% probability of a rate cut in September the focus is likely to be on guidance. Anything short of a clear signal that the Fed is closer to cutting interest rates in September is likely to disappoint markets, in my view.

Friday’s employment report will also be a focus for markets, especially in the context of the uptick in the unemployment rate and the heightened weight Fed Chair Powell suggested the committee would place on dynamics in the labour market. Signs of additional cooling is likely to further cement expectations of a September rate cut.

Euro area CPI data likely to firm September rate cut expectations

In the euro area, Consumer Price Inflation (CPI) data will be the focus for markets. Our European economics team expect headline Harmonized Index of Consumer Prices (HICP) inflation to edge down to 2.4% year-on-year in July from 2.5% in June – in line with the European Central Bank’s (ECB) inflation projections for Q2.

All eyes on the Bank of Japan

Elsewhere, the Japanese Yen looks to be at an inflection point, benefiting from the decline in investor sentiment and on expectations that the Bank of Japan (BoJ) could complete their path to policy normalisation and raise interest rates this week, whilst major central banks move to reduce interest rates.

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