Forex News

TD Securities reports United Kingdom (UK) Gross Domestic Product (GDP) grew 0.1% month-on-month in May, matching their forecast and beating the market’s flat expectation. Three‑month growth remains strong at 0.7%, with services and manufacturing outperforming. However, construction dragged and they see Q2 GDP tracking 0.2% quarter-on-quarter, warning residual seasonality likely overstates first-half data, implying underlying growth may be closer to zero.

Growth solid but may be overstated

"GDP growth came out in line with our forecast of +0.1% m/m in May (mkt: 0.0%), following the small negative print in April."

"It leaves 3m/3m GDP, the ONS' preferred measure, running at a still-strong 0.7%."

"Details of the report were constructive, with both services and manufacturing out-pacing expectations in May."

"This leaves GDP growth on track for a 0.2% q/q gain in the second quarter, a notable slowdown from 0.6% in Q1."

"If this bias persists, it suggests that true underlying Q2 growth is closer to zero."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• EUR/USD trades under pressure as softer US inflation delays, but does not derail, Fed rate hike expectations.
• A Reuters poll shows most economists expect one more ECB rate hike this year.
• US Retail Sales meet expectations while Jobless Claims beat forecasts.

EUR/USD trades with a downside bias on Thursday, snapping a two-day winning streak as the US Dollar (USD) steadies following recent losses driven by softer-than-expected United States (US) inflation data. At the time of writing, the pair trades around 1.1457, down modestly on the day.

Market sentiment remains fragile as renewed tensions in the Middle East push Oil prices higher, raising concerns that June's inflation slowdown may prove short-lived. This is limiting the downside in the US Dollar as traders continue to expect a Federal Reserve (Fed) interest rate hike later this year.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 100.60 after falling to 100.35 on Wednesday, its lowest level since June 18.

The Greenback found additional support after the latest US labour market data showed that Initial Jobless Claims fell to 208K in the week ending July 11. The reading was below the 217K forecast.

US Retail Sales rose 0.2% MoM in June, in-line with expectations. May's reading was slightly revised upward to 1.0% from 0.9%. The Retail Sales Control Group also came in as expected at 0.5%, down from May's 0.8% increase.

On the geopolitical front, the US carried out a fifth consecutive night of strikes against Iranian targets, while Tehran responded by targeting US assets in Kuwait, Bahrain and Jordan.

Reuters reported, citing sources, that Iran had instructed Yemen’s Houthis to close the Bab el-Mandeb gateway to the Red Sea if the US attacks its power network. West Texas Intermediate (WTI) is trading near $80 and gaining around 12% so far this week.

Higher energy prices have also revived expectations of another European Central Bank (ECB) rate hike. A Reuters poll released on Thursday showed that all 74 economists expect the ECB to keep its deposit rate unchanged at 2.25% at its July meeting, while a 70% majority expect one more increase this year, most likely in September.

• The Canadian Dollar strengthens against the US Dollar despite persistent geopolitical tensions in the Middle East.
• US Retail Sales meet expectations, while Jobless Claims reinforce the resilience of the US labor market.
• The Bank of Canada maintained its policy rate at 2.25%, with analysts seeing limited domestic support for further CAD gains.

USD/CAD trades around 1.4010 at the time of writing on Thursday, down 0.21% on the day as the Canadian Dollar (CAD) extends its gains against the US Dollar (USD). The pair remains under pressure despite US economic data broadly meeting expectations, with the Greenback failing to sustain a rebound after recent inflation data reinforced expectations that the Federal Reserve (Fed) will keep moving toward monetary easing.

Data released on Thursday showed that US Retail Sales rose 0.2% MoM in June, matching market expectations, while May's reading was revised higher to 1%. The Retail Sales Control Group also increased by 0.5%, in line with forecasts, while Initial Jobless Claims declined to 208K from the revised 216K previously, pointing to continued resilience in the US labor market.

The US Dollar remains caught between supportive economic data and expectations that the Fed will keep interest rates on hold. Earlier this week, softer-than-expected US Producer Price Index (PPI) data reinforced the view that inflation pressures continue to moderate, limiting the Greenback's upside despite Thursday's solid macroeconomic releases.

Geopolitical developments continue to support demand for safe-haven assets. The United States (US) carried out another round of strikes against Iranian targets, while Tehran said it retaliated by targeting US assets in Kuwait, Bahrain and Jordan. According to Reuters, Iran also instructed Yemen's Houthis to close the Bab el-Mandeb Strait if the US attacks its power network. However, Oil prices continue to ease despite the heightened risks to regional energy supplies, limiting additional support for the commodity-linked Canadian Dollar.

The Bank of Canada (BoC) left its benchmark interest rate unchanged at 2.25% on Wednesday, as widely expected, marking a sixth consecutive meeting without a policy change. Governor Tiff Macklem said that Canada's economic growth appears to be resuming after stalling over the past year, although US trade policy remains a headwind.

Commerzbank analysts argue that any further decline in USD/CAD is likely to depend primarily on continued weakness in the US Dollar rather than stronger Canadian fundamentals. BBH also believes the BoC's updated projections leave little room for additional tightening. At the same time, TD Securities notes that the central bank's balanced guidance offers limited immediate support for the Canadian Dollar. However, improving domestic economic data could eventually allow USD/CAD to extend its move below the 1.40 level.

Societe Generale’s Kiyong Seong reviews the Bank of Korea’s 25bp hike to 2.75%, noting a unanimously hawkish Monetary Policy Committee. The July statement is assessed as more hawkish than May, and Governor Shin’s comments keep the option of a consecutive hike at the 27 August meeting open. Key upcoming GDP, GDI and inflation data are seen as crucial for the policy path.

Door open to consecutive tightening

"Our conclusion is that the BoK leaves the door open to the possibility of consecutive hike at the August meeting, although it will be data dependent."

"From Governor Shin's response to a question on the possibility of a back-to-back rate hike, we think the risk of another hike at the 27 August MPC meeting cannot be dismissed."

"In a nutshell, this sounded like an indirect signal that the BoK remains open to a back-to-back rate hike in August."

"Nevertheless, we suspect that receivers may be quicker than usual to take profits ahead of the upcoming key data releases, given the heightened sensitivity of the policy outlook to incoming growth and inflation data."

"July BoK MPC statement read more hawkish, signalling further hike ahead."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

“BNY’s Geoff Yu says tougher Western action against Chinese automakers could add pressure on Europe’s legacy manufacturers. U.S. bank and TSMC earnings validate the AI-led growth cycle, but crowded positioning, premium valuations and underpriced geopolitical risks limit the appeal of European equities.”

Chinese autos and crowded growth

"White House senior trade adviser Peter Navarro has called on Europe and other western governments to take tougher action against Chinese automakers, arguing in a Politico Europe commentary that Chinese firms are making aggressive gains abroad while the West responds too weakly. He said the U.S. remains the only major auto market that has kept BYD out, but warned that the company is pressing at U.S. borders."

"Navarro framed the issue as an industrial contest with Beijing, saying current tariffs and policies have not stopped Chinese brands from expanding in Europe, even as legacy carmakers including Volkswagen and BMW have cut jobs and trimmed earnings guidance."

"Earnings are constructive. U.S. banks and TSMC confirm that the core AI-led growth story remains intact, with resilient capital markets activity, stable client demand and strong AI-linked semiconductor demand. This is not a market built only on hope."

"Value has not disappeared, but verified growth is getting harder to buy cheaply. Warren Buffett’s point about “everybody gambling” is simple: when too many investors are chasing risk, genuine bargains become harder to find. That tallies with the current setup: the strongest growth engines are still delivering, but the cost of owning them has risen."

"Growth is being verified, FX carry is working and earnings are supporting the cycle. On the flipside, geopolitical risks are underpriced, speculative leverage is drawing policy attention and the best assets are already trading at a premium."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

ING’s Warren Patterson and Ewa Manthey highlight that investment funds have sharply increased net long positions in TTF natural gas, driven by fresh longs. LNG and European gas markets are seen as vulnerable with heightened US–Iran hostilities and stronger competition between Europe and Asia for spot cargoes. Low EU gas storage levels versus the five-year average complicate refilling ahead of the heating season.

Low EU storage and LNG risks

"Investment funds boosted their net long in TTF natural gas by 26.7TWh over the last reporting week to 181.9TWh. The move is dominated by fresh longs entering the market."

"The LNG and European gas markets remain vulnerable amid the flare-up in hostilities between the US and Iran. There’s increased competition between Europe and Asia for spot LNG cargoes."

"LNG supply disruptions and stronger power generation demand make the job of refilling storage ahead of the heating season increasingly more difficult. EU gas storage is just 53% full vs a 5-year average of 68%, and some distance from the EU’s minimum target ahead of 75% going into the heating season."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)