Kenanga Research & Investment

Global FX Monthly Outlook - Most global currencies to remain pressured as the Fed sustains aggressive tightening

Publish date: Fri, 01 Jul 2022, 10:12 AM

EUR (1.040) ▲

▪ Despite European Central Bank’s (ECB) hawkish turn, the EUR depreciated to its lowest level since November 2002 as the Fed raised its interest rate by 75 basis points (bps) in an aggressive move to curb soaring US inflation (8.6%; Apr: 8.3%). However, the bloc’s currency benefitted slightly from a rise in European bond yields amid growing euro zone inflation fears.

▪ Even though the Fed is widely expected to deliver another 75 bps hike in July, the EUR may consolidate above the 1.05 level as the ECB may start its tightening cycle while avoiding a debt crisis in the peripheral Europe. However, another upside surprise in the US inflation rate and an ineffective anti-fragmentation tool by the ECB may push the EUR closer to parity with the USD.

GBP (1.211) ▼

▪ GBP weakened against the USD in June, on broad dollar strength following the US Fed’s larger than expected 75 bps rate hike and as UK headline inflation soared to a 40- year high of 9.1% in May. This comes despite some support for the sterling, as the Bank of England (BoE) raised rates by 25 bps for the fifth consecutive meeting.

▪ GBP will likely maintain a downtrend this month, as the US-UK policy rate differential continues to widen. The Fed is expected sustain its aggressive stance and raise rates by another 50 – 75 bps at the end of the month, whilst BoE policy moves may remain relatively less hawkish.

AUD (0.688) ▼

▪ AUD depreciated against the USD in June following a 75 bps rate hike by the US Fed and fears over global recession driven by interest rate hike acceleration. The return of China’s lockdown also weighed on AUD but was partially capped by the Reserve Bank of Australia's (RBA) decision on a 50 bps rate hike.

▪ AUD may continue to depreciate in July as the US Fed is expected to remain hawkish and accelerate the tightening of monetary policy to tame stubbornly high inflation. Nevertheless, the downtrend could be partially mitigated if RBA decides to embark on larger rate hikes at its next Monetary Policy meeting on July 5.

NZD (0.621) ▼

▪ NZD depreciated against the USD in June and tracked other global currencies' downtrend as the US Fed continued to be hawkish and accelerate its monetary policy tightening to tame inflation. This was further weighed by weak risk sentiment, mainly due to increasing global recession fears.

▪ The near-term direction for the kiwi remains on south, primarily weighed by the next US Fed decision slated on July 27. However, the NZD is expected to find support from the Reserve Bank of New Zealand’s meeting on July 13, as the central bank is expected to lift its policy rate further. Furthermore, the relaxation of pandemic restrictions in China may also support the kiwi going forward

Source: Kenanga Research - 1 Jul 2022

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