EUR (1.022) ▲

▪ EUR depreciated to a near two-decade low despite the European Central Bank’s (ECB) larger-than-expected rate hike of 50 basis points (bps) and Eurozone’s strong 2Q22 GDP reading. The bloc’s currency weakness was mainly attributable to soaring European gas prices due to Russia’s supply cuts and Europe’s growing political uncertainty due to Italy’s Draghi’s resignation.

▪ EUR may continue to trade above parity if the ECB’s new bond-buying tool manage to effectively reduce the risk of Europe’s sovereign debt crisis amid ECB’s interest rate hikes. In addition, dissipation of USD’s strength due to weak US fundamentals may help to buoy the bloc’s currency around the 1.020-1.030 level.

GBP (1.217) ▲

▪ GBP appreciated strongly against the USD towards the end of the month, after falling to its weakest level since March 2020, as the market anticipates further rate hikes by the Bank of England (BoE) and the UK’s Manufacturing and Services PMI registered a slightly better-than-expected reading. This comes despite lingering recession fears and political woes following the resignation of Prime Minister Boris Johnson

▪ GBP may continue to strengthen slightly as the BoE looks set to raises rates for the sixth consecutive meeting and appears increasingly likely to hike by a larger 50 bps, on upbeat employment data and hotter-than-expected CPI reading of 9.4% in June (consensus: 9.3%; May: 9.1%).

AUD (0.699) ▲

▪ AUD appreciated against the USD in July, despite facing pressure early in the month following the weaker-thanexpected China 2Q22 growth estimate and a broadly strong USD amid a hawkish US Fed. With that said, AUD strengthened considerably towards the end of the month on better-than-expected jobs data, with Australian unemployment at 3.5% in June (consensus: 3.8%; May: 3.9%), fuelling bets that the Reserve Bank of Australia (RBA) would be more hawkish going forward.

▪ AUD may continue to strengthen in August as the RBA could raise rates by as much as 75 bps to 2.1% after the strong jobs reports, which would match the US Fed’s recent rate hike. However, expect AUD strength to be milder should the central bank opt for another 50 bps hike instead.

NZD (0.628) ▲

▪ NZD appreciated against the USD in July despite the hawkish US Fed and rising global recession fears. The performance was mainly due to a hawkish Reserve Bank of New Zealand (RBNZ) as the central bank delivered its sixth straight month of interest rate hike to 2.50% and signalled an aggressive tightening path to curb inflation.

▪ The kiwi may find its support from the hawkish RBNZ as the central bank is expected to raise the policy rate further in August. Nevertheless, the upside bias could be capped if the domestic economy signalled a slowdown as inflation and higher interest rates bite.

Source: Kenanga Research - 1 Aug 2022