WEEK AHEAD: JULY 19

Short Description

The European Central Bank and People’s Bank of China both set monetary policy while US earnings season has started. I will take a look at the Euro-dollar and dollar-Chinese yuan currency pairs for how they setup before the action this week. Thanks! Rich

Video Script

Hi everyone, we’re entering choppy summer trading conditions now but there are still some big market-moving events to look out for this week. The European Central Bank and People’s Bank of China both set monetary policy while US earnings season has started. I will take a look at the Euro-dollar and dollar-Chinese yuan currency pairs for how they setup before the action this week. Wait right here!

 

Right so first let’s talk about the euro and the ECB. Unusually, ECB President Christine Lagarde actually flagged the July meeting as one to watch saying that there will be some “interesting variations and changes.” Changes make sense in the context of the ECB’s recent policy review that approved changing its inflation target to 2% and allowing a greater tolerance of periods of inflation above that target. Whatever these changes are, it feels unlikely that the ECB is setting the scene for tapering just yet- in fact it might be that Europe’s central bankers are looking to ease the transition to less stimulus, perhaps for example by buying more corporate bonds and less government bonds.

 

As far as the EUR/USD currency pair goes, it has been all about dollar-strength. The exchange rate fell below 1.18 last week, almost entirely due to dollar strength after strong CPI data. The thinking goes that higher price pressures will force the Fed to normalise its policy sooner. If Lagarde’s changes include a hawkish surprise, then the influence of the euro on this pair will rise.

 

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OK let’s move East to China, where monetary policy is also being decided by the People’s Bank of China. It comes after the PBOC cut the Reserve Ratio Requirement, known as the RRR for all banks holding money at the central bank. This is said to have released about $154 billion in liquidity into the economy and is a form of policy easing. The move came a few days before the release of China Q2 GDP data that was accompanied by a warning from officials that economic uncertainty is rising.

 

The dollar-yuan currency pair is up over the past few weeks but remains not far off the lows of a huge downtrend that set-in at the end of May last year and lasted through February this year. It seems likely that part of the PBOC calculus is to limit China’s currency strength, which is damaging to exports. If that’s the case, a cut to the so-called loan prime rate (or LPR for short) this week seems quite possible and could add could help establish a bottom in this pair.

 

Now let’s round off with the rest of the highlights in the economic calendar. Outside of the monetary policy meetings just mentioned, the other ones to mention are producer prices in Germany and PMIs. Markets are looking for signs that inflation is also running hot in Europe that might pressure the ECB- and producer prices where supply bottlenecks hit first is somewhere to look. PMIs still look very strong but there is a debate about whether we’ve already past the best that partly explains the move back into US Treasuries and strength in the dollar. Look out for PMI misses as a possible bullish dollar catalyst. And just finally, make a note that Netflix reports Q2 earnings on Tuesday the 20^th.

 

Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.