Quiet Start to an Intense Week as Fed Plans to Raise

The Independence Day holiday in the US means the week should start quietly in markets, but US data will soon attract the market's attention again now that a July Fed rate hike is a consensus view and there is also speculation about a move in September. I think the dollar can find some support this week.

USD: Data in focus amid thin holiday volumes

In June, the dollar weakened against all G10 currencies except the Japanese yen, but it has shown recent support. Comments from Federal Reserve Chair Jay Powell at the Sintra central bank symposium last week have helped narrow the gap between market expectations and the FOMC's dot plot projections. Currently, the Fed funds futures curve indicates a pricing in of 34bp of tightening to the peak, a 10bp increase compared to a week ago. Importantly, the market is now actively considering the possibility of two rate hikes.

The week is expected to begin quietly due to the Independence Day holiday, leading to reduced flows in US markets until tomorrow. Nevertheless, market activity will peak as investors assess the likelihood of a September rate hike now that a July increase appears to be the consensus view.

Yesterday, all attention was focused on the ISM manufacturing index, that came as expected, although greater focus will be on the services survey released on Thursday, as the May print dropped more than expected. Jobs figures for June will be published on Friday. Considering Powell's recent comments, it would likely require a very weak reading to bring a July rate hike into discussion.

On the side of the Federal Reserve, the release of the June FOMC minutes on Wednesday is noteworthy. The dollar may find additional support this week as market participants find more reasons in the data and minutes to align gradually with the more hawkish dot plot projections.

EUR: Core inflation issues continue for the ECB

Given the slight increase in core prices (from 5.3% to 5.4% for the entire Euro area), the decrease in headline inflation in June is unlikely to satisfy the European Central Bank (ECB). President Christine Lagarde has already indicated a commitment to a July rate hike, but the current discussion revolves around a move in September. While markets have fully priced in two final rate hikes, they do not anticipate them happening by September. Regardless, the persistence of core inflation will provide an opportunity for ECB hawks to reinforce their message.

Since ECB members had the chance to clarify their stance at the Sintra symposium last week, the impact of this week's speakers on the Euro may be relatively weak, even though market participants will be interested in comments following the June inflation report.

It is expected that the USD's performance will drive most of the movements in EUR/USD this week, particularly once US data starts to be released. There is some potential for the pair to experience a modest decline due to dollar strength, but a significant drop below 1.0800 may be premature.

GBP: Pricing remains volatile

Expectations for tightening by the Bank of England (BoE) remain highly volatile. Currently, markets have priced in 130 basis points (bp) of BoE rate hikes to the peak. This indicates a high threshold for hawkish surprises in the MPC's communication, but it also reflects the market's inclination towards a hawkish stance given the inflation situation in the UK.

In terms of data and speakers, the upcoming week offers limited input from the UK side. The list of BoE speakers is also relatively short. As a result, the movement of the GBP/USD exchange rate (Cable) may be primarily influenced by the performance of the US dollar, with some potential risk of a correction. Additionally, the EUR/GBP pair may struggle to find sustainable support above current levels.

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