The prospect of lower oil prices and possible Fed easing is benign for most G10 currencies.
The US dollar appreciated modesty following Israel’s airstrikes on Iranian nuclear facilities in June. However, the announcement of a ceasefire led to the USD weakening, pushing the EUR/USD above 1.17. Looking ahead, we expect the US dollar to continue weakening against the euro, driven by persistent hedging demand and any potential softness in the US labour market.
USD: Keep an eye on the US labour market
In June, the US Federal Reserve held rates steady at 4.50%, with Chair Powell adopting a cautious stance. The Fed now sees inflation lingering at 3% in 2025, while growth expectations have been reduced to 1.4%. Meanwhile, momentum in the Fed’s preferred super-core inflation gauge is fading. Should the labour market show signs of strain, the door could open to rate cuts, setting the stage for a renewed wave of US dollar weakness.
EUR: Upward momentum set to persist
Ongoing hedging requirements and any nascent weakness in the US labour market will weigh on the USD, which can easily push the USD/EUR pair towards higher levels. We note that long EUR positioning has increased in recent weeks, though it remains well below levels which prevailed in 2023. The European Central Bank’s (ECB) 24 July meeting is likely to be a non-event, with rates highly likely to remain on hold.
JPY: Losing appreciation catalysts
The downside risks for the USD/JPY are likely to be limited. The BoJ’s apparent reluctance to raise rates means that investors will likely move to reduce long JPY positioning, which may weigh on the JPY, or at least prevent short-term appreciation pressures. The main event risk for the JPY will be the publication of Japanese inflation data on 18 July. Any print on the downside of expectations is likely to weigh on the JPY.
CNY: Trading at the lower end of its recent ranges
The USD/CNY will continue to trade at the lower end of its recent ranges. Two-year yield spreads have contracted further, creating continued downside risks to levels of 7.15. We suspect that any material downside will reflect the USD leg of the pair. The PBC is unlikely to want ongoing CNY appreciation, given low domestic inflation dynamics.
GBP: August rate cut
The GBP/USD pair will edge higher, driven more by the dollar's weakness than its own strength. However, markets will increasingly focus on the UK labour market and retail sales data. The BoE is banking on a substantial decline in average wage growth from Q3 onwards, and any signs of this will weigh on the GBP, especially against the EUR.
CHF: Ongoing appreciation risks
Also reflecting USD weakness, the USD/CHF downside trend is set to persist. In addition, the SNB is unlikely to intervene forcefully in the short term, because EUR/CHF exchange rates are generally quite stable at levels of just below 0.94.
