FX Weekly: G10 Insight From our Head of Market Analyst

The USD's direction depends on today's PCE data; strong data could keep rates higher, while dovish data might prompt shorting the USD and a rate cut in September. Bearish on the EUR due to weak Eurozone data and political risks; prefer shorting EUR against stronger currencies like GBP or AUD. Bullish on the GBP for its political stability and positive data, though cautious ahead of the BoE meeting, which might hold rates with a dovish tone. AUD's recent weakness stems from risk-off sentiment and China's rate cuts, but high CPI data could trigger an RBA hike, making AUD a good long-term buy. The NZD and CAD are clear shorts due to rate cut signals from RBNZ and BoC. CHF remains weak with no SNB interventions and potential for more cuts. JPY's direction hinges on the next BoJ meeting but may strengthen when the Fed cuts rates in September.

USD: The USD's direction is currently mixed, influenced by political factors and Federal Reserve actions (notably Trump and Fed cuts). The future direction will hinge on today's PCE data. If the data is strong, similar to or higher than prior readings, it could indicate that the Fed will remain cautious, potentially keeping rates higher for longer with one cut in 2024. Conversely, if the PCE data is dovish, it would be an opportunity to short the USD next week, as the market already anticipating a rate cut in September.

EUR: I remain bearish on the EUR due to recent weak figures from the Eurozone, particularly Germany and France. Additionally, the ECB signalled in its July meeting that weak growth is now a primary concern, despite ongoing inflation risks. Political risks in France and fiscal policy issues add to the bearish outlook. Therefore, I prefer to short the EUR against stronger currencies such as GBP or AUD, if both signal strength next week on the BoE meeting and CPI respectively.

GBP: I remain bullish on the GBP due to political stability, recovering economic activity, and positive data. However, caution is warranted with the upcoming BoE meeting and I see will be a dovish meeting. The BoE indicated in June that high services inflation would not disrupt the UK's disinflation process. Additionally, the labour market showed some moderation in June, although it remains elevated. The BoE might hold rates but give a dovish tone during the meeting. If this happens, buying on dips in GBP could be a good strategy.

AUD: The recent weakness of the AUD is driven by risk-off sentiment and further rate cuts from China. While rate cuts are generally not good for currency value, but the latest China cuts aim to boost their economy and meet the 5% GDP target by the end of 2024, which could benefit the AUD in the long term. Moreover, high monthly Australian CPI signals upside risk on June CPI which could prompt an RBA hike in August. Meanwhile, the Australian June labour report aligns with the RBA's expectations, but inflation risk remains RBA's main concern. As a result, the AUD will remain a good currency for me to long next week if inflation shows another upside surprise.

NZD: In the July meeting, RBNZ signalled a possible rate cut this year and New Zealand is suffered the weak economy, so NZD is an obvious currency to short.

CAD: Similar to the NZD, the BoC has indicated further rate cuts in the July meeting if incoming data is soft. The primary concern for Canada is growth and the labour market shows some slack, with a rising unemployment rate and moderating wage growth, though it remains elevated. As a result, I will continue to hold the bearish view on the CAD for the time being and short it against with strongest currencies such as AUD, GBP or USD if the strength allows next week.

CHF: Fundamentally, the CHF remains weak. Stable sight deposits indicate no SNB interventions, and the SNB is open to more cuts this year. In the June meeting, the SNB expressed a preference for a weaker CHF to reduce import inflation. Recent CHF strength resulted from BoJ intervention, which triggered risk-off sentiment. Overall, without any new developments for now, the broader view supports continuing to short the CHF.

JPY: For me, It is too early to adopt a bullish view of the JPY. The direction will depend on the next BoJ meeting. If the BoJ hikes rates or tapers bond buying while maintaining an accommodative monetary policy, shorting the JPY could still be viable. BoJ members have signalled weak consumption in the economy, which is not conducive to a rate hike. The JPY might strengthen only when the Fed starts cutting rates in September, marking a clear fundamental shift and policy divergence between the US and Japan. As a result, I will maintain a cautious approach on JPY until next week meeting.

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