The week ahead in the forex market.

With a miserable first half for the stock market now in the history books, investors are assessing whether the U.S. economy can avoid a significant downturn as the Federal Reserve raises rates to fight the worst inflation in decades.

However, the U.S. labour market powered ahead with strong job gains despite recession fears.

U.S. employers hired far more workers than expected in June and continued to raise wages at a steady clip, signs of persistent labour market strength that give the Federal Reserve ammunition to deliver another 75-

basis-point interest rate hike this month.

US payrolls smash expectations

US payrolls rose by 372K in June, easily beating expectations of a 268K. It was the third month in a row that jobs beat expectations. Average hourly earnings went up another 0.3% on the month, in line with the expectation. The hot jobs data means the Fed has no reason not to press ahead with its aggressive hikes. However, as we had noted previously, NFP was never going to cause a major reaction as the market only cares about growth and inflation data right now.

So far, the US economy has managed to stay stronger than many other parts of the world, not least Europe. In terms of inflation, US CPI printed a new 40-year high of 8.6% last month. Consequently, the Federal Reserve decided to hike rates by 75 basis points on June 15 and signalled more aggressive tightening was on the way.

Let’s see how the situation has evolved in June. The latest CPI data is due on Wednesday, as we now look forward to the key events in the week ahead. The RBNZ and BoC will be making interest rate decisions. In addition, the week ahead also marks the unofficial start of company reporting season. So, there will be lots to look forward to.

The markets managed to claw back some losses in the first full week of July after a bruising first half of the year. By European close on Friday, the major US indices were testing their weekly highs following a rather good US nonfarm payrolls report. The US dollar came off its highs, though, and this allowed the EUR/USD et. al to turn positive heading into the European close. Markets were signalling risk ON, in other words, as we looked forward to the week ahead. But shortly after the European close, US indices came sharply off their highs, suggesting that this bear market is not done just yet.

"The June employment report indicates that the economy is neither on the cusp of a recession - much less already in one - nor in an overheated state," Oxford Economics said in a note.

It predicted more market volatility "amid heightened speculation over what the Fed will do."

More key information on the course of the economy is expected later this month, as second-quarter earnings reports flood in over the next few weeks and investors parse fresh data, including Wednesday’s closely watched consumer prices report for June.

EUR/USD Weekly Forecast: More fireworks ahead as inflation data looms.

The EUR/USD pair plummeted to a 20-year low of 1.0071 on Friday to end the week at around 1.0170. Panic took over financial markets amid lingering recession fears and mounting inflationary pressures, spiced with an energy crisis in Europe, courtesy of Russia.

Investors moved into safety, and the dollar made the most out of it. Demand for US government bonds weighed on yields at the beginning of the week, although the Treasury yield curve inverted, and hell broke loose. The yield on the 2-year note is higher than that on the 10-year note, usually seen by market participants as a hint of an upcoming economic setback.

Central banks on hold

In fact, central banks poured some cold water on fears amid policymakers' decision to not innovate on monetary policy.

The FOMC released the Minutes of its June meeting on Wednesday. The document showed that Federal Reserve officials agreed high inflation warranted restrictive interest rates and are open to being even more restrictive if inflation persists. Also, the majority of participants saw a downside risk to growth while judging there was a “significant risk” that higher inflation could become entrenched.

The Fed left the door open to another 75 bps hike, but investors welcomed the fact that it refrained from hinting at a 100 bps rate hike or any other more aggressive measure. Another thing that was missing from the document was a reference to a potential recession. The fact that the Fed did not mention it, however, does not mean the risk is not there. The Fed downwardly reviewed growth forecasts while remarking that inflation risks remain elevated.

On Thursday, it was the turn of the European Central Bank to release June meeting Accounts. The Governing Council agreed it needed to preserve its credibility “by showing its resolve.” Some members still wanted to keep the door open for a larger rate hike in the July meeting, although President Christine Lagarde reiterated multiple times the hike would be 25 bps.

Central banks put a temporal halt to the dollar’s rally by helping equities to recover some ground, but the greenback ends the week retaining its strength across the FX board.

An early trigger of the weekly panic trading was macroeconomic data, as S&P Global published the final June PMIs, which showed that growth in the EU slowed to a 16-month low. Also, Retail Sales in the Union rose a modest 0.2% in May, while German Industrial Production contracted 1.5% YoY in the same month.

Inflation in the eye of the storm

The upcoming week will be critical for currencies, as the US will release June inflation figures. The Consumer Price Index is expected to have risen to 8.7% YoY, from 8.6% in May. The core reading, however, is foreseen contracting from 6.0% to 5.7%. The country will also publish June Retail Sales, expected to have recovered after dipping in the previous month, and the preliminary estimate of the July Michigan Consumer Sentiment Index.

Across the pond, the focus will be on Germany, as the country will publish the July ZEW survey and the final estimates of June inflation.

Other data highlights for the week

Tuesday: German ZEW survey

  • Wednesday: Chinese trade figures, UK construction and industrial production

  • Thursday: Aussie employment figures and US PPI

  • Friday:

  • Chinese GDP & industrial production

  • US retail sales, UoM surveys and Empire State Manufacturing among others.

Among the highlights, China’s trade figures and GDP will be important while the ZEW survey out Germany could see the euro start drifting towards parity. The euro area economy faces mounting headwinds caused by Russia’s war in Ukraine, which has helped to drive record inflation and gas crunch. A recession may not be avoided now. A weakening euro means more inflation will be imported in the Eurozone, which is not something desirable right now. Thus, we may hear the ECB officials start talking up the euro, although they will have a hard time to convince the markets given the macro risks all pointing to the downside. Any hawkish rhetoric to lift the currency might fall on deaf ears.