Despite recent tariff announcements, global foreign exchange markets are demonstrating a clear and unwavering focus on fundamental economic data, signaling a nuanced perspective on Global Trade policy impacts. This paradigm shift highlights that while protectionist measures grab headlines, the underlying strength and direction of economies, as revealed by Economic Indicators, hold sway over currency movements.
The United States recently unveiled new ‘reciprocal’ tariffs, targeting nations like Canada, Switzerland, and New Zealand, while maintaining a base rate for most countries. However, the market’s response has been notably subdued, largely due to lingering expectations of impending trade deals. This diffidence suggests that participants in FX Markets view these tariffs as a negotiation tactic rather than a definitive long-term barrier to global commerce.
Today, the spotlight remains firmly on critical Economic Indicators from the US. Anticipated payroll figures, expected around 115,000, and a projected unemployment rate of 4.2% are eagerly awaited. These statistics could significantly influence the USD Forecast, potentially leading to a consolidation of recent gains or introducing new volatility as traders react to the health of the labor market.
A review of yesterday’s US data reinforced this data-centric approach. The core Personal Consumption Expenditures (PCE) deflator, a key inflation gauge, rose 0.3% month-on-month, aligning with consensus and avoiding any alarming uptick. Concurrently, personal income and spending increased by 0.3% nominally, with real spending up 0.1%. Furthermore, the employment cost index saw a 0.9% quarter-on-quarter rise, slightly exceeding forecasts and indicating private wage growth consistent with long-term inflation targets.
Overall, recent data points have not provided a decisive push for a significant downward trend in the dollar. The Dollar Index (DXY) saw some upward momentum primarily driven by the post-Bank of Japan yen selloff, yet the dollar’s performance against other G10 currencies remained mixed. This underscores our view that the FX Markets are fundamentally data-driven, with broader reassessments of growth and central bank stances having less lasting impact than immediate economic releases.
Looking ahead, upcoming US jobs data presents a crucial opportunity for FX Markets, particularly for the EUR/USD pair, potentially paving the way for a drop to 1.130 before later August CPI figures. The recent correction has alleviated stretched long positions, creating a more balanced risk profile for the pair ahead of these pivotal Economic Indicators.
While the new ‘reciprocal’ tariffs have had minimal market impact, Canada’s position warrants special attention, especially following Mexico’s recent pause extension. Despite partial USMCA protection from a new 35% levy, we believe markets continue to underestimate the downside risks for the Canadian Economy. Progress on trade negotiations remains lackluster, and Canada’s recognition of Palestine has added another layer of complexity.
Across Europe, the release of July PMIs will be closely watched on the calendar, offering fresh Economic Indicators for the region. June showed a mixed picture, highlighting strong divergences in local stories, particularly in Central and Eastern Europe. While an improvement in sentiment is generally expected across most countries, recent PMI releases have delivered more surprises than usual, keeping FX Markets on alert.
In Poland, recent inflation data presented a surprise, with headline inflation dropping less dramatically than anticipated, from 4.1% to 3.1%, largely due to higher fuel and energy prices. Core inflation also saw a slight fall to 3.2% year-on-year. While the general trend points towards a more dovish stance, the slower decline in inflation complicates the bearish outlook on the Polish zloty. Despite some recent hawkish repricing, Monetary Policy expectations suggest a 25bp rate cut in September remains feasible, justified by the current rate differential.
