News & Analysis

The past month will predominantly be remembered for developments in Europe as restricted gas supplies from Russia threatened to tip major euro-area economies into immediate recession and intensify already-high inflation pressures. At the same time, battling an acute cost of living crisis, the Italian coalition government under former ECB President Mario Draghi collapsed and brought political risk back into the fold. In currency markets, these developments meant the limelight was firmly on EURUSD, with the pair making repeated attempts at breaking parity before finally breaching the threshold for the first time since 2002 on July 14th. Since then, an improvement in gas flows and a 50bp hike from the ECB resulted in EURUSD retracing to an anchor point of 1.02. Outside of Europe, developments in monetary policy have come thick and fast. The most notable have been a 100bp hike from the Bank of Canada and a more dovish 75bp hike by the Federal Reserve. The latter saw the dollar soften at the margin and boost pro-cyclical G10 currencies towards month-end. Looking ahead, developments in July have endorsed our medium-term view on the dollar, which foresees a more sustained depreciation towards the end of Q3 due to the deceleration of the Fed’s hiking cycle as policy enters restrictive territory and the economy begins to feel the full effects of tighter financing conditions. Until then, the DXY index is likely to remain supported at elevated levels, owing to the weighing of the euro in the DXY basket and our expectation that the euro-area’s growth outlook will force another run on parity this month. Additionally, concerns around the global growth outlook are likely to limit the extent to which risk assets can rally without a co-ordinated shift in monetary policies.

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Authors:
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst

 

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