GemForex - Weekly analysis

This month has dragged on and seems to be lasting forever. And it probably feels so due to the fact the US FOMC policy meeting falls in the middle of this week, instead of its usual mid-month schedule. Last week the market's data news was disappointing, to say the least, coming in softer across the board, but being a prerequisite for this week, which has the potential to diverge the expectations and the actual reality situation for our beloved FX pairs. 

In Japan, the BOJ, as widely expected, decided to keep its policy measures unchanged at its Jul Monetary Policy Meeting (MPM). The BOJ continued its stark divergence with its G7 peers who are on the cusp or already normalizing monetary policy, as the Japanese central bank kept persistently to its preference for easing. And with that in mind, the divergent Fed-Bank of Japan policy stance should limit the downside for the USD/JPY pair. In fact, the BoJ stuck to its ultra-easy policy settings last week and committed to continue buying the Japanese Government Bonds (JGB) at an annual pace of around ¥80 trillion. Its only a matter of question if the monetary policy divergence between BOJ and FED will widen the spread between the Yen and the Dollar to an alarmingly worrying level.

For the week ahead, the markets are anticipating FED to go for the 75-bps rate hike, and alongside the FOMC, we have major news coming from the Eurozone, Germany‘s and Eurozone’s GDPs and inflation prints, regions which are holding the brunt of record inflation and suffer for lack of accessible fuel, which slowed down the industry and performed much worse than anticipated. 

In tandem, the ECB turned hawkish last week, and  President Christine Lagarde said that the ECB will raise its interest rates until inflation falls back to its 2% target, a spread of 6.6% with the current Euro CPI prints. The ECB raised Its interest rates last week, for the first time since 2011, by a 50-bps rate hike, much higher than markets anticipated. The ECB also has introduced a new Transmission Protection Instrument to keep sovereign bond yields in check while at the same time hiking rates by 50bps in a surprise move, giving itself unrestricted bond buying abilities, even in a Quantitative tightening period, something unprecedented. 

However, at the same time, Italian politics has moved into the spotlight. ''The Italian political crisis was worsening while subsequent PMI data have suggested that recession risks for the Eurozone could be rising

On a similar note, Australia releases its Q2 CPI on Wednesday. The Australian Dollar‘s value is a function of international investors' macro outlook for the world economy, and with the global recession words being on everyone’s lips, we can expect volatility over the number as the street uses it to reprice the trajectory of the Reserve Bank of Australia tightening cycle. 

 In short, this upcoming week will pave the wave with reactive policies for the remainder of the summer and for the autumn months. It remains only a question of whether the Western economic world will manage to battle this tide effectively before a natural winter downturn across all industries.