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2 August 2021

FX Daily: Not trusting the weaker dollar trend

We don't think the dollar will have another bad week, as some lingering external risk factors (mostly related to China's regulatory crackdown) could weigh on risk assets and the US dataflow may endorse hawkish expectations on the Fed's policy. Elsewhere, the RBA announcement should not help AUD, which remains vulnerable to falling iron ore prices. 

USD: We don't expect to see another bad week for the dollar

In many ways, last week was a rather unique one for markets. A new risk factor – Beijing’s regulatory crackdown – hit risk assets, the Fed signalled it is nearing tapering but Powell sounded less hawkish than some expected, and ultimately the dollar weakened across the board. In the week ahead we think Beijing’s regulation moves will remain firmly in focus. Differently from what we saw at the start of last week, this now appears to be less of a domestic story for China and more of a geopolitical theme, as Beijing is reportedly seeking a discussion with the US after the SEC banned IPOs and asked for additional disclosures from Chinese companies.

In the US, data will also take centre stage again. The ISM Manufacturing index today will be the first piece of a dataflow that will culminate with Friday’s payrolls and will provide some indications of how sustained the US recovery has been in July. We expect the ISM Manufacturing to stay around the 60 level, as strong demand should continue to be met by supply strains.

As discussed in our week ahead preview, we think this week’s data should, on balance, keep investors upbeat on the US recovery and ultimately help cement the view that the Fed will soon announce more details on its tapering programme (we think this could happen at the Jackson Hole Conference) and keep fuelling speculations around a 2022 rate hike. When combined with a market that remains concerned around flaws in the global recovery story due to the Delta Variant spread, the Beijing-Washington regulatory spat that may give further jolts to risk assets and portfolio outflows from EM that may well have been exacerbated by Chinese equities’ sell-offs, we are inclined to think the dollar will not extend its depreciating trend into this week. After what appeared to be a profit-taking-related move last week, we see DXY endorse Friday’s rebound and stabilise around or above the 92.00 level in the coming days.

EUR: Range-bound trading could continue

EUR/USD looks set to face a week in which most moves will be caused by external factors and where, once again, the USD leg will be the key driver. The eurozone’s calendar is fairly quiet and indeed the ECB provided enough reasons with its strategy review and at the July meeting that they will remain unreactive to economic developments for longer. We expect more range-bound trading in the EUR/USD this week and if the dollar regains some ground we could see the pair retract to sub 1.1800 levels.

GBP: Sailing towards a likely uneventful BoE meeting

UK markets will mostly be focused on the Bank of England meeting on Thursday this week, from which, however, we do not expect any new guidance to emerge and the GBP impact to be contained. Other themes to follow will be any development on the EU-UK post-Brexit talks about the Northern Ireland protocol (latest news hinted at a more conciliary tone) and any movements in the UK contagion curve (also here, there has been some good news), along with the government’s decisions on travel rules. All in all, we think the upside for GBP/USD should be limited by some tentative USD progress and a material spike above 1.4000 may not be a story for this week.

AUD: No help coming from the RBA

A plunge in iron ore prices to May’s lows after China took steps to curb steel production prompted some idiosyncratic weakness in AUD, which has been the worst-performing currency in G10 in the past few days. As iron ore displays tentative signs of stabilisation today, the focus will soon shift to the RBA policy announcement tomorrow morning (at 0530 BST). We already thought the RBA would leave all sides of its policy stance unchanged at this meeting, but this view was likely reinforced by the spread of the Delta Variant in Australia (Sydney will be in lockdown at least until the end of August) and the drop in iron ore prices. There is very little RBA hawkishness priced in, so the impact on AUD should be neutral, with external factors (commodities, China’s sentiment dynamics, above all) likely to keep dominating - and possibly bearing more downside risks - this week.

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