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Scotiabank strategists say the Pound is weakening against the US Dollar due to disappointing PMI.
The Pound Sterling is currently weak, down by 0.3% against the US Dollar. It is performing poorly compared to most G10 currencies, except for the Swiss Franc.
Recent preliminary PMIs have put pressure on the pound. The services PMI came in at 51.2, below the expected 52.9. Meanwhile, the manufacturing PMI surprised slightly at 48.2, which was better than the forecast of 48.0.
BBH FX analysts report that USD/JPY rises above 146.00 after Japan’s stable PMI data.
USD/JPY has risen above 146.00 after hitting a low of 145.86. Japan’s composite PMI stayed at 51.5 in July, showing growth in the service sector at 53.5, while manufacturing output fell to 48.8.
The chances of a Bank of Japan rate hike in December are now at 80% for a 25bps increase to 0.75%. In contrast, potential rate increases in the next two years are forecasted to be only 50bps.
Inherent Risks and Forward-Looking Statements
This information comes with inherent risks and forward-looking statements. It is important for readers to do their own research before making any financial decisions. Investing carries significant risks, including the potential for losing your entire investment. The markets and instruments discussed are for informational purposes only and should not be seen as an endorsement for trading. The content does not offer personal recommendations, and there is no liability for errors, omissions, or any consequences from using this information. Readers are responsible for any financial decisions made based on this content. The rise above 146.00 indicates mixed economic signals. While Japan’s service sector is growing, its manufacturing output is shrinking, creating uncertainty about the yen’s future direction. This divide suggests that any policy changes will be approached very cautiously.Contrasting Monetary Policies
The high likelihood of a December rate hike is supported by new data, as Japan’s core inflation has stayed at or above the central bank’s 2% target for over a year. Significant wage growth, the highest in over 30 years from recent union negotiations, pressures policymakers to abandon negative rates. This hike seems more like a necessity rather than a choice. In contrast, U.S. monetary policy is moving in the opposite direction. According to the CME FedWatch Tool, markets expect a greater than 60% chance of at least one interest rate cut by the Federal Reserve by September 2024. This clash between a possible hike in Japan and a cut in the U.S. is a central factor affecting the currency pair. We should also keep in mind the risk of government action, recalling the market intervention in late 2022 when the dollar-yen exchange rate went above 150. Recent verbal warnings from Japan’s finance minister about a weakening yen indicate that authorities are closely monitoring the situation. This creates a soft cap on the pair and poses a significant risk for those betting on continued yen weakness. Given these opposing forces, we recommend using derivative strategies that benefit from increased volatility rather than simple directional bets. Buying options like a straddle allows traders to profit from significant price movements in either direction without needing to predict which way it will go. This strategy helps manage the considerable uncertainty from central bank policies and potential interventions. The market’s expectation for a slow pace of future rate increases after the initial move is also important. This suggests that any yen strength following a hike may not last long. Traders may prefer shorter-dated options contracts that can capture immediate volatility around policy meetings. Create your live VT Markets account and start trading now.Initial jobless claims at 217K show job market resilience, not weakness
US initial jobless claims for the week were reported at **217,000**, which is lower than the expected **226,000**. The previous week saw **221,000** claims. The four-week moving average of initial claims is **224,500**, compared to the anticipated **229,500**.
Continuing claims hit **1.955 million**, just shy of the forecast of **1.960 million**. The prior week’s continuing claims were adjusted to **1.951 million** from an earlier estimate of **1.956 million**. The four-week moving average of continuing claims stands at **1.954 million**, versus the expected **1.956 million**.
Stable Job Market
These numbers suggest a stable job market with no signs of weakness. According to data from Michalowski, the strong labor market indicates that the Federal Reserve has no urgent need to lower interest rates. The lower-than-expected initial claims show that companies are not laying off workers at a troubling pace. This strength counters concerns about a potential economic slowdown. This perspective is backed by the latest Non-Farm Payrolls report, revealing that the economy added an impressive **303,000** jobs in March, exceeding expectations. Historically, the central bank is less likely to ease monetary policy when job creation and wage growth are both strong. We believe that this combination of data suggests a “higher for longer” interest rate environment is the most likely outcome. With the annual inflation rate holding steady at **3.5%**, as reported by the Consumer Price Index, there is strong support for maintaining current policies. The market is also adjusting to this reality, as seen in the CME FedWatch Tool, where the probability of a rate cut by September has dropped below **50%**. This adjustment creates clear opportunities for well-positioned traders.Trading Strategies and Market Implications
For those trading interest rate derivatives, we believe strategies betting on sustained elevated rates are wise. This may include selling futures contracts linked to the Secured Overnight Financing Rate (SOFR) that are pricing in rate cuts for late 2024. The aim is to profit as market expectations align with the central bank’s cautious approach. In the equity market, this scenario suggests potential challenges for stocks, particularly in interest-sensitive sectors like technology and real estate. We recommend considering put options on indices such as the Nasdaq 100 (QQQ) as a tactical hedge against a possible market correction in the coming weeks. This strategy would take advantage of the increased volatility that often comes with changing interest rate expectations. This policy outlook also favors the US dollar. As other central banks, like the European Central Bank, show a greater willingness to lower rates, a widening policy gap is likely to draw capital towards the dollar. We suggest using options to establish long positions in the U.S. Dollar Index (DXY) to take advantage of this strengthening currency trend. Create your live VT Markets account and start trading now.Retail sales in Canada drop by 1.1% in May due to ongoing US trade tensions
In May, Canada’s retail sales fell by 1.1%, matching expectations. This drop came after a revised increase of 0.4%, up from an earlier 0.3%.
When we exclude auto sales, the monthly decline was 0.2%, slightly better than the expected 0.3% drop. Early reports for June indicate a strong recovery, with a 1.6% rise in sales.
Retail Sales Growth
Year-over-year, retail sales grew by 4.9%, just below last month’s 5.0%. In May, 32% of retail businesses reported challenges from trade tensions between Canada and the U.S., down from 36% in April. Many faced price increases, changes in product demand, and rising costs for raw materials, shipping, and labor. The 1.1% drop in May was widely anticipated and is now considered old news. Our focus should shift to the positive advance estimate for June, which shows a robust 1.6% rebound. This suggests that consumer spending is stronger than the recent headline figures may suggest.Canadian Dollar Outlook
The expected increase in spending and reduced business worries about trade enhance the outlook for the Canadian dollar. We view this as an opportunity to anticipate a lower USD/CAD exchange rate in the coming weeks. Historically, when domestic data is unexpectedly strong, it has boosted currency performance. Increased activity may lead the Bank of Canada to be cautious about cutting interest rates further. With annual inflation holding steady at 2.9% in May, policymakers must remain vigilant. We expect short-term interest rates to stay high, as the case for aggressive cuts has weakened significantly. A strong consumer positively impacts Canadian corporate earnings, creating a good environment for the stock market. We see potential gains in the S&P/TSX 60 index, especially among consumer discretionary stocks that thrive on increased spending. This data supports a more optimistic approach through index futures or call options. The market often reacts strongly to past data, and we think this is one such case. The story is shifting from a weak May to a strong June, which hasn’t yet been fully reflected in asset values. This gap offers a chance to act before the stronger economic reality becomes widely accepted. Create your live VT Markets account and start trading now.Analysts report a slight decline of the Euro against the US Dollar as the ECB meeting approaches.
The Euro is down 0.2% against the US Dollar as everyone awaits the European Central Bank’s policy decision. Recent preliminary PMIs show that manufacturing is at 49.8 and services have slightly exceeded expectations at 51.2.
Market experts believe the ECB will keep interest rates the same, taking a neutral approach to future changes. A pending trade agreement between the US and EU on tariffs has given the Euro some upward momentum, continuing the positive trend seen since February.
Technical Indicators and PMI Data
The Relative Strength Index (RSI) at 60 indicates that the current trend is strong. The trend support is found at the 50-day moving average, which is at 1.1546. We expect resistance to be between 1.1700 and 1.1800, suggesting a potential range-bound situation in the short term. With the European Central Bank’s decision approaching, we think rates will stay the same, which is the view of most market analysts. However, a recent Reuters poll shows that over 90% of economists are now anticipating a rate cut in June, making the guidance moving forward very important. The latest composite PMI data from March, which shows a reading of 50.3 for the first time in ten months, suggests an economy that is stabilizing and may lessen dovish comments. This situation suggests a possible range-bound scenario, supported by the continued positive sentiment from the US/EU trade agreement on tariffs. We see an opportunity to sell volatility since the one-week implied volatility for EUR/USD has recently gone above 6% before the announcement. Strategies like short strangles or iron condors could be effective if the Euro stays within key technical levels after the meeting.Trend and Resistance Levels
The current trend is strong, as suggested by the strength index reading, but it’s crucial to monitor key levels to manage risk. We find important trend support at the 50-day moving average, now around 1.0830, while significant resistance is near the 1.0950 level. Historically, failing to break through major resistance after important news often signals a pullback toward the moving average. Create your live VT Markets account and start trading now.Canadian dollar declines as global stocks and commodity currencies rise
The Canadian Dollar (CAD) is facing some pressure as it hasn’t received any help from FX commodity currencies or global stocks. Retail sales in Canada are expected to drop by 1.0% in May, matching the early decline from April.
Seasonal trends for the CAD might become less favorable later this summer, partly due to rising equity market volatility. The USD/CAD pair has bounced back, suggesting a possible short-term low around the upper 1.35 zone.
**Short Term Indicators Favor USD**
Current short-term indicators are leaning toward the USD after a recent shift in range. However, the overall trends hint at a possible return to a downward movement for USD/CAD. Resistance for the USD is expected around the 1.3650/75 level.
The EUR/USD remains bearish following the ECB’s choice to keep the Deposit Facility Rate at 2.00%. Gold prices are nearing $3,360 per ounce, supported by the US Dollar’s rebound and rising US Treasury yields.
The GBP/USD pair has dropped to the mid-1.3500s, influenced by the Greenback’s recovery and a general risk-averse sentiment. Economic indicators, like S&P Global flash PMIs for July, show progress, indicating growth in the US economy, with stable interest rates from the Federal Reserve anticipated.
**Future CAD Prospects**
The Canadian dollar is expected to face challenges ahead. Recent data from Statistics Canada shows a 0.6% decline in retail sales for April. Although the preliminary estimate for May suggests a rebound, weakness in consumer spending and a soft job market could limit significant currency strength. Thus, we remain cautious about the loonie’s future.
Seasonal patterns might soon be unfavorable for the CAD, as historical data indicates that August and September can be tough months. Increased equity market volatility during this time often leads to more investment in the safer US dollar. Derivative traders should prepare for this potential shift in market sentiment.
The US dollar’s strength is supported by strong economic reports. The latest S&P Global Flash US Composite PMI reached a 26-month high of 54.6 in June, reinforcing the U.S. economic edge. This strong data allows the Federal Reserve to take its time regarding interest rate cuts, making the dollar more appealing.
Gold prices are stabilizing around $2,320 per ounce, pressured by the strong US dollar. The stability of US Treasury yields, with the 10-year note above 4.2%, makes non-yielding assets less attractive for now. This trend highlights the dominance of the greenback over other currencies and commodities.
Given these factors, traders should consider strategies that favor a rising USD/CAD exchange rate. Buying call options on the pair could provide upside exposure to further US dollar strength while limiting potential losses if the trend reverses. This seems like a smart way to position for a possible test of new highs above the 1.37 level.
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Costa emphasizes commitment to improving relations with China on climate change and trade issues
The EU is committed to improving its relationship with China and is open about addressing concerns. Climate change is a shared priority for both parties.
Trade Relations and Market Concerns
EU leaders discussed how to enhance cooperation on climate change. They also pointed out issues related to trade distortions, imbalances, and market access, stating that fair trade should be a common goal. The recent discussions are a sign of diplomatic efforts, but trade friction remains a key issue. The EU’s trade deficit with China decreased to €291 billion last year, highlighting the imbalance noted by the European Council President. This ongoing tension creates uncertainty for European investments. Due to the nature of these negotiations, we expect to see increased volatility in European markets, particularly with indices like the Euro Stoxx 50. Traders might think about buying straddles or strangles to prepare for big price changes, regardless of the outcome. This approach can be profitable if talks fail or lead to a major agreement.Sector Vulnerability and Strategic Positions
We believe that sectors heavily involved with China, especially German automakers, are most at risk from trade distortions. The ongoing EU investigation into electric vehicle subsidies may prompt retaliatory actions, posing a risk for these companies. Therefore, buying put options on an index of European car manufacturers could be a smart hedge in the upcoming weeks. Conversely, the focus on climate change by senior officials could create opportunities. If climate cooperation deepens, it may favor European firms in renewable energy and carbon capture. We suggest looking into long-dated call options on relevant clean energy ETFs to take advantage of this potential growth. Historically, EU-China trade talks have caused significant market swings, similar to the solar panel dispute from a decade ago. This experience leads us to believe that traders should remain vigilant, even with positive diplomatic rhetoric. We are watching option pricing closely for signs of increased hedging activity from institutions. Create your live VT Markets account and start trading now.In July, the ECB decided to maintain stable interest rates to align with expected market conditions.
The European Central Bank (ECB) kept key interest rates the same during its July 2025 meeting. The deposit facility rate is at 2.00%, the main refinancing rate is at 2.15%, and the marginal lending facility is at 2.50%.
Price pressures at home are easing, and wage growth is slowing down. The economy shows resilience despite global challenges. The ECB plans to decide its monetary policy based on the latest data, meaning they haven’t promised a specific direction for rates.
Currency Pair Stability
The ECB maintains a flexible approach and is likely to pause through the summer. The market reaction shows that the EUR/USD currency pair is stable at 1.1755. Traders expect a rate cut of about 21 basis points by year-end. Given the ECB’s decision, we should adjust our strategies to focus on patience and data. Moving away from a fixed rate path means taking strong bets now could be risky. Instead, we should consider strategies that benefit from a stable market or sudden increase in volatility. We need to pay close attention to upcoming economic reports, especially on inflation and growth. The latest Harmonised Index of Consumer Prices (HICP) for the Eurozone shows inflation at 2.4%. Any significant deviation from this number will likely impact the market more than comments from the central bank. We will also monitor the S&P Global Composite PMI, which recently reported 51.2, for signs that economic strength may be weakening.Market Volatility and Strategy
In this environment, near-term implied volatility is often low, giving us a chance to sell short-dated options for profit. History shows that when the central bank pauses—like the U.S. Federal Reserve did in mid-2023—there are sharp market reactions to key employment and price data. Thus, it’s wise to consider buying longer-dated options to prepare for possible policy changes later this year. For currency traders, the steady EUR/USD pair indicates that the market has accounted for the current situation. The future focus will be on comparing economic data from the Eurozone and the United States. With expectations for a 21 basis point cut by year-end, any signs that slow wage growth is sticking could quickly raise those expectations and put downward pressure on the currency. Create your live VT Markets account and start trading now.The US dollar sees slight gains but remains bearish, particularly against the CNY.
The US Dollar has made slight gains overall, but its performance differs among G10 currencies. It fell to a low against the CNY that hasn’t been seen since November during overnight trading.
Positive developments in trade agreements have boosted risk sentiment, although worries about tariffs remain. US consumers are facing an average effective tariff of about 20%. This raises short-term inflation concerns and may limit consumer spending.
Potential Inflation Concerns
Even with a temporary rebound in the USD, concerns about inflation and criticism of Federal Reserve policies continue. Futures suggest that we might see around 100 basis points in Fed rate cuts over the next year. Technical analysis indicates the USD is on a bearish path, showing stronger momentum after consolidating in early July. Analysts are closely watching the ECB’s policy decision and US economic indicators, such as PMI data and Initial Claims, for potential impacts on the currency market. We think derivative traders should prepare for a weaker US Dollar in the upcoming weeks. The bearish trend has gained speed, suggesting that any short-term strength may be a chance to sell rather than a sign of recovery.Federal Reserve Rate Cuts
The market expects significant rate cuts from the Federal Reserve, which is a key reason for this outlook. Futures pricing shows a strong likelihood of policy easing, with the CME FedWatch Tool indicating over an 80% chance of a rate cut by mid-next year. This expected easing will likely continue to put downward pressure on the currency. The impact of higher tariffs on US consumers could further weaken the economy and the Dollar. Recent figures, like the Conference Board’s Consumer Confidence Index dropping to its lowest level in months, suggest that consumer activity may slow down. This economic softness makes it more likely that the central bank will adopt an accommodating policy. We are monitoring key currency pairs where the Dollar shows clear weakness, particularly against the yuan. The Dollar’s decline to a multi-month low against the offshore yuan (CNH) below 7.20 highlights widespread selling pressure. The upcoming European Central Bank decision is vital; any difference from the Fed’s dovish approach could push the EUR/USD pair higher. Our strategy involves buying put options on dollar-tracking ETFs to take advantage of the expected drop. Keeping an eye on important US data points, such as the recent rise in Initial Jobless Claims to over 220,000, will help us find moments to trade or take advantage of volatility around these releases. These figures confirm the fading economic momentum that has been supporting the Dollar. Create your live VT Markets account and start trading now.BBH analysts: UK composite PMI hits two-month low due to services sector slowdown
The UK’s composite PMI dropped to a 2-month low of 51.0, down from 52.0 in June. This fall was mainly due to a slowdown in the services sector, where the PMI decreased from 52.8 to 51.2. However, the manufacturing PMI improved, rising to a 6-month high of 48.2 from 47.7.
In July, private sector businesses increased their prices, causing inflation to rise for the first time since April. Ongoing inflation makes it hard for the Bank of England to implement further easing measures to support economic growth. The swaps market indicates a 95% chance of a 25 basis point rate cut to 4.00% at the August 7 meeting, with a total expected cut of 75 basis points over the next year.
