Forex markets: The euro corrected on Trichet’s hint that there might be a second rate hike in July.

Thus, next week the “July hike” will no longer affect the exchange rate as an upside factor. EUR might move sideways. GBP might find the opportunity to correct, moving into a slightly lower fluctuation range, if the data come out to be weak. JPY might fall if the US data are positive...   

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            EUR – This week EUR rose to a whisker away from 1.4700 EUR/USD, but it then corrected to 1.44 at the end of the ECB meeting. Trichet hinted that there might be a rate hike in July, but this was already priced in by the market. The correction was triggered by (1) the fact that the market was already pricing in a hike, (2) uncertainties on the Greek front, and (3) the ECB’s stance on Greece. Next week the “July hike” will no longer affect the exchange rate as an upside factor, as was the case before the ECB meeting. However, the Greek issue is still unresolved, and it might generate some volatility depending on whether problems arise on the path to a possible solution or whether things go smoothly. Thirdly, EUR might be affected by the data, rising on adverse US data and/or positive Euro area data, andvice versa. Overall, EUR might move sideways roughly between 1.46 and 1.43/1.42.  

            GBP – Next week GBP might have the opportunity to correct, notably vs. USD, but also vs. EUR. The data due out (inflation, labour market and retail sales) should have the effect of pushing back in time the need to start monetary tightening. Barring surprises of a positive nature in the data, the expected fall in sterling might in this case prove permanent, resulting in a slight lowering of the fluctuation range (towards 1.60 GBP/USD). The mixed nature of the data had kept GBP in range. This week’s numbers were more even: industrial and manufacturing output contracted sharply, while producer prices cooled. Finally, the BoE left rates and APF unchanged, and rate hike expectations implied in market futures fell back a little, while two-year yields continued their falling trend.

            JPY – JPY has remained virtually steady around 80.00 USD/JPY. Next week’s BoJ meeting is not expected to furnish sufficient triggers to give a downward direction to JPY. As for the current level of the exchange rate, we think the central bank is unlikely to signal willingness to intervene in order to weaken yen. It is more likely that next week the USD/JPY will move in relation to the US data, with a slight asymmetrical response, i.e. rising on positive data more than it would fall on negative data. One factor, albeit secondary, favourable to the resilience of JPY might be a possible flare-up of concerns over Greece.

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