Last week (7/10-7/14), the US dollar index plummeted by 2.3%, while non-US currencies rallied across the board. Among them, the Japanese yen rose by 2.4% and the Euro increased by 2.3%.

【Source: MacroMicro   Date2023/7/10-2023/7/14】

【Source: MacroMicro   Date2023/1/1-2023/7/14】

Last week, the euro surged against the US dollar, gaining 2.3%. The main reasons behind this were the lower-than-expected US inflation data for June and the hawkish minutes from the European Central Bank (ECB) meeting in June.

The US Consumer Price Index (CPI) rose by 3% year-on-year in June, the lowest since March 2021, falling short of the expected 3.1%. The core CPI for June also declined by 0.5 percentage points to 4.8% compared to the previous month, which was lower than anticipated. Additionally, the US Producer Price Index (PPI) released afterwards showed a narrower increase than expected.

Overall, market expectations for rate hikes by the Federal Reserve cooled down after July, with rate cut expectations shifting to as early as March next year. This led to a significant decline in US bond yields and a sharp drop in the value of the US dollar.

In contrast, the ECB may need to continue raising interest rates after July. The minutes from the ECB's monetary policy meeting in June, released on July 13th, revealed that committee members unanimously believed it was necessary to further raise rates to tighten monetary policy and bring inflation back to the target level.

【Source：MacroMicro ，Eurozone's Core Inflation Remains Strong】

Mitrade Analyst：

In the short to medium term, the market's expectations of interest rate hikes by the European and US central banks for the rest of the year remain a key variable influencing the EUR/USD exchange rate. This week, particular attention will be paid to the final June Harmonized Consumer Price Index (CPI) for the Eurozone and US retail sales data. If the CPI data indicates persistent inflationary pressures, the euro may continue to maintain its relatively high position.

From a technical perspective, the EUR/USD pair has exceeded the previous high of 1.11 and risen above the 20-day moving average by 2%. Additionally, the RSI indicator suggests an overbought condition. Therefore, there may be a moderate pullback in the EUR/USD pair this week, with support at 1.11.

【Source：TradingView】

Last week, the Japanese yen appreciated against the US dollar by about 2.4%, mainly due to the significant weakness of the dollar and expectations of adjustments in Japan's monetary policy.

Many traders and analysts are betting that with the improvement in the Japanese economy, the Bank of Japan is likely to make adjustments to its yield curve control policy (YCC) at the end of this month (July 28th). Despite the absence of a major increase in US bond yields, Japanese 10-year government bond yields have been rising rapidly recently.

【Source：MacroMicro 】

If the Bank of Japan adjusts its policy, it will narrow the interest rate differential, making the yen more attractive. This is why the expectation of adjusting the YCC policy leads to yen appreciation.

However, not everyone believes that the Bank of Japan will adjust or even abolish the YCC policy this month.

Tetsufumi Yamakawa, Chief Japan Economist at Barclays, stated that the Bank of Japan has taken a visibly cautious stance and does not appear compelled at this stage to modify the YCC based on the current improvements in wages and price indices. He believes that the timing for the Bank of Japan to adjust its policy is not July but October. Earlier, analysts from Bank of America also predicted that the Bank of Japan would adjust the YCC policy in October rather than this month.

Mitrade Analyst：

Although Japan's latest CPI year-on-year is close to that of the United States, recent leading indicators such as PPI have shown signs of inflation peaking. This will bring downward pressure on inflation in Japan and delay the time for the Bank of Japan to adjust its monetary policy. The focus this week is on Japan's CPI data for June. If inflation exceeds expectations, the yen is expected to continue to rise.

From a technical perspective, the USD/JPY has dropped below the 60-day moving average towards the 90-day moving average, and the RSI indicator shows it is approaching the oversold area. It is expected that the USD/JPY will experience range-bound volatility in the short term, with support at 137 and resistance at 140.

【Source：TradingView】