The Fed and the ECB will provide new guidance to the markets. Overview of USD, EUR, GBP
June 14, 2023 3:22 am
This week, several of the largest central banks will make decisions on monetary policy following the recent hawkish surprises from the RBA and the Bank of Canada. The Fed, ECB, Bank of Japan, and the People’s Bank of China could trigger significant movements in the currency market.
The Fed will be the first to announce its decision, which will take place on Wednesday evening. It is expected that the FOMC will pause and keep the current rate unchanged but maintain the suspense in favor of another rate hike in July, while expectations for the start of a rate-cutting cycle confidently shift towards the end of the year. Overall, the rate expectations favor the dollar.
Bearish sentiment towards the US dollar has been declining for the third consecutive week. The aggregate short position has decreased by $3.5 billion to -$8.26 billion, marking the largest single change in favor of the dollar since the beginning of the year.
It should be noted that all major currencies have adjusted in favor of the dollar without exception. At the same time, the net position in gold has increased by $1.313 billion to $34.487 billion, which indirectly indicates both persistent inflationary expectations and the fact that risks for the global economy sliding into a global recession are still high.
Oil prices are declining, despite overall positive risk sentiment. It appears that Saudi Arabia’s decision to cut production by 1 million barrels per day did not help sustain oil prices at high levels. Market focus may now be more on the ongoing selling of oil inventories.
Simultaneously, concerns about a slowdown in economic growth in China are growing, which could further pressure global demand. Goldman Sachs has revised its oil price forecasts downwards for the third time in six months.
EUR/USD
On Thursday, the ECB meeting will take place, where an interest rate increase of 25 basis points is expected, which is already fully priced in by the markets. Additionally, an announcement will be made regarding the cessation of reinvestments within the APP program from July. New staff forecasts will be presented, and commentary on the monetary policy perspective will be provided.
As the markets are currently primarily focused on signs of inflationary decline, any dovish signals from the ECB could trigger a strong reaction leading to euro sell-offs, while the maintenance of a hawkish position may be ignored.
At present, the rate forecast implies another 25 basis point increase in July, meaning the final rate is expected to be 50 basis points higher than the current level of 3.25%.
The net long position in EUR has decreased by $1.063 billion to $21.175 billion over the reporting week. The bullish bias is still high, but the reduction has been observed for the third consecutive week, with the calculated price moving further downward.
A week ago, we saw a high probability of further decline in EUR/USD. This forecast remains valid, and the recent local high at 1.0797 is considered a correction. We expect that bulls will encounter resistance near the technical level of 1.0810. If the ECB confirms its hawkish stance on Thursday, the corrective rally may generate another upward impulse towards the resistance at 1.0865. However, it should be noted that the long-term trend is bearish, and after the completion of the upward attempts, a reversal to the downside is expected. The long-term target is still seen in the support zone of 1.0480/0520.
GBP/USD
The Bank of England will hold its next meeting next week, and the upcoming macroeconomic data in the following days can be crucial for its position.
This morning, the labor market report was released, and despite the decline in the unemployment rate, the growth in average wages continues, at a higher pace than expected. The growth in average wages for the three months up to April reached 7.2% compared to the previous month’s 6.8% (forecast 6.9%). The growth including bonuses also accelerated from 6.1% to 6.5%.
The report strengthens inflation expectations and increases the chances of a hawkish decision by the Bank of England, which may be reflected in the BoE’s inflation forecast to be published on Friday. Comments from Bank of England officials appear hawkish – Haskell supports further rate hikes, and Mann notes the persistent upward pressure on inflation. These comments have increased the yield of British securities and reinforced expectations of further rate hikes. The futures market now sees the peak of the Bank of England’s rate at 5.50% by the end of the year.
Thus, in the short-term perspective, the pound has the potential to strengthen slightly. However, investors are not rushing to make bets on the pound in the long run. The net long position in GBP has slightly decreased by £57 million to £969 million over the reporting week. The positioning is bullish, but the excess is insignificant. The calculated price is below the long-term average and is downward-directed.
Based on this, we continue to prioritize the bearish impulse, despite the pound’s attempts to correct higher. We expect that the corrective rally will end below the local high of 1.2678, and any attempt to test it will be unsuccessful, leading to a reversal of GBP/USD to the downside. The nearest target is 1.2305, followed by 1.2240 and 1.2134.
The material has been provided by InstaForex Company – www.instaforex.com
This week, several of the largest central banks will make decisions on monetary policy following the recent hawkish surprises from the RBA and the Bank of Canada. The Fed, ECB, Bank of Japan, and the People’s Bank of China could trigger significant movements in the currency market.
The Fed will be the first to announce its decision, which will take place on Wednesday evening. It is expected that the FOMC will pause and keep the current rate unchanged but maintain the suspense in favor of another rate hike in July, while expectations for the start of a rate-cutting cycle confidently shift towards the end of the year. Overall, the rate expectations favor the dollar.
Bearish sentiment towards the US dollar has been declining for the third consecutive week. The aggregate short position has decreased by $3.5 billion to -$8.26 billion, marking the largest single change in favor of the dollar since the beginning of the year.
It should be noted that all major currencies have adjusted in favor of the dollar without exception. At the same time, the net position in gold has increased by $1.313 billion to $34.487 billion, which indirectly indicates both persistent inflationary expectations and the fact that risks for the global economy sliding into a global recession are still high.
Oil prices are declining, despite overall positive risk sentiment. It appears that Saudi Arabia’s decision to cut production by 1 million barrels per day did not help sustain oil prices at high levels. Market focus may now be more on the ongoing selling of oil inventories.
Simultaneously, concerns about a slowdown in economic growth in China are growing, which could further pressure global demand. Goldman Sachs has revised its oil price forecasts downwards for the third time in six months.
EUR/USD
On Thursday, the ECB meeting will take place, where an interest rate increase of 25 basis points is expected, which is already fully priced in by the markets. Additionally, an announcement will be made regarding the cessation of reinvestments within the APP program from July. New staff forecasts will be presented, and commentary on the monetary policy perspective will be provided.
As the markets are currently primarily focused on signs of inflationary decline, any dovish signals from the ECB could trigger a strong reaction leading to euro sell-offs, while the maintenance of a hawkish position may be ignored.
At present, the rate forecast implies another 25 basis point increase in July, meaning the final rate is expected to be 50 basis points higher than the current level of 3.25%.
The net long position in EUR has decreased by $1.063 billion to $21.175 billion over the reporting week. The bullish bias is still high, but the reduction has been observed for the third consecutive week, with the calculated price moving further downward.
A week ago, we saw a high probability of further decline in EUR/USD. This forecast remains valid, and the recent local high at 1.0797 is considered a correction. We expect that bulls will encounter resistance near the technical level of 1.0810. If the ECB confirms its hawkish stance on Thursday, the corrective rally may generate another upward impulse towards the resistance at 1.0865. However, it should be noted that the long-term trend is bearish, and after the completion of the upward attempts, a reversal to the downside is expected. The long-term target is still seen in the support zone of 1.0480/0520.
GBP/USD
The Bank of England will hold its next meeting next week, and the upcoming macroeconomic data in the following days can be crucial for its position.
This morning, the labor market report was released, and despite the decline in the unemployment rate, the growth in average wages continues, at a higher pace than expected. The growth in average wages for the three months up to April reached 7.2% compared to the previous month’s 6.8% (forecast 6.9%). The growth including bonuses also accelerated from 6.1% to 6.5%.
The report strengthens inflation expectations and increases the chances of a hawkish decision by the Bank of England, which may be reflected in the BoE’s inflation forecast to be published on Friday. Comments from Bank of England officials appear hawkish – Haskell supports further rate hikes, and Mann notes the persistent upward pressure on inflation. These comments have increased the yield of British securities and reinforced expectations of further rate hikes. The futures market now sees the peak of the Bank of England’s rate at 5.50% by the end of the year.
Thus, in the short-term perspective, the pound has the potential to strengthen slightly. However, investors are not rushing to make bets on the pound in the long run. The net long position in GBP has slightly decreased by £57 million to £969 million over the reporting week. The positioning is bullish, but the excess is insignificant. The calculated price is below the long-term average and is downward-directed.
Based on this, we continue to prioritize the bearish impulse, despite the pound’s attempts to correct higher. We expect that the corrective rally will end below the local high of 1.2678, and any attempt to test it will be unsuccessful, leading to a reversal of GBP/USD to the downside. The nearest target is 1.2305, followed by 1.2240 and 1.2134.
The material has been provided by InstaForex Company – www.instaforex.com
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