The GBP/USD pair remained under intense selling pressure for the third successive day on Monday and plunged to the 1.2700 mark, or its lowest level since September 2020 during the mid-European session.
The British pound was pressured by last week's dismal macro data, which indicated that the UK economy is under stress from the soaring inflation. On the other hand, the prospects for a more aggressive policy tightening by the Fed pushed the US dollar to a more than two-year high and contributed to the heavily offered tone surrounding the GBP/USD pair.
Sterling is taking a broad beating, as well it should, with the economy beset by supply-side limitations, a contracting fiscal outlook and a cost-of-living crisis that is already showing signs of crimping real growth, with last week’s weak March Retail Sales and second-lowest ever April GfK Consumer Confidence reading helping to spark the sterling meltdown on top of the pressure provided by the strengthening US dollar. And this is before the inevitable roll-over in home prices once higher rates begin to bite. The UK has a yawning current account deficit aggravated over the last 6 months by spiraling costs for its energy imports, while recent weak risk appetite reduces the potential for investment capital inflows to offset. The 1.3000 level in GBPUSD gave way on Friday with brutal force and the follow through to kick off this week looks ominous. On the chart, the eye is drawn toward the massive 1.2000 level – arguably the real range support when not considering the worst chaotic days in early 2020 during the reaction to the global pandemic outbreak.
A convincing break below the 1.2700 mark, leading to a subsequent break through the September 2020 low, around the 1.2675 region, will reaffirm the negative bias. The GBP/USD pair might then turn vulnerable to weaken further below the 1.2600 round figure and accelerate the slide towards the 61.8% Fibo. level, around the key 1.2500 psychological mark.
On the flip side, the 1.2755-1.2760 region now seems to act as an immediate resistance ahead of the 1.2800 mark. Any subsequent move up is more likely to run out of steam near the 1.2825-1.2830 region, which should act as a pivotal point. Sustained strength beyond could trigger a near-term short-covering move.
The GBP/USD weekly forecast is bullish as the price found respite at 1.3000 psychological level despite the central bank divergence.
Risk-sensitive currencies like the British pound have been relieved by optimism regarding the probable truth between Russia and Ukraine. As a result, the GBP/USD pair staged an impressive comeback as the US dollar failed to capitalize on the Fed’s dovish outlook. Although the Bank of England (BOE) raised interest rates cautiously, Cable posted its first weekly gain in four weeks. Next week, data on UK inflation and US durable goods will be closely watched, while geopolitical developments in Eastern Europe will also be closely monitored.
The sterling bulls eventually gained control, leading a solid recovery in the major currencies that continued into Thursday. However, as markets repositioned ahead of Wednesday’s critical Fed decision, the US dollar lost its winning momentum and yields. The world’s most powerful central bank raised interest rates by 25 basis points, bringing their target range to 0.25-0.50%. Despite six more rate hikes this year on the Fed’s scatter chart, Chair Jerome Powell said each meeting is a live meeting.
The US dollar did not benefit from the Fed’s hawkish stance as market optimism overshadowed hopes for diplomacy in the Ukraine crisis, eroding its safe-haven appeal. However, the currency pair pared all of its Fed-inspired gains on Thursday following the Bank of England’s cautious rate hike. Despite the uncertainty in Ukraine and its risks to the country’s economic growth, the UK central bank raised interest rates for the third consecutive month by 0.25%.
Macro traders are bracing for a quiet start to a busy week, with Wednesday’s UK inflation data expected to be the first major event. Increasing oil prices caused by the crisis in Ukraine will lead to an increase in the UK consumer price index (CPI) to 6.0% from 5.5% previously. Also, in the middle of the week, the UK will release its annual budget report.
The GBP/USD price formed a double bottom at 1.3000 and soared to 1.3210 weekly highs. However, the pair saw fluctuation within 1.3100 to 1.3190 several times. The daily chart shows a cup and handle pattern with a handle top around 1.3200-10. If the price breaks this level, we may see a test of a broken double bottom at 1.3272.
Trade accordingly with your risk
The risk sentiment slide yesterday gathered further momentum as the Biden White House was out fretting an “extraordinarily elevated” March CPI release today. Whether that is simply to prep the general public for the first 8-handle on the headline year-on-year CPI in over 40 years or because it has had a sneak peek at the data and it is even worse than the consensus expectations for an 8.4% reading (and 1.2% month-on-month, with core expected at +0.5% MoM and +6.6% YoY) is impossible to say. A 9% CPI rate could encourage the market to look for a move straight to 1.00% at the May FOMC meeting, something the market has not yet been willing to price, preferring instead to predict multiple 50-basis point moves.
More interesting than the data itself will be to track the market reaction in longer maturity treasuries after we have seen a strong pivot in the direction of steepening of the yield curve in recent days.
The most alarming being that the market has become less concerned that projections of Fed tightening are getting too aggressive and therefore eventually risking an incoming recession. Instead, a continued steepening of the yield curve here could suggest that the market thinks that the Fed is not in any way in control of the narrative or inflation yet, with the risk that an inflationary mind-set has taken hold that could suddenly bring forward demand (make large purchases now and generally hoard what can be hoarded rather than waiting for price rises later) and lead to a scramble for hard assets and spiking monetary velocity. This would trigger the risk of a titanic inflationary bust in the worst instance.
USDCAD has bounced back to just about the half-way point of its slide from the early March highs inspired by the risk-off meltdown in the wake of Russia’s invasion of Ukraine. One the one hand, CAD under pressure from weaker risk sentiment of late and the correction in oil, although as we point out above, the market has repriced longer term oil prices significantly higher. And Canada’s trade bounce has pulled out of a long period of large deficits to begin posting solid trade surpluses. The Bank of Canada tomorrow is seen hiking 50 basis points for the first time since 2000. If the focus in coming days is on inflation risks and crude oil rebounds strongly without a strong melt-down in risk sentiment, USDCAD could post a key reversal lower if the BoC encourages the market’s forward pricing of its hiking intentions (currently looking for a BoC policy rate near 2.2% by year end – about in-line with Fed expectations.)
The weekly forecast for gold price is bullish as the deteriorated risk sentiment lends support to the precious metal as a safe-haven asset.
Gold price reacted sharply to changes in risk sentiment throughout the week, ending the week at its highest weekly close since November 2020 near $1950. Russia does not intend to deescalate the conflict with Ukraine.
The price of gold began the week strongly after the US, EU, UK, and other western countries banned some Russian financial institutions from using SWIFT, the global payment system. However, this week, a second round of “peace talks” was organized between Russian and Ukrainian delegations, alleviating investors’ concerns.
Russian military was reported to have increased its presence in Ukraine in an attempt to seize Kyiv, which triggered a surge in safe-haven inflows.
The sharp rise in US Treasury yields resulted from hawkish remarks from FOMC Chairman Jerome Powell on Wednesday, despite a weak market environment. This pushed gold into negative territory. In his semi-annual hearing on the first day, Powell told the House Financial Services Committee that a 25 basis point rate hike in March would be appropriate. Powell indicated that if the first round of rate increases fails to ease price pressures, a rate hike of 50 basis points may be considered later this year. According to the chairman, sanctions against Russia will not directly affect the US economy but are fueling uncertainty about growth prospects.
After losing some ground on Wednesday, gold regained some momentum on Thursday and Friday, erasing some of Wednesday’s losses. On the second day of his Senate Banking Committee hearing, Powell effectively reiterated his economics, inflation, and politics.
There will be no high-level macroeconomic data out of the US on Monday and Tuesday. As a result, gold’s market value will likely remain affected by the Russian-Ukrainian crisis and risk perceptions.
Consumer price index (CPI) data for February will be released Wednesday by the US Bureau of Labor Statistics. In January, the CPI rose to 6% from 6% annually. The Fed’s dovish outlook should remain intact unless inflation surprises the downside. The yellow metal’s growth could be limited by a further rise in US Treasury yields due to a strong CPI.
On Wednesday, the European Central Bank (ECB) will also announce its monetary policy decisions. The ECB’s rate hike rates have already been priced in by the markets. However, there are growing concerns about the potential negative impact of the Russo-Ukrainian war on the Eurozone economic outlook, prompting the bank to adopt a dovish stance. Gold remains attractive in this scenario.
If investors don’t see signs of a de-escalation in the Russia-Ukraine conflict, the yellow metal should remain a traditional safe-haven asset next week. However, XAU/USD’s upside potential might be limited by gold’s inverse correlation with US Treasury yields after the Federal Reserve’s monetary policy outlook was released following inflation data.
A further sense that the Fed wants to focus on tightening conditions for asset markets as well as for the economy in general was in evidence in the FOMC minutes last night, which revealed plans for a rapid pace of quantitative tightening after the May 4 meeting. Some Fed members were in favor of not “capping” Fed balance sheet reductions at all in other words, not rolling whatever treasuries and other assets were expiring in a given month, but in the end, members “generally agreed” that a cap of $60 billion on treasuries and $35 billion on MBS would be an appropriate pace of tightening still nearly double of the maximum pace during the 2017-19 tightening and really well over double the average pace of the average tightening over much of that time frame. As well, the minutes indicated that more on the Fed were in favour of moving 50 basis points at the March 16 meeting, but went with the 25-basis point move due to the Russian invasion of Ukraine. In response to the FOMC minutes, risk sentiment stayed under pressure and the US dollar surged against risky currencies/EM.
Focusing on AUDUSD for the third day in a row as it is the most interesting technical pair and sits astride at least a couple of themes, including the commodity overlay focus across markets of late, the situation in China, where lockdowns are pressuring activity, and general risk sentiment, where the Fed is fully engaged in playing catch-up in a bid to attain credibility with its latest ratcheting higher of rate expectations and now a vicious tightening regime that will settle over the market in the coming months. So far, the reversal here is most interesting in that it took place just after the modestly hawkish RBA upgrade to guidance this week triggered a sprint above the well-defined range resistance of 0.7556. That move has been reversed, but the up-trend from the lows early this year has not yet been erased and only gets full tested below 0.7400, with the 0.7300 area perhaps the point of final capitulation.
Trade accordingly with your risk
Central bank policy in Japan and the United States captivated headlines this week but the dollar’s long-term position is under increasing threat from the erosion of real interest rates by inflation.
The USD/JPY rose moderately but remained below resistance at 109.30, as offsetting dovish outlooks from the Bank of Japan (BOJ) and the Federal Reserve left the pair without motive.
In Japan, the BOJ kept monetary policy unchanged as universally anticipated. Governor Haruhiko Kuroda said he is prepared to extend the pandemic relief programs beyond the September deadline. He did not expect inflation to reach its 2% target by the time of his retirement in early 2023.
Rising COVID-19 cases and a slow vaccination rollout have brought on a third state of emergency in Tokyo, Osaka and two other prefectures, inhibiting prospects for an economic recovery, though the BOJ did raise its quarterly growth forecast. The USD/JPY saw its largest one-day gain of the week after the BOJ meeting on Tuesday.
In the US, the central bank also left policy unaltered. Fed Chair Jerome Powell refused to speculate when or under what conditions the governors might reduce the $120 billion of monthly asset purchases that have pinned the short end of the Treasury yield curve.
The US economy expanded at a 6.4% annualized rate in the first quarter, slightly more than predicted. Initial Jobless Claims dropped to 553,000 in the latest week, the lowest level of the pandemic era. Inflation was stronger than projected in March with the headline Personal Consumption Expenditure Price Index (PCE) rising 2.3% on the year, outstripping the 1.6% forecast by a wide margin. Core PCE was 1.8% as expected.
The current bout of US inflation is temporary and largely due to the base effect from the steep decline in prices last year during the lockdown, as the Fed has asserted.
But behind the immediate rationale, fast-rising commodity prices, consumer demand and massive spending by the Federal government may be altering the general price structure.
If the basal inflation rate in the US does increase it will undermine the advantage that rising Treasury yields have provided the dollar this year.
In Japan, Retail Trade (sales) rose 5.2% for the year in March, the highest increase since last October and a strong reversal of April’s 1.5% decline. Industrial Production was also much more vibrant than forecast at 4% in March on a 0.0% forecast and 2% decrease in February.
Inflation was again a cause for BOJ concern as annual Tokyo CPI fell 0.6% in April, three times the -0.2% forecast.
The USD/JPY has been propelled this year by the increase in US interest rates and that advantage will continue to underpin the USD/JPY this week
Though the long-term dollar benefit of higher Treasury yields is under potential threat as rising US inflation reduces the currency's real interest rate margin, for the moment the trade impact on the USD/JPY is limited.
The 10-year Treasury yield has added over 70 basis points since the New Year and 10 this week. In the past month, US CPI has jumped from 1.7% to 2.6% and it is expected to rise further as the base index differential over last year increases.
American economic growth is easily outpacing Japan’s and the pandemic status in the US adds to the dollar’s advantage.
Treasury rates will rise despite the Feds obvious reluctance to sanction such, but the key for yields is inflation. Whether the increase in US inflation is transitory or not will not be known for several months.
The USD/CHF outlook remains negative despite a recent recovery attempt. The broad risk aversion may keep the gains limited.
As buyers embrace the dollar’s recovery ahead of Monday’s European session, demand for a fresh intraday high near 0.9340 is fueling the USD/CHF pair.
Despite geopolitical worries out of Ukraine and negative headlines from China and Saudi Arabia, the Swiss currency pair is posting a rebound, supporting the US dollar as a safe-haven asset. In addition, a recent hawkish statement by Fed officials is also encouraging for bulls of the US dollar. Neil Kashkari, Thomas Barkin, and Christopher Waller, the three presidents of the Federal Reserve Banks of Minneapolis, Richmond Fed, and the Federal Reserve Board, spoke Friday about inflation and the Fed’s next steps. Dollar bears, who fear dovish rate hikes in the future, were repelled by policymakers citing the Ukraine crisis as the reason for the latest rate hike.
Market sentiment has been impacted by record-high Coronavirus cases in China and Evergrande’s suspension of trading in Hong Kong, which has resulted in a recent boost to the USD/CHF pair. These games indicate that the one percentage point decline in the S&P 500 futures at press time has helped, while the drop in Japan is limiting the US Treasury Department’s activity in Asia.
US Dollar will be watched for the impact Jerome Powell’s recent words have had on the US dollar as the Fed Chair speaks. US dollar bears will return to the table if the policymakers hope inflation worries will ease again. Risk aversion may limit USD/CHF declines.
The USD/CHF price looks feeble, struggling with the 50-period SMA (4-hour chart). The 20-period SMA is also pointing downwards. We can see four widespread down bars with very high volume in the immediate background. It shows that the pair will likely find it too hard to recover.
Any upside recovery may stall at 0.9350 ahead of 0.9400. On the flip side, 0.9300 will be the immediate target for the bears ahead of 0.9250.
After the economy slumped in Q3 due to a COVID-related lockdown, incoming data show a solid rebound from Q4 last year, as reflected in employment and retail spending data. Meanwhile, inflation pressures have also intensified, as the Q4 headline CPI firmed to 5.9% year-over-year with an acceleration also in underlying inflation as well as non-tradables inflation.”
Against this backdrop, we expect the RBNZ to continue its shift toward a less accommodative monetary policy stance at next week's policy meeting. At the same time, we favor a more measured 25 bps rate hike as opposed to a larger 50 bps increase, particularly after the central bank governor said late last year the RBNZ would take a “cautious” approach to tightening by moving in 25 bps increments “for now.
The EUR/USD weekly forecast is mildly tilted towards the downside as the pair failed to sustain above the 1.1000 area after several attempts.
The EUR/USD pair may not attract much speculative interest as it hovers around the 1.1000 level. As war-related uncertainty grew, volatility was limited due to a lean macroeconomic calendar.
Despite Jerome Powell’s more aggressive stance as Fed chair, the US dollar strengthened on Monday. During the annual economic policy conference of the National Business Economics Association, he said that “inflation is too high” and that the central bank will act accordingly. As early as May, several Fed members reported that they would support a decision to scale back the Fed’s policy. Powell joined the bullish club with this announcement.
Upon Powell’s announcement, Treasuries were sold off, pushing yields to their highest level since May 2019. While yields declined over the days, the week yielded a higher yield.
European Central Bank’s patience is slowly ebbing away. As a result of Christine Lagarde’s unexpected aggressive comments at the last meeting, several members of the ECB have hinted at a rate hike by the end of the year. This is now planned for the third quarter of the year, earlier than previously planned by the central bank.
The Fed aims to achieve maximum employment and price stability, while the ECB is only concerned with price stability. The US and EU are experiencing the highest inflation in decades as economies slowly recover from the massive lockdowns imposed at the pandemic.
The EUR/USD daily chart shows that the price is hovering around the 20-day MA. As a result, the pair could not find acceptance above the 1.1000 mark. However, the volume remains low for downside correction that started from the 1.1135 area. Therefore, the pair remains in a broad range, and traders should wait for a clear directional bias. Moreover, the traders should watch the triple bottom at 1.0965. If broken, the pair will lead to 1.0900 ahead of 1.0800.
At the week, Olli Rehn and Ignazio Visco of the ECB governing council tried to calm ECB rate hike expectations, with Rehn suggesting that a rate hike is not around the corner, but has gotten nearer. He also said that policy rates don’t impact energy prices and that wage rises have been subdued. The Banca d’Italia head Visco likewise noted the lack of pressure on wages. Lagarde is set to speak later today after she also tried to weigh in with dovish rhetoric last Thursday.
EUR/USD has suffered heavy losses late Friday and started the new week on the back foot. The souring market mood is making it difficult for the shared currency to find demand and the pair is likely to extend its slide unless risk flows return. The negative shift witnessed in market sentiment helped the greenback find demand ahead of the weekend and the US Dollar Index (DXY) managed to register weekly gains.
Later in the session, European Central Bank President Christine Lagarde will deliver a speech. In an interview with Redaktionsnetzwerk Deutschland last week, Lagarde argued that raising rates would not solve the inflation problem and said that they don't want to "choke off the recovery." In case Lagarde sounds less hawkish than she did at the ECB's press conference on February 7, the pair could face additional bearish pressure.
The near-term technical outlook suggests that sellers dominate EUR/USD's action to start the week. The Relative Strength Index (RSI) indicator on the four-hour chart is now below 40 and the pair is trading below the 100-period.