12 June 2023
Weekly Outlook - All Eyes on Fed and ECB
Markets remained in a holding pattern over the last week in anticipation of the two major events coming up this week: The Fed's expected "skip" and the ECB's expected hike.
3 Top Stories for the Week Ahead
US CPI and FOMC on Tuesday and Wednesday
ECB rate decision on Thursday
UK Jobs & GPD on Tuesday and Wednesday
US CPI To Define Whether Fed Hikes or Not
At the start of the week, the consensus still favours a so-called "skip" at the next FOMC meeting ending on Wednesday. That is, the Fed is expected not to hike but heavily imply that there will be a hike at the next meeting in July. The concept was floated only a couple of weeks ago and gained traction as the markets still think the Fed won't manage to hike as much as it says it will. But, before the meeting, CPI figures will be announced, which are expected to show a relatively modest decrease in the short-term inflation rate from 0.4% to 0.2%.
Should inflation come in above forecasts, the chances of a skip could vanish and be replaced with a new consensus of a hike. EUR/USD could come under pressure, looking at finding potential supports at $1.0640 and $1.0575 next. But if inflation comes in well below expectations, the "skip" could become a talk of a"pause", allowing the pair to rise towards $1.0807 for a chance at $1.0876. Price action suggests prices are correcting, with upsides restricted to major resistance levels.
Tradingview Chart: Euro / U.S. Dollar
ECB Expected to Hike Despite Data
May inflation in the Euro Area came down substantially but still triples the ECB's target. Core inflation has also come down for three consecutive months. Despite that, the rhetoric coming from the ECB's President, Christine Lagarde, has put emphasis on more action being needed, as she keeps repeating the "inflation is too high for too long" phrase. The Euro Area also slipped technically into a recession, dragged by underperformance in the block's largest economy, Germany. The focus is likely to be on the post-rate decision commentary, as the consensus is shaky for whether the ECB will deliver more tightening in July.
While EUR/JPY appears to have printed a bearish divergence off its peak at 151.00, the triangle's measured-move points at 154.15, which may or may not be reached based on Lagarde's hawkishness. If the ECB President hints at further hikes, the pair could embark on an upward spiral beyond 151.60 and towards the round resistance at 152.00. On the flip side, dovishness would imply a confirmation of the divergence instead, opening the door to 146.15 via a potential break under 148.83.
Tradingview Chart: Euro / Japanese Yen
UK Jobs and Trailing 3-Month GDP
Ahead of the BOE's meeting next week, the UK is expected to report that the April unemployment rate was steady at 3.9%, and the claimant count declined to 22.0K from 46.7K in April –– a reminder that the smaller this figure is, the better it usually is for the pound. Monthly GDP is expected to roll back into positive at 0.2%, up from -0.3% reported previously, affirming the narrative that the UK has escaped a technical recession for now. However, it's unlikely that the data will convince the BOE dissenters, even though better economic figures would give more room for the BOE to tackle inflation which is only just starting to turn lower.
GBP/NZD has traded comfortably above the 2.00 handle, and if both pieces of data suffice, a potential cup-and-handle pattern could see prices extend as high as 2.12. However, not as a result of the assumed beat. In this event, traders could focus on the peak of 2.0740 and the round resistance at 2.10. But if the claimant count falls less than expected or the UK's chances of falling into recession increase, the pair could slide towards 2.0167 should 2.04 give in early in the week.
Tradingview Chart: British Pound / New Zealand Dollar
Top Stories in Review
OPEC+ announced an extension of existing cuts, plus Saudi Arabia would voluntarily cut 1M bbl/day in July, causing WTI to spike, but quickly faded the gains over concerns around economic growth.
RBA unexpectedly raised rates, pushing the Aussie higher and the Kiwi in sympathy as yields rose.
The Canadian dollar also gained after the BOC surprised markets by hiking a quarter point after a five-month pause.
SNB Chairman Thomas Jordan said it was imperative to bring down inflation, leading to a jump in the Swiss franc.
EuroZone officially fell into recession after Q1 GDP was revised lower, but the EUR/USD rose as the ECB is seen unwavering in its hiking path while more traders saw a "skip" by the Fed.
Japan's economy outperformed expectations in the first quarter, but the yen weakened as BOJ Governor Kazuo Ueda stuck to his ultra-easing stance in the face of the improved economic situation, raising speculation that inflation might be allowed to run hot.
Major Calendar Events 12-16 /06 (GMT)
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