Important calendar events
The dollar exhibited high volatility last week. Diminishing expectations of Fed rate hikes boosted the dollar mid-week and the dollar index rose to 105.2. Disappointing US economic data, however, coupled with easing inflationary pressures, drove the dollar down at the end of the week. However, the dollar sank after the release of the US GDP data on Thursday. The dollar continued to decline after US inflation showed signs of cooling on Friday and the dollar index retreated to 104.6. US treasury yields followed a similar pattern, with the US 10-year bond rising to 4.63% mid-week then dipping towards the end of the week, yielding approximately 4.50% on Friday.
Core PCE Price index data released on Friday showed that inflationary pressures in the US are easing, putting pressure on the dollar. This is the Federal Reserve’s preferred inflation gauge and may affect the Fed’s rate outlook. Core PCE Price index rose by just 0.2% in April from 0.3% in March against expectations of 0.3% growth. Core PCE came at 2.8% annually, which was in line with expectations, marginally exceeding March’s print of 2.7%.
Signs that US economic growth is slowing down drove the dollar down on Thursday. Preliminary GDP data released on Thursday showed that the US economy expanded by just 1.3% in the first quarter of the year falling considerably below the 3.4% expansion registered in Q4 of 2023. Advance GDP data had previously indicated that the US economy expanded by 1.6% in the first quarter of the year, but this estimate was revised lower primarily due to reduced consumer spending. The US economy is expanding at an increasingly slower pace putting pressure on the dollar, as GDP data have shown expansion by 4.9% in the third quarter of 2023. In addition, the Preliminary GDP Price Index rose by just 3.0% in Q1, which represents a downward revision of 0.1% from the previous estimate.
Pending US Home Sales estimates, which represent the change in the number of homes under contract to be sold were also released on Thursday. Pending Home Sales estimates contracted by 7.5% in April, falling below expectations of a 1.1% contraction and an expansion of 3.6% in March.
One of the key factors that are driving the dollar right now is the US rate outlook. The US Federal Reserve kept interest rates unchanged at its latest policy meeting, within a target range of 5.25% to 5.50%, as expected. The US Federal Reserve has held interest rates steady since last July. Fed chair Jerome Powell stated that, while future rate hikes are unlikely, US inflation has not cooled sufficiently to allow the central bank to proceed with rate cuts.
Odds of a rate cut in September have dropped close to 50% as Fed policymakers have expressed disappointment in the progress of disinflation in the US. Fed officials have stressed that more evidence of cooling inflation is required before a policy change can be considered.
Currently, only 25-50 basis points of rate cuts are priced in within the year. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly. The uncertainty around Fed rate expectations is likely to continue in the coming months causing volatility in Forex markets.
US CPI data for April showed that disinflation in the US is finally progressing. Monthly inflation rose by just 0.3% in April, falling below expectation of a 0.4% raise. More importantly, headline inflation in April eased to 3.4% on an annual basis from 3.5% in March, which was in line with expectations. Core inflation, which excludes food and energy, came in at 3.6%, its lowest reading in three years.
This coming week the US labour report is in focus on Friday. The most highly anticipated fundamentals this week are the US Non-Farm Payrolls (NFPs) on Friday. Before the release of the labor report, however, we have other important data coming up, especially in the employment sector. JOLTS Job Openings are scheduled to be released on Tuesday, ADP Non-Farm Employment Change data are due on Wednesday and Unemployment Claims on Thursday.
The EUR/USD rate traded sideways against the dollar last week, fluctuating around the 1.085 level. If the EUR/USD pair declines, it may find support at 1.072, while resistance may be encountered near 1.089.
This coming week, the market focus will be on the ECB interest rate decision on the 6th. The ECB kept interest rates unchanged at 4.50% at its latest monetary policy meeting but hinted at a dovish shift in the future. ECB President Christine Lagarde has expressed confidence that Euro area inflation is under control and has pointed to a rate cut in June.
Markets are expecting the ECB to start cutting interest rates at Thursday’s meeting, after keeping rates at record highs since September. This will increase the policy gap between the ECB and the Fed, as the Fed is not expected to start cutting interest rates before the final quarter of the year.
The Euro is under pressure by expectations that the ECB will start lowering interest rates this week. The Fed is not likely to start cutting interest rates before September, putting the Euro at a disadvantage against the dollar. In addition, markets are currently pricing 35 basis points of Fed rate cuts within 2024, compared to 65 bps of ECB rate cuts.
An ECB rate cut this week is considered highly likely and is already priced in by markets, but the big question right now is how the central bank will proceed after the first cut. Several ECB members have spoken in favor of continuing rate cuts, possibly with consecutive cuts at the next meeting in July. Sticky inflation, however, may slow down the pace of future rate cuts. Traders will focus on ECB President Christine Lagarde’s statement after the meeting for guidance into the ECB’s policy outlook.
On the data front, Eurozone inflation data came out hotter than anticipated last week, propping up the Euro. German CPI data released on Wednesday showed that German inflation rose to 2.4% year-on-year in May from 2.2% in April. Monthly inflation in Germany, however, rose by only 0.1% in May against expectations of 0.2% and a 0.5% print in April.
More importantly, flash CPI released last week for the EU showed that headline inflation in the Euro Area accelerated to 2.6% year-on-year in May up from 2.4% in April and exceeding the forecast of 2.5%. Core CPI, which excludes food and energy, rose to 2.9% on an annual basis in May from 2.7% in April against expectations of a 2.7% print. Inflationary pressures in the Eurozone are not easing as fast as anticipated, which might hold up the ECB’s plans to lower interest rates.
The Eurozone economy expanded by 0.3% in the first quarter of the year, which was in line with preliminary estimates. GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero. The EU economy contracted by 0.1% in the third quarter of 2023 and barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1.
GBP/USD was volatile last week, rising to 1.280 at the beginning of the week and then retreating and closing near 1.274 on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.280, while support may be found near 1.264.
The BOE kept interest rates steady at its latest monetary policy meeting. The BOE maintained its official rate at 5.25% but showed signs of preparing for a dovish pivot.
Inflationary pressures in the UK are not easing as fast as anticipated reducing expectations of BOE rate cuts. British headline inflation eased to 2.3% in April on an annual basis from 3.2% in March from 3.4%, exceeding expectations, however, of a more drastic drop to 2.1%. Annual Core CPI, which excludes food and energy, fell to 3.9% in April from 4.2% in March, again surpassing expectations of a 3.6% print.
The BOE had updated its inflation outlook earlier this year, predicting that inflation would drop to the BOE’s 2% target in the second quarter of the year. The BOE’s forecasts were not confirmed, however, which may force BOE policymakers to keep interest rates at restrictive levels for longer.
Currently market odds of a BOE rate cut in June are very low and even a rate cut in August is considered unlikely. Markets are pricing in a rate cut in September with a high probability, while a rate cut by November is fully priced in. Rate cut expectations shifted from two rate cuts and a total of 50 basis points of rate cuts in 2024 to a single rate cut and only a 25 bp reduction in rates within the year.
The British economy slipped into recession last year, contracting by 0.3% in the final quarter of 2023. Monthly GDP data for February released last week, however, revealed that the British economy has narrowly avoided slipping into recession and has expanded by 0.1%. More importantly, January’s GDP was revised upwards to show an expansion of 0.3%. The British economy is fragile and may force the BOE to pivot to a more dovish policy.
USD/JPY edged higher last week, rising to the 157.2 level. If the USD/JPY pair declines, it may find support near 151.8. If the pair climbs, it may find resistance near 158.5.
The BOJ kept all policy settings unchanged at its latest policy meeting, despite the Yen’s recent weakness. The BOJ had pivoted to a more hawkish policy at its previous meeting in March, ending its negative interest rate policy and raising the benchmark interest rate into the 0% - 0.1% range. The Yen continues to weaken as there is still a significant disparity between interest rates offered by the BOJ and those from other major central banks.
The Yen’s weakness is causing concern to Japanese officials who have been warning traders against speculative short selling of the Yen. Yen intervention concerns remain high, as Japanese authorities have been warning repeatedly that an intervention to support the currency might be imminent. Japanese authorities have intervened to support the currency in the past and may do so again if the Yen continues to decline. Concerns about an imminent intervention have been keeping Yen short sellers in check, providing some support for the currency.
On the data front, inflation in Japan remains weak. Tokyo Core CPI rose to 1.9% in May from 1.6% in April, which was in line with expectations, but remained below the BOJ’s 2% target. Headline inflation dropped to 2.2% year-on-year in April from 2.6% in March, which was in line with expectations. BOJ Core CPI dropped to 1.8% on an annual basis in April, falling short of expectations of 2.2% and dropping from 2.2% in March according to data released on Tuesday. Low inflation in Japan is preventing the BOJ from raising interest rates putting pressure on the Yen.
Preliminary GDP data for Q1 of 2024 for Japan showed that the country has slipped into recession. Japan’s economy shrank by 0.5% in the first quarter of the year against expectations of a 0.3% drop. Japan’s economy registered a small expansion by 0.1% in the final quarter of 2023, showing that the country’s economy is shrinking. Recession concerns limit the odds of a BOJ hawkish pivot in the coming months.
Gold prices edged lower last week, ending the week close to $2,330 per ounce. If gold prices rise, resistance may be encountered again at the all-time high of $2,450 per ounce, while if gold prices decline, support may be encountered near $2,280 per ounce.
Gold prices have been typically directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. Gold prices exhibited high volatility last week mirroring dollar prices. Core PCE Price index data released on Friday showed that inflationary pressures in the US are easing, putting pressure on the dollar and propping up gold prices.
Diminishing expectations of Fed rate hikes boosted the dollar mid-week and the dollar index rose to 105.2 putting pressure on gold prices. However, the dollar sank after the release of the US GDP data on Thursday. The dollar continued to decline after US inflation showed signs of cooling on Friday and the dollar index retreated to 104.6. US treasury yields followed a similar pattern, with the US 10-year bond rising to 4.63% mid-week then dipping towards the end of the week, yielding approximately 4.50% at closing on Friday.
Gold prices have experienced a meteoric rise recently and are trading in overbought territory. Geopolitical tensions raise the appeal of safe-haven assets boosting gold prices. Concerns that the crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets keeping gold prices high.
Gold prices are affected by central banks’ interest rates. A restrictive monetary policy hinders economic growth lowering the global economic outlook and putting pressure on gold prices. The US Federal Reserve kept interest rates unchanged at its latest policy meeting, within a target range of 5.25% to 5.50%.
Odds of rate cuts are becoming more moderate, putting pressure on gold prices, as policymakers state that they do not intend to start reducing interest rates until there is more evidence of disinflation. The uncertainty around the US Fed rate outlook is causing volatility in gold prices. Fed policymakers have expressed that the progress of disinflation in the first quarter of the year was disappointing and that interest rates would need to remain at high levels for longer for inflation to cool sufficiently.
Oil prices were volatile last week and plummeted after the OPEC meeting on Sunday, with WTI price dropping below $77.0 per barrel. If WTI price declines, it may encounter support near $76.7 per barrel, while resistance may be found near $80.8 per barrel.
Oil prices were volatile ahead of the highly anticipated OPEC meeting on Sunday and dipped immediately after the meeting. OPEC+ decided to extend most of its voluntary production cuts into 2025 to boost oil prices. The organization, however, also announced that it would gradually phase out oil production cuts and laid out plans for restoring production levels within 2025. Markets had already priced in the extension of oil production cuts and the news that OPEC eventually plans to unwind the cuts drove oil prices down.
US crude oil inventories showed that US crude stockpiles fell short of expectations. The US Energy Information Administration reported a weekly crude stockpile drop of 4.2M barrels for the week to May 25th, against expectations of a 1.6M barrel draw and following a build-up by 1.8M barrels the week before. However, the EIA reported an unexpected rise in gasoline and distillate fuel inventories as US oil demand weakened.
Signs of diminishing oil demand in China put pressure on oil prices last week. According to a Bloomberg report, China’s crude oil demand dropped in April due to slow economic growth. China’s oil demand outlook is weakening, putting pressure on oil prices.
Oil prices are also kept in check by high Fed interest rates. The US Federal Reserve kept interest rates unchanged at its latest policy meeting within a target range of 5.25% to 5.50%. The US Fed is keeping interest rates at a 23-year high, restricting economic growth and limiting the oil demand outlook as a result.
Odds of rate cuts are becoming more moderate, putting pressure on oil prices, as policymakers have stated that they do not intend to start reducing interest rates until there is more evidence of disinflation.
Supply concerns provide support for oil prices, as the crisis in the Middle East threatens to disrupt oil distribution. Tensions around the Red Sea area raise concerns that hostilities may spread further in the Middle East, affecting oil supply and distribution.
Bitcoin price exhibited high volatility last week. Bitcoin surged above the key $70,000 level early in the week but pared gains mid-week and dropped below the $68,000 level over the weekend. If BTC price declines, support can be found at $64,600, while further resistance may be encountered at $72,000.
Ethereum price also edged higher early last week then dropped below $3,800 and hovered just below the $3,800 level over the weekend. If Ethereum's price declines, it may encounter support at $3,570, while if it increases, resistance may be encountered near $4,000.
Signs that US economic growth is slowing down put pressure on crypto markets last week. Preliminary GDP data released on Thursday showed that the US economy expanded by just 1.3% in the first quarter of the year falling considerably below the 3.4% expansion in Q4 of 2023. In addition, US Core PCE Price index data released on Friday showed that inflationary pressures in the US are easing. This is the Federal Reserve’s preferred inflation gauge and may affect the Fed’s rate outlook.
Cryptocurrency prices are affected by central banks’ interest rates. High interest rates are restricting economic growth putting pressure on risk assets, while the promise of rate cuts boosts crypto markets. Lower-than-expected Core PCE Price Index data last week raised Fed rate cut expectations boosting cryptocurrency prices briefly. Most cryptocurrency prices deflated over the weekend, however, as markets had time to digest the news and readjust their expectations.
Odds of a rate cut in September have dropped below 50% as Fed policymakers have expressed disappointment in the progress of disinflation in the US. Fed officials have stressed that more evidence of cooling inflation is required before a policy change can be considered.
The US Federal Reserve kept interest rates unchanged at its latest policy meeting within a target range of 5.25% to 5.50%. The Fed’s forward guidance was hawkish, indicating that interest rates will remain at high levels for longer. Odds of rate cuts are becoming more moderate, putting pressure on crypto markets, as policymakers have stated that they do not intend to start reducing interest rates until there is more evidence of disinflation.
Crypto markets have been under pressure by the war in Gaza. Fears that the war will spread in the Middle East are promoting a risk aversion sentiment putting pressure on risk assets such as cryptocurrencies.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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