Important calendar events
The dollar dipped after the release of the US inflation report on Wednesday and the dollar index plummeted to 104.1 before paring some of the week’s losses and closing near the 104.4 level on Friday. US treasury yields also plummeted mid-week, with the US 10-year bond dropping to 4.32% then rallying to 4.42% on Friday.
Signs of cooling US inflation put pressure on the dollar last week. US inflation came out hotter than expected for three straight months, from January to March. However, US CPI data for April released on Wednesday 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.
Inflationary pressures in the US have proven to be sticky, preventing the Federal Reserve from lowering interest rates. Signs that US inflation is cooling, however, fuelled expectations of a rate cut in September driving the dollar down.
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. The FOMC statement released after the conference emphasized that inflationary pressures in the US have eased in the past year, but the progress of disinflation is not as steady as anticipated.
One of the key factors that are driving the dollar right now is the US rate outlook. For months now, markets have been speculating as to the timeline of the Fed’s pivot to a more dovish policy. Odds of a rate cut in September had dropped below 50% but rose again after the release of the US inflation report to approximately 70%. 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 GDP data for the first quarter of 2024 showed that US economic growth is slowing down. The US economy expanded by only 1.6% in the first quarter of the year, missing expectations of 2.5% and falling considerably below the 3.4% expansion registered in the final quarter of 2023. The US economy is expanding at an increasingly slower pace, as GDP data have shown expansion by 4.9% in the third quarter of 2023.
Increased demand for safe-haven assets due to rising tensions in the Middle East is boosting the dollar. The conflict between Israel and Iran is expected to influence Forex markets in the weeks to come. The crisis between Israel and Iran seems to have been diffused for the time being, although risk aversion sentiment remains high as markets anticipate future developments in the region.
This week markets will focus on Fed members’ speeches. Several Fed officials are due to deliver speeches throughout the week and traders will watch their speeches closely to gain insight into the central bank’s policy outlook.
The EUR/USD rate edged higher last week, rising to the 1.087 level. If the EUR/USD pair declines, it may find support at 1.060, while resistance may be encountered near 1.097.
The ECB left all policy settings unchanged at its latest monetary policy meeting. The European Central Bank kept interest rates unchanged at 4.50% but hinted at a dovish shift in the future. In their statement after the meeting, policymakers stressed that if Euro area inflation remains on a path to achieve the central bank’s 2% target, it would be appropriate to reduce the current level of monetary policy restriction.
The EU central bank has revised its inflation projections down to an average of 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026. In addition, the ECB has revised its growth projection for 2024 to 0.6%. Expectations of cooling inflationary pressures coupled with increased economic fragility, may induce the central bank to start cutting interest rates sooner than anticipated.
The ECB is expected to start cutting interest rates later this year since inflationary pressures in the Euro area are easing. ECB President Christine Lagarde has hinted that ECB policymakers expect to have sufficient data in three months, pointing to a rate cut in June. Markets are pricing in a rate cut in June, while most market analysts forecast around 75 basis points of cuts this year. ECB Vice President Luis de Guindos stated on Friday that EU policymakers are confident that inflation will drop to the central bank’s target next year.
The Euro is under pressure by expectations that the ECB will start lowering interest rates by June. The Fed is not likely to start cutting interest rates before July, putting the Euro at a disadvantage against the dollar. In addition, markets are currently pricing in only 50 basis points of Fed rate cuts within 2024, compared to 75 bps of ECB rate cuts.
On the data front, Flash GDP data released on Wednesday showed that 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.
Euro area inflation remained steady at 2.4% in April according to Final CPI data released on Friday. Headline inflation in the EU cooled to 2.4% in March from 2.6% in February. Core CPI, which excludes food and energy, dropped to 2.7% in April from 2.9% in March, beating estimates, however, of a 2.6% print. Easing price pressures in the Eurozone may encourage the ECB to start lowering borrowing costs as early as June.
GBP/USD traded in an uptrend last week as the dollar weakened, with the currency rate rising to the 1.270 level. If the GBP/USD rate goes up, it may encounter resistance near 1.289, while support may be found near 1.229.
British wages grew by more than expected in the first three months of the year according to labor data released on Tuesday. The British Average Earnings Index grew by 5.7% in the first three months of the year, exceeding expectations of 5.3% growth. The unemployment rate in the UK, however, rose to 4.3% in March from 4.2% in February.
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. The BOE’s forward guidance was dovish overall. The voting split of the nine MPC members indicated that the central bank is preparing to abandon its hawkish policy. Seven out of nine members voted for interest rates to stay the same and two members voted to lower interest rates, compared to only one member at the BOE meeting in March.
Markets are currently giving a high probability of BOE rate cuts starting in August, while a rate cut by September is fully priced in. Rate cut expectations have become more moderate in the past months, with less than 50 basis points of rate cuts expected this year.
The BOE has updated its inflation outlook, predicting that inflation will drop to the BOE’s 2% target in the second quarter of the year. If the BOE’s forecasts are not realized, however, policymakers may be forced to keep interest rates at restrictive levels for longer. BOE chief economist Huw Pill stated on Tuesday that the central bank might consider cutting interest rates over the summer.
British headline inflation eased to 3.2% year-on-year in March from 3.4% in February, surpassing expectations of a drop to 3.1%, however. Annual Core CPI, which excludes food and energy, fell to 4.2% in March from 4.5% in February, against the 4.1% forecast. Inflationary pressures in the UK remain high and inflation may take a while to drop to the BOE’s 2% target.
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.
This coming week, key data releases for the UK might affect the GBP/USD rate. The British inflation report for April due on Wednesday, especially, might cause volatility in the price of the Sterling. Markets are anticipating a drastic drop in inflation, with headline inflation in the UK expected to drop to 2.1% year-on-year in April from 3.2% in March, touching the BOE’s target.
The Yen benefitted from the dollar’s weakness last week and USD/JPY dropped to 153.5 before paring some losses and closing near 155.9 on Friday. The currency rate rose to 155.5 later on Thursday as the dollar rallied. If the USD/JPY pair declines, it may find support near 151.8. If the pair climbs, it may find resistance near a multi-decade high of 158.4.
The Yen’s weakness is causing concern to Japanese officials who have been warning traders against speculative short selling of the Yen. The Yen got a reprieve last week as the rivaling dollar plummeted. USD/JPY dropped sharply after the release of the US inflation report but bounced back later in the week as the dollar rallied.
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.
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. BOJ Governor Kazuo Ueda did not deliver clear forward guidance at his press conference after the meeting, putting pressure on the Yen.
On the data front, preliminary GDP data for Q1 of 2024 released on Thursday 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.
Inflation in Japan remains low but is slowly rising. Headline inflation dropped to 2.6% year-on-year in March from 2.8% in February against expectations of a 2.7% print.
Gold prices extended gains last week, rising to the $2,420 per ounce level. If gold prices rise, resistance may be encountered at the all-time high of $2,431 per ounce, while if gold prices decline, support may be encountered near $2,280 per ounce.
Gold prices gained strength last week, rising close to their all-time high. China announced stimulus measures to aid its ailing economy last week. Reports of “historic” steps by China to stabilize its property sector boosted gold prices since China is one of the world’s largest markets for gold.
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. The dollar dipped after the release of the US inflation report on Wednesday and the dollar index plummeted to 104.1 before paring some of the week’s losses and closing near the 104.4 level on Friday. US treasury yields also plummeted mid-week, with the US 10-year bond dropping to 4.32% then rallying to 4.42% 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.
Fed rate cut expectations are propping up 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%. 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 gold prices, as policymakers have stated that they do not intend to start reducing interest rates until there is more evidence of disinflation.
Renewed rate cut expectations propped up gold prices last week, however after the release of the US inflation report. Inflationary pressures in the US are easing, which may allow the US Federal Reserve to start cutting interest rates by September.
Oil prices edged higher last week, with WTI price rising to the $79.8 per barrel level. If WTI price declines, it may encounter support near $75.8 per barrel, while resistance may be found near $87.8 per barrel.
US crude oil inventories released on Wednesday showed a surprisingly large draw in US crude stockpiles, boosting oil prices. The US Energy Information Administration reported that weekly crude stocks fell by 2.5M barrels for the week to May 10th, against expectations of a smaller drop by 0.4M barrels and a drop by 1.4M barrels the week before.
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.
Oil prices are 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.
Renewed rate cut expectations boosted oil prices last week, however, after the release of the US inflation report. Inflationary pressures in the US are easing, which may allow the US Federal Reserve to start cutting interest rates by September.
OPEC+ kept existing output cuts in place at its latest meeting, boosting oil prices. OPEC kept its output policy steady in April, maintaining its voluntary production cuts of 2.2 million barrels per day. OPEC’s monthly report published on Tuesday showed that the organization’s crude oil output dropped by 48,000 barrels per day in April compared to March, corresponding to a 0.18% decline.
Bitcoin gained strength last week, rising above the key $67,000 level but lost its upward momentum over the weekend, dropping back to $66,000. If BTC price declines, support can be found at $68,000, while resistance may be encountered near $56,600.
Ethereum price also rose last week, touching the $3,150 level but retreated over the weekend, dropping to the $3,050 level. If Ethereum's price declines, it may encounter support at $2,800, while if it increases, resistance may be encountered near $3,350.
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. Renewed rate cut expectations boosted cryptocurrency prices after the release of the US inflation report last week. Inflationary pressures in the US are easing, which may allow the US Federal Reserve to start cutting interest rates by September. Bitcoin was on a bullish trend last week, but its rally was arrested over the weekend, however, as a risk aversion sentiment prevailed.
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 escalation of hostilities between Israel and Iran. Fears that the war will spread in the Middle East are promoting a risk aversion sentiment putting pressure on risk assets such as cryptocurrencies.
Bitcoin recently reached a new all-time high of $73,800. Bitcoin’s bullish run has renewed interest in crypto markets, boosting other cryptocurrencies as well. Bitcoin underwent ‘halving’ last month. Every halving event cuts the rate at which new bitcoins are released into circulation in half, increasing the scarcity value of Bitcoin. This was the fourth halving event in the history of Bitcoin and markets have been anticipating the event for some time. The Bitcoin halving event, however, had already been priced in and Bitcoin price has been dropping since.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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