Important calendar events
The dollar plummeted after US inflation showed signs of cooling on Wednesday and the index dropped to 104.7. The dollar rallied later in the week and the dollar index climbed to 105.6 on Friday, as markets had time to digest the Fed’s decision. However, US treasury yields continued to decline, with the US 10-year bond yield yielding 4.25%.
One of the key factors that are driving the dollar right now is the US rate outlook. As expected, the US Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday, within a target range of 5.25% to 5.50%. The US Federal Reserve has held interest rates steady since last July.
Fed chair Jerome Powell reiterated on Wednesday that more evidence of cooling inflation is required before a policy change can be considered. Powell stated that the disinflation was slow in the first quarter of the year, resulting in a delay in rate cuts.
The Fed’s latest dot plot, which is revised every three months, was also released on Wednesday. This is the summary of the central bank’s economic projections and was updated on Wednesday to take into account recent inflation and economic data and to provide estimates of the Fed’s interest rate outlook. According to the central bank’s revised dot plot, Fed officials expect to cut interest rates only once in 2024.
US CPI data released on Wednesday, however, showed that disinflation in the US is finally progressing. Monthly inflation remained the same in May, after rising by 0.3% in April and against expectations of a 0.1% rise. Headline inflation eased to 3.3% year-on-year in May from 3.4% in April, dropping below expectations of a 3.4% print. Core inflation, which excludes food and energy, rose by just 0.2% in May versus 0.3% anticipated. Annual Core CPI came in at 3.4% versus 3.6% expected, its lowest reading in three years.
US PPI data on Thursday confirmed that price pressures in the US are easing. US producer prices dropped unexpectedly in May. PPI declined by 0.2% in May against expectations of 0.1% growth and 0.5% rise in April. Core PPI, which excludes food and energy, remained steady in May, falling below expectations of 0.3% growth and 0.5% growth in April.
Odds of a rate cut in September rose above 70% last week, as markets considered that easing US inflationary pressures outweighed the Fed’s dot plot. Markets are pricing in approximately 25-50 basis points of rate cuts within the year regardless of the Fed’s dot plot, which predicts only one 25 bp rate cut in 2024. The uncertainty around Fed rate expectations is likely to continue in the coming months causing volatility in Forex markets.
Core PCE Price index data 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. 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% on an annual basis, which was in line with expectations, marginally exceeding March’s print of 2.7%.
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. 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.
EUR/USD exhibited high volatility last week, climbing to 1.085 mid-week and then plummeting to 1.070 by the end of the week. If the EUR/USD pair declines, it may find support at 1.066, while resistance may be encountered near 1.091.
The Euro has been under pressure last week since political turmoil in France led to the announcement of national elections. French President Emmanuel Macron has decided to dissolve the parliament and announce a snap election on the 30th of June, putting pressure on the Euro.
The ECB lowered its Main Refinancing Rate by 25 basis points to 4.25% in June. Markets were anticipating this, however, and a rate cut had been fully priced in.
Eurozone inflation remains sticky and may slow down the pace of future rate cuts. ECB President Christine Lagarde’s statement after the meeting was perceived as slightly hawkish. Lagarde did not give many hints on the ECB’s policy outlook and stated that the central bank’s policy will remain data-driven. Market odds of future rate cuts went down after Lagarde’s statement boosting the Euro.
On the data front, 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.
Eurozone industrial output fell unexpectedly In April according to data released on Thursday. Industrial production contracted by 0.1% in April, falling short of expectations of 0.2% after rising by 0.5% in March.
GBP/USD rose to the 1.286 level mid-week then dropped to the 1.268 level at the end of the week. If the GBP/USD rate goes up, it may encounter resistance near 1.286, while support may be found near 1.244.
In the coming weeks, we expect to see high volatility in the price of the sterling especially ahead of the UK elections in July.
Last week GDP data showed that the British economy remained stagnant in April. GDP data released on Wednesday showed that the British economy was stagnant in April after expanding by 0.4% in March. Wednesday’s GDP print, however, was in line with expectations. The British economy slipped into recession last year, contracting by 0.3% in the final quarter of 2023. The British economy remains fragile and may force the BOE to pivot to a more dovish policy.
This week markets will focus on the BOE policy meeting on the 20th. The BOE is not expected to start cutting interest rates this week even though prolonged tightening has taken its toll on the economy.
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. Currently market odds of a BOE rate cut at June’s policy meeting next week are very low and even a rate cut in August is considered unlikely. Markets are pricing in a rate cut in September with approximately 75% probability, while a rate cut by November is fully priced in. Rate cut expectations have shifted from two rate cuts and a total of 50 basis points of rate cuts in 2024 to approximately 35 bp reduction in rates within the year.
This week traders will focus on the BOE forward guidance for hints on the central bank’s rate outlook.
British labor data released last week were overall disappointing, putting pressure on the Sterling. The UK jobless rate rose to 4.4% for the three months to April exceeding expectations of 4.3%. In addition, the number of unemployed people in the UK rose to 50.4K in May from just 8.4K in April against expectations of 10.2K. On the other hand, though, average earnings for the three months to April rose to 5.9% against 5.7% anticipated. This is an indicator of consumer inflation and sticky price pressures may prevent the BOE from cutting interest rates.
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.
The Yen weakened last week after the BOJ policy meeting and USD/JPY edged higher, rising to the 157.5 level. If the USD/JPY pair declines, it may find support near 153.5. If the pair climbs, it may find resistance near 160.3.
The BOJ kept interest rates steady at its policy meeting on Friday. Reports that the central bank would consider slowing its bond purchases boosted the Yen ahead of the BOJ meeting.
The BOJ, however, kept all policy settings unchanged on Friday. The BOJ had pivoted to a more hawkish policy at its 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 hinted that the central bank would ease its bond purchasing at the next meeting in July. BOJ officials, however, have not given any specifics for paring back their bond-buying program. Market expectations of a hawkish shift were disappointed after the BOJ policy meeting, putting pressure on the Yen.
On the data front, inflation in Japan remains weak. Headline inflation dropped to 2.2% year-on-year in April from 2.6% in March. BOJ Core CPI dropped to 1.8% on an annual basis in April, falling short of expectations of 2.2%. 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 were under pressure last week as the rivalling dollar gained strength and gold hovered close to $2,320 per ounce. If gold prices rise, resistance may be encountered near $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. The dollar plummeted after US inflation showed signs of cooling on Wednesday and the index dropped to 104.7. The dollar rallied later in the week and the dollar index climbed to 105.6 on Friday, as markets had time to digest the Fed’s decision. However, US treasury yields continued to decline, with the US 10-year bond yield yielding 4.25%.
US CPI data released last week showed that disinflation in the US is finally progressing, putting pressure on the dollar and boosting gold prices. Headline inflation eased to 3.3% year-on-year in May from 3.4% in April, dropping below expectations of a 3.4% print.
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. As expected, the US Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday, within a target range of 5.25% to 5.50%.
Odds of a Fed rate cut in September rose above 70% last week on easing US inflationary pressures, propping up gold prices. The uncertainty around the US Fed rate outlook is causing volatility in gold prices.
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.
Oil prices gained strength last week, with WTI prices rising above the $78.0 per barrel level. If oil prices drop, they may encounter support near $72.6 per barrel, while resistance may be found near $80.8 per barrel.
Oil prices rallied last week on the seasonal oil demand outlook. Increased oil demand outlook in the summer months is propping up oil prices. Oil prices dipped mid-week, however, burdened by rising US stockpiles. US crude oil inventories showed that US crude stockpiles exceeded expectations. The US Energy Information Administration reported a weekly crude stockpile rise of 3.7M barrels for the week to June 7th, against expectations of a 1.2M barrel draw and following a build-up by 1.2M barrels the week before.
Oil prices are kept in check by high central banks’ interest rates. As expected, the US Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday, 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.
US CPI data released on Wednesday showed that disinflation in the US is finally progressing, however, raising Fed rate cut expectations and boosting oil prices. Headline inflation eased to 3.3% year-on-year in May from 3.4% in April, dropping below expectations of a 3.4% print. Odds of a rate cut in September rose above 70% last week on easing US inflationary pressures.
Odds of Fed rate cuts have become 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.
OPEC+ has decided to extend most of its voluntary production cuts into 2025 to boost oil prices. OPEC, however, announced that it would gradually phase out oil production cuts and laid out plans for restoring production levels within 2025.
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 attempted to breach the key $70,000 level on Wednesday but dropped below $67,000 on Thursday and continued to trade below $67,000 over the weekend. If BTC price declines, support can be found at $65,000, while further resistance may be encountered at $72,000.
Ethereum price slipped mid-week, dropping below the $3400 level but recovered towards the end of the week rising to the $3,600 level. If Ethereum's price declines, it may encounter support near $3,300, while if it increases, resistance may be encountered near $3,900.
Fluctuating risk sentiment caused volatility in crypto markets last week after the release of the US inflation report. US CPI data released on Wednesday showed that disinflation in the US is finally progressing, raising Fed rate cut expectations and promoting a risk on sentiment. Headline inflation eased to 3.3% year-on-year in May from 3.4% in April, dropping below expectations of a 3.4% print. Risk sentiment dropped towards the end of the week, however, as markets had time to digest the Fed’s message.
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. As expected, the US Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday, within a target range of 5.25% to 5.50%. Odds of a rate cut in September rose above 70% this week on easing US inflationary pressures propping up risk assets.
Crypto markets have also 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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