FOMC members

All eyes on central bankers as Fed, ECB meet The dollar struggled in lackluster trading last week, as the rebound in commodity prices and improving investor sentiment meant the main 2023 trends continue to drive markets: a soft dollar, and a particularly strong showing by commodity currencies.   Latin American currencies continue to shine, and at the other end, we have the Turkish lira, spiralling down week after week as markets lose patience with Erdogan's bizarre fiscal and monetary notions.   After a news-light week, markets are bracing for the Federal Reserve and European Central Bank meetings. Markets are pricing in a one-third chance of a hike from the Fed Wednesday. However, the release of the critical inflation report for May the day before means that some FOMC members likely will not decide their vote until the day of the meeting. The ECB decision is an easier call, with markets and strategists universally expecting a 25 bp hike; the key there will be the new staff forecasts and the hawkishness of the communications. Expect plenty of volatility.

No price test occurred in EUR/USD this morning due to low volatility and empty macroeconomic calendar. But ahead lies the latest consumer price index in the US, which will likely force many market players to review their positions on risky assets. Demand for euro may drop, which could lead to a decline in the pair.   There will be an increase only when inflation drops more than expected. Markets will also pay attention to the speeches of FOMC members Neel Kashkari and Raphael Bostic. For long positions: Buy when euro hits 1.1036 (green line on the chart) and take profit at the price of 1.1075. Growth will occur amid weak US inflation.   However, when buying, traders should make sure that the MACD line lies above zero or rises from it. Euro can also be bought after two consecutive price tests of 1.1017, but the MACD line should be in the oversold area as only by that will the market reverse to 1.1036 and 1.1075. For short positions: Sell when euro reaches 1.1017 (red line on the chart) and take profit at the price of 1.0981. Pressure will increase in the case of another jump in US inflation. However, when selling, traders should make sure that the MACD line lies below zero or drops down from it. Euro can also be sold after two consecutive price tests of 1.1036, but the MACD line should be in the overbought area as only by that will the market reverse to 1.1017 and 1.0981.       What's on the chart: Thin green line - entry price at which you can buy EUR/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell EUR/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely. MACD line- it is important to be guided by overbought and oversold areas when entering the market       Important: Novice traders need to be very careful when making decisions about entering the market. Before the release of important reports, it is best to stay out of the market to avoid being caught in sharp fluctuations in the rate. If you decide to trade during the release of news, then always place stop orders to minimize losses. Without placing stop orders, you can very quickly lose your entire deposit, especially if you do not use money management and trade large volumes. And remember that for successful trading, you need to have a clear trading plan. Spontaneous trading decision based on the current market situation is an inherently losing strategy for an intraday trader.  

The test of 1.2942, coinciding with the decline of the MACD line from zero, prompted a sell signal that led to a price decrease of around 20 pips. The latest CPI data in the US lies ahead, and this will likely cause market players to review their positions on risky assets. Demand for pound may drop, which could lead to a decline in GBP/USD. There will be an increase only when inflation drops more than expected. Markets will also pay attention to the speeches of FOMC members Neel Kashkari and Raphael Bostic.   For long positions: Buy when pound hits 1.2946 (green line on the chart) and take profit at the price of 1.3014 (thicker green line on the chart). Further growth will be seen in the case of weak US inflation data. However, when buying, make sure that the MACD line lies above zero or rises from it. Pound can also be bought after two consecutive price tests of 1.2895, but the MACD line should be in the oversold area as only by that will the market reverse to 1.2946 and 1.3014.     For short positions: Sell when pound reaches 1.2895 (red line on the chart) and take profit at the price of 1.2844. Pressure will increase in the event of further growth in US inflation. However, when selling, make sure that the MACD line lies below zero or drops down from it. Pound can also be sold after two consecutive price tests of 1.2946, but the MACD line should be in the overbought area as only by that will the market reverse to 1.2895 and 1.2844.         What's on the chart: Thin green line - entry price at which you can buy GBP/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell GBP/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely. MACD line- it is important to be guided by overbought and oversold areas when entering the market     Important: Novice traders need to be very careful when making decisions about entering the market. Before the release of important reports, it is best to stay out of the market to avoid being caught in sharp fluctuations in the rate. If you decide to trade during the release of news, then always place stop orders to minimize losses. Without placing stop orders, you can very quickly lose your entire deposit, especially if you do not use money management and trade large volumes. And remember that for successful trading, you need to have a clear trading plan. Spontaneous trading decision based on the current market situation is an inherently losing strategy for an intraday trader.  

The latest report on the US consumer price index reveals a slowdown in inflation, with an annual rate of 3.0% in June compared to 4.0% the previous month. This figure, slightly below the expected 3.1%, indicates a moderation in price growth. Core inflation also decelerated to 4.8% from 5.3%, falling in line with expectations. Surprisingly, this marks the ninth consecutive report where indicators have either met or fallen short of expectations, sparking a distinct market reaction. Notably, the response from the market differs this time around, as confidence grows and risk appetite increases, leading to a decline in the value of the US dollar. The latest report has fueled speculation that the Federal Reserve (Fed) may deviate from its planned two rate hikes this year or consider an expedited shift towards policy easing in the upcoming year.   US inflation slows, but Fed has the last word The US consumer price index slowed to an annual rate of 3.0% in June from 4.0% the previous month. This was slightly below the expected 3.1%. Core inflation slowed to 4.8% from 5.3%, and 5.0% expected. This is the ninth consecutive report where an indicator has been in line or weaker than expected, but we see a different market reaction.       This time the markets are confident, risk appetite is rising, and the dollar is falling as the latest report has fuelled speculation that the Fed will not need to stick to its plan of two rate hikes this year or will allow for a quicker reversal to policy easing next year. While the Fed is often wrong in its forecasts, it is still the Fed that has the final say on interest rate decisions. Despite the constant inflation surprises, FOMC members remain hawkish in their comments, regularly pointing out that the fight against inflation is not over.     After the latest inflation report, the dollar index was close to its lowest level since April 2022, losing more than 12% from its peak last September. This decline creates additional pro-inflationary pressure, unlikely to please the central bank. Traders' and investors' attention should now turn to the Federal Reserve's assessment of the latest data. In addition to the speeches by Barkin, Kashkari and Bostic, the Fed's Beige Book will be released today, which will be used as the basis for the Fed's observations at the July meeting.    

FX Daily: Currencies starting to detach from bond dynamics Volatility in long-dated sovereign bonds has remained elevated, but that has almost only been mirrored in a weaker yen in FX since the start of the week. The currency market is starting to detach from short-term bond swings, but the dollar’s newfound resilience could still consolidate into Thursday’s US inflation numbers.   USD: Wait and see It’s been a slow start to the week in the currency market, with the dollar being mixed but generally supported yesterday and in today’s Asian session. We continue to observe rather elevated volatility in bond markets, with long-dated Treasury yields rising again: unsurprisingly, the only notable move in FX since the weekend has been another leg higher in USD/JPY. With the Bank of Japan normalisation still looking too remote to temper bearish pressure on the yen, USD/JPY is the most exposed G10 pair to the ongoing bond market instability, especially given some signs of resilience in US equities, which limited losses in high-beta currencies. The US data calendar only includes second-tier releases until Thursday’s CPI figures. Today, the key highlights are the NFIB Small Business Confidence Optimism Index – which is expected to rise very marginally from June – trade balance figures from June, and final wholesale inventory numbers. It will be interesting to hear what FOMC members Patrick Harker and Thomas Barkin say about the economy in two separate speeches today, especially following last week’s slightly weaker-than-expected headline payroll figures. With the exception of the yen, it appears that most G10 currencies are losing their direct exposure to swings in US bond yields. At this stage, it would probably take a larger swing in yields to cause a substantial spill-over into FX than it did before the US credit downgrade by Fitch. Still, we expect some consolidation of the dollar around current levels into Thursday’s inflation numbers.

For the fourth consecutive day, the USD/JPY pair is steadily heading towards the psychological level of 150.00, currently trading above the 149.00 mark.   The Japanese yen continues to face pressure due to the Bank of Japan's decision last week to maintain the status quo. At the end of the September meeting, the Japanese central bank left its ultra-loose policy unchanged, refraining from any hints of possible changes in the near future.   Additionally, earlier this week, Bank of Japan Governor Kazuo Ueda stated that the current policy has a significant stimulative effect on the economy, and the main position is to patiently maintain monetary easing. He added that Japan's economy is at a critical stage in achieving a positive wage growth cycle and sustainable inflation at 2%, which is not yet visible. Such statements dispel hopes of a future exit from the massive stimulus program and continue to undermine the yen. On the other hand, the Federal Reserve has indicated that interest rates will not be falling in the near future. It openly stated that there will be further rate hikes by the end of the year, with only two rate cuts expected in 2024, instead of the previously speculated four, as anticipated three months ago.   Many FOMC members still express uncertainty about the end of the fight against inflation. Consequently, this supports the prospects for further tightening of monetary policy. This, in turn, led to selling in the U.S. bond market and pushed the yield on 10-year Treasury bonds to the highest level since 2007, which became a key factor in the recent rise of the U.S. dollar to a 10-month peak and continues to support the USD/JPY pair's upward trajectory.   Nevertheless, the prevailing risk-off environment favors the relative status of JPY as a safe haven and limits the potential for spot price growth. But it should not be forgotten that Japanese authorities will intervene in the currency market to support the national currency. This restrains bulls from pushing USD/JPY to new levels. In fact, Japanese Finance Minister Shunichi Suzuki issued a new warning against the recent weakness of the yen and stated last week that the government would not rule out any options to address excessive volatility in the currency markets.   This, in turn, requires caution before taking positions regarding the continuation of the established upward trend observed since mid-July. However, for now, the fundamental backdrop supports the pair's growth. But it is worth paying attention to today's news regarding the dollar before rushing into betting on further moves.