rate hike probability

The main news of the weekend was the agreement on the US debt limit, which may serve as a basis for increased risk demand at the beginning of the week. The House of Representatives is expected to vote on Wednesday.   It was reported that the debt ceiling will be approved until the 2024 presidential elections. Non-defense spending will remain at current levels in 2024 and will increase by only 1% in 2025. This is a compromise between Republican demands for sharp spending cuts and Democratic intentions to raise taxes.   The aggregate short position in the US dollar decreased by 3.3 billion to -12.1 billion during the reporting week. Overall, sentiment towards the dollar remains negative, but the trend may have changed.     It is also worth noting a decrease in the long position on gold by 4 billion to -31.7 billion, which is also a factor in favor of the US dollar. The core PCE deflator increased by 0.4% MoM, which is slightly higher than the consensus forecast of 0.3%.   Despite the faster-than-expected price growth, real consumer spending rose by 0.5% MoM, surpassing the expected 0.3%. The rise in the PCE deflator indicates that the fight against inflation is still far from over. In a 3-month annualized expression, the core PCE deflator stands at 4.3%, the same as in April 2022. The combination of higher spending and faster price growth is expected to lead to the Federal Reserve raising rates in June. Cleveland Fed President Loretta Mester, commenting on the released data, stated that "the data that came out this morning suggests that we still have work to do."   The CME futures market estimates a 63% probability of a Fed rate hike in June, compared to 18% the previous week, making the strengthening of the dollar in the changed conditions more than likely. Monday is a banking holiday in the US, so by the end of the day, volatility will decrease, and we do not expect strong movements. EUR/USD The ECB maintains a firm stance on continuing rate hikes as part of its fight against inflation.   On June 1, preliminary inflation data for the Eurozone will be published, and the forecast suggests a slowdown in core inflation from 5.6% to 5.5%. If the data release aligns with expectations, it will lower the ECB rate forecasts and put additional pressure on the euro.   The net long position on the euro decreased by 2.013 billion to 23.389 billion during the reporting week, marking the first significant reduction in the past 10 weeks. The calculated price is moving further south, indicating a high probability of further euro weakening.     EUR/USD has predictably declined to 1.0730, where support held, but we expect another attempt to test its strength, which will likely be more successful. Within a short-term correction, the euro may rise to resistance at 1.0735 or 1.0830, but the upward movement is likely to be short-lived and followed by another downward wave. Our long-term target is seen in the support zone of 1.0480/0520.   GBP/USD The decline in inflation in the UK is once again being called into question. The core Consumer Price Index rose from 6.2% YoY to 6.8% in April, with yields sharply increasing. The retail sales report for April, published on Friday, showed that the slowdown in consumer demand remains more of an aim than a reality. Retail sales excluding fuel increased by 0.8% MoM, significantly higher than the forecast of 0.3%.   If it weren't for the sharp decline in energy demand, both the monthly and annual retail growth would have been noticeably higher than expected. Monday is a banking holiday in the UK, and there are no macroeconomic data expected this week that could influence Bank of England rate forecasts.   Therefore, the pound will be traded more in consideration of global rather than domestic factors. We do not expect high volatility or significant movements. The net long position on the pound slightly decreased by 84 million to 899 million during the reporting week. The bullish bias is small, and the positioning is more neutral than bullish. The calculated price is below the long-term average and is downward-oriented.     The pound has predictably moved towards the support zone at 1.2340/50, but the decline has slowed down at this level. We expect the decline to continue, with the nearest targets being the technical levels at 1.2240 and 1.2134. There is currently insufficient basis for a resumption of growth.  

The US and UK markets were closed on Monday, but European government bond yields sharply fell, which is a direct consequence of rumors that the Biden administration and the Republican majority in Congress are close to reaching an agreement.   The removal of the US default threat contributes to an increase in risk appetite and, at the same time, a slight decrease in demand for the US dollar as demand for bonds decreases. The dollar is also facing pressure due to the upcoming meetings of the Bank of England and the European Central Bank, where further rate hikes are anticipated, and uncertainty regarding the possible actions of the Bank of Japan at the June 16 meeting.   NZD/USD The Kiwi is facing increasing pressure as the reasons that could prompt the RBNZ to raise rates above the current 5.50% are diminishing, with the main one being the threat of an almost inevitable recession.   Retail sales showed zero growth in April (forecast was +0.2%), a decline of 1.4% in the first quarter, and a decline of 1% in the last quarter of the previous year. This means that consumer activity is declining despite high migration rates. Trade indicators have also deteriorated significantly, with a 3.4% decrease in terms of trade for goods in the first quarter and an expected decline in exports.   While expectations for an increase in the Fed rate are growing and markets are anticipating another hike in either June or July, the Reserve Bank of New Zealand (RBNZ) announced a pause that is expected to last at least until November. Additionally, there is the threat of an economic slowdown amid still uncertain prospects for inflation.   Although inflation is expected to slow down in the second half of the year, it is currently only a forecast, while the threat of a recession is very real, as is the pause taken by the RBNZ.       Overall, based on the data, the demand for NZD is expected to decrease due to worsening trade indicators, pressure on the current account, and an increase in the yield spread in favor of the US dollar.   Positioning on NZD continues to balance at near-zero levels, with slight deviations in either direction. Over the reporting week, the net short position decreased by 107 million to -23 million, reaching a negligible level. The calculated price has shifted downwards.     Last week, we predicted that after the RBNZ decision, the Kiwi would move downwards towards support at 0.6020. This scenario has played out, and it can be assumed that the southward movement will continue. A probable correction will find resistance near 0.6079, where selling may resume.   We expect another test of support at 0.6020 and further movement towards the target of 0.5940/50, and then 0.5900. AUD/USD RBA Governor Lowe, as reported in the Australian media, held a "pessimistic" briefing behind closed doors with the parliamentary economics committee. Sources described the tone as "noticeably more pessimistic due to the emphasis on risks to achieving the bank's forecast targets for inflation and unemployment."   Markets are currently assessing the probability of another rate hike by the RBA and the likelihood of the bank taking a pause approximately equally. The key value will be the tone of Lowe's testimony before the Senate Economics Committee. The NAB Bank estimates the peak rate to reach 4.1%, which will be achieved in August or July.   On Friday, June 2, an important decision will be made regarding the minimum wage. Changes will be announced for two indicators - the minimum wage, which will affect around 200,000 workers, and the volume of bonus payments, which will be significant for 2.4 million workers.   Preliminarily, according to the Treasury, a 7% increase is expected for the first indicator and a 4% increase for the second, which will likely be seen by the markets as a factor fueling inflation. The net short position on AUD decreased by 323 million over the reporting week to -3.244 billion. The positioning remains persistently bearish, with the calculated price below the long-term average and directed downwards.     The bearish impulse we anticipated in the previous review has developed, although the price did not reach the stated target of 0.6466. Nevertheless, there are no grounds to expect a resumption of growth, and any potential upward retracement is likely to be halted in the 0.6560/80 zone, after which selling will resume.   The nearest target is 0.6466, followed by technically significant levels down to the local low of 0.6172.        

As markets factor in interest rate hikes by the Federal Reserve until the end of 2023, gold prices remain under pressure. In its latest gold price forecast, ABN AMRO's Senior Economist Sustainability Research, Georgette Boele, has lowered her long-term gold forecast. She projects prices to reach $2,000 by the end of this year and 2024 instead of the $2,200 previous forecast for 2024.   According to her, investors are not eager to buy gold at current levels, likely because prices are close to historical highs. She added that market expectations shifted after the Federal Reserve's statement about continuing its aggressive policy, even though the tightening cycle is nearing completion, marking the most aggressive tightening cycle in the last 40 years.   According to the CME FedWatch Tool, there is an 80% probability of a rate hike in July.   Boele stated that the Dutch bank expects the Federal Reserve to cut interest rates by 175 basis points only next year, as the economy slipped into a recession in the first quarter. Consequently, the bank anticipates a global bullish impulse for gold only in the following year, which could push prices towards.  

Traders will focus on the upcoming US inflation report. The US will publish key inflation reports that will trigger high volatility among dollar pairs, including the EUR/USD pair. At the end of last week, buyers actively traded as they approached the boundaries of the 10th figure. Traders interpreted June's Non-farms against the US currency, although the report itself was rather contradictory (for example, the wage component came out in the "green").   Inflation reports can restore confidence to the dollar bulls if they reflect an acceleration of the main indicators. But they can also plunge the greenback, enhancing doubts about the interest rate hike within the "post-July" period (the fact of the rate hike at the July meeting is beyond doubt, judging by market expectations). Therefore, traders will focus on the three US inflation reports that will be published during the upcoming week. All other macroeconomic reports will be of secondary importance, although they should not be ignored either.   Consumer Price Index The most important release of the week is the report on the growth of the consumer price index in the US for June (Wednesday, July 12). According to most experts, the indicator will reflect a slowdown in inflation growth. Thus, the general consumer price index in June should decrease quite sharply - to 3.1% y/y (from the previous value of 4.0%). The core index, excluding food and energy prices, should also demonstrate a downward dynamic, slowing down from the May value of 5.3% to 5.0% y/y. Take note that even if the CPI surprises market participants with unexpected growth, this fact is unlikely to fundamentally change the situation in the context of the July FED meeting. According to the CME FedWatch Tool, the likelihood of a rate hike this month is 93%.   That is, traders are practically confident in the hawkish outcome of the July meeting - the "green tint" of the inflation report will maintain (confirm) this confidence, but no more. However, if the consumer price index ends up in the "red", the dollar will be under quite strong pressure.   The fact is that the probability of another rate hike in September is now only 24% (again, according to the CME FedWatch Tool). If inflation indicators decrease at a more active pace, the probability of another increase (after July) by the end of the current year will weaken, and this fact will put pressure on the greenback. Producer Price Index, Import Price Index... and more Interestingly, the other inflation reports to be published in the coming week are also expected to reflect a slowdown in US inflation. For example, on Thursday, July 13, we will learn the value of the producer price index.   Experts believe that the overall PPI in monthly terms will come out at 0.2%, and in annual terms - at 0.4%. In annual terms, the indicator has been consistently decreasing for 11 months in a row, and June will accordingly be the 12th month. If it comes out at the forecast level, it will be the weakest result since August 2020. The core producer price index should show a similar dynamic. In annual terms, it should decrease to 2.7% (from the previous value of 2.8%). In this case, it will be the fifteenth consecutive decrease in the indicator. For comparison, it should be noted that in March of last year the base PPI was at 9.6%. On Friday, July 14, we will learn the dynamics of the import price index.   This indicator can be an early signal of changes in inflation trends, or their confirmation. In this case - more likely a confirmation. According to general forecasts, in monthly terms, the indicator will remain in the negative area, standing at -0.1%. In annual terms, the index has been below zero for three months in a row, and in June it should also remain in the negative area (-6.9%). Certainly, aside from US inflation reports, the economic calendar for the upcoming week is packed with other events: for instance, many Fed representatives (Barr, Bostic, Daly, Mester) will speak on Monday, the ZEW indices will be published on Tuesday, and a speech by Fed Reserve representative Neel Kashkari and ECB governing council member Philip Lane is expected on Wednesday. Also, we have the release of the ECB's June meeting minutes and the initial jobless claims data in the US.   On Friday, the release of the University of Michigan's consumer sentiment index and a speech by Fed Reserve governing board member Christopher Waller is expected. But all these events will serve as a kind of information backdrop. The main focus will be on US inflation. Conclusions The aforementioned inflation reports have the potential to greatly influence the dollar, especially if they end up in the "red", i.e., if the pace of inflation decline in the US accelerates. Amid contradictory Nonfarm, this would mean that the Federal Reserve may limit itself to just one additional rate hike, which will obviously occur at the July meeting.   The July rate hike has already been factored into the market, so any doubts about further tightening of monetary policy will be detrimental to the greenback. In this case, buyers will be the beneficiaries of the current situation: their path will be open not only to the boundaries of the 10th figure, but also to the 1.1080 mark (upper line of the Bollinger Bands on the weekly chart).  

First impressions can be deceiving. US non-agricultural employment rose by 209,000 in June fell short of the Bloomberg expert consensus forecast and was the weakest since December 2020. Moreover, the data for April and May were revised down by 110,000. Initially, the market perceived the report as weak, which led to a drop in Treasury bond yields and a rise in EUR/USD above 1.092. However, the devil is always in the details. In the lead-up to the report, investors were counting on strong numbers as private sector employment from ADP rose by nearly half a million people.   However, the actual non-farm payrolls turned out to be worse than that report by the largest amount since the beginning of 2022. This fact can be seen as a sign of a cooling labor market. Nevertheless, unemployment in June dropped from 3.7% to 3.6%. As long as it does not increase, we can forget about a recession in the US economy. In addition, the average wage increased faster than expected, so it's still too early for the Federal Reserve to relax.     The employment report for the US private sector turned out to be mixed. It reduced the probability of a rate hike to 5.75% in 2023 from 41% to 36%, which worsened the position of the US dollar against the main world currencies. However, Deutsche Bank noted that only a figure of +100,000 or less for non-farm payrolls could change the worldview of FOMC officials and make them abandon their plans for two acts of monetary restriction this year. June employment data gave food for thought to both the "hawks" and "centrists" of the Fed, as well as the "bulls" and "bears" for EUR/USD.   Now, investors' attention is shifting to US inflation data and Fed Chair Jerome Powell's speech in Jackson Hole. Bloomberg experts expect consumer prices to slow in June from 4% to 3.1%, and core inflation from 5.3% to 5% year-on-year. CPI is moving so quickly towards the 2% target that it's as if Fed officials have not changed their minds. Could it be that this time the financial market will be right? And those who went against the Fed will make money? We'll see.     Not everyone agrees with this. ING notes that the minutes of the FOMC's June meeting set a very high bar for incoming data for the Bank to abandon its plans. The US labor market report is unlikely to have surpassed this bar. Core inflation continues to remain high, and the economy is firmly on its feet.   All this allows ING to predict the EUR/USD pair's fall towards 1.08 within the next week. Technically, on the daily chart, there is a battle for the fair value at 1.092. Closing above this level will allow you to buy on a breakout of resistance at 1.0935. This is where the upper band of the consolidation range within the "Spike and Ledge" pattern is located. On the contrary, if the 1.092 mark persists for the bears, we will sell the euro from $1.089.      

Analysis of GBP/USD 5M   The GBP/USD pair continued to decline on Tuesday, primarily based on technical factors, as this was in the absence of influential economic releases. The only noteworthy event was the moderately hawkish statement by Neel Kashkari, which we have already discussed. Nonetheless, this is just the opinion of one of the eighteen members of the Federal Reserve's monetary committee. At the CME, its own FedWatch tool showed a low probability of a hike for the December meeting. Therefore, the market currently does not expect a new rate hike in the US. However, this information should not be crucial for the US dollar. It should resume its trend and, consequently, continue to strengthen. It is almost guaranteed that the pair will return to the level of 1.2109, which is roughly 200 pips down from its current position. The decline may be gradual. There were only two trading signals for the pound yesterday. The price bounced off the 1.2269 level twice, but in both cases, it managed to rise by a maximum of 20 pips. This was enough to place a stop-loss to breakeven for both long positions. Therefore, both trades were certainly not losing ones. You could manually close the second trade in profit.   COT report:   COT reports on the British pound also align perfectly with what's happening in the market. According to the latest report on GBP/USD, the non-commercial group closed 3,400 long positions and 1,700 short ones. Thus, the net position of non-commercial traders decreased by another 1,700 contracts in a week. The net position indicator has been steadily rising over the past 12 months, but it has been firmly decreasing over the past three months. The British pound is also losing ground. We have been waiting for many months for the sterling to reverse downwards. Perhaps GBP/USD is at the very beginning of a prolonged downtrend. At least in the coming months, we do not see significant prospects for the pound to rise, and even if we're currently witnessing a corrective phase, it could persist for several months.   The British pound has surged by a total of 2,800 pips from its absolute lows reached last year, which is an enormous increase. Without a strong downward correction, a further upward trend would be entirely illogical (if it is even planned). We don't rule out an extension of an uptrend. We simply believe that a substantial correction is needed first, and then we should assess the factors supporting the US dollar and the British pound. A correction to the level of 1.1844 would be enough to establish a fair balance between the two currencies. The non-commercial group currently holds a total of 63,700 longs and 85,800 shorts. The bears have been holding the upper hand in recent months, and we believe this trend will continue in the near future.