The Market Awaits US Inflation Report (EUR/USD), EUR/GBP Bullish, Canadian Dollar “skewed to the downside”

Fed is expected to hike the rate by 50bp, but weaker greenback and Treasury yields don't play in favour of the bank

Summary:

  • Market awaits US inflation reports on Wednesday.
  • Fed and ECB will continue to hike interest rates.
  • The Bank of Canada may decide to scale down its plans to raise interest rates.

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USD is expected to remain supported

The market is reflecting bullish signals for this currency pair. As the market awaits the US inflation report on Wednesday, the Euro has remained stable on Tuesday. So far today, the EUR/USD has fluctuated only slightly, around 1.0190. In the North American session, Treasury rates decreased; today in Asia, they were flat throughout the curve. At about 106.36, the US Dollar (DXY) index is unchanged. However, Analysts at Rabobank, a Dutch-based worldwide lender and investment bank, predict that the Euro to Dollar exchange rate (EUR/USD) will decline down below the 1.0 level during the upcoming weeks. In contrast to some analysts' predictions that the Dollar's multi-month surge is coming to an end, new analysis reveals the currency will likely continue to be well supported long into 2023.

The Market Awaits US Inflation Report (EUR/USD), EUR/GBP Bullish, Canadian Dollar “skewed to the downside” - 1 EUR/USD Price Chart

EUR/GBP Bullish

The market is reflecting bullish signals for this currency pair. On August 4, the Bank of England increased interest rates by 50 basis points as it stepped up its campaign against inflation. "Having stepped up the pace of rate hikes, it would look odd to throttle back straight away. The Fed and ECB are likely to continue to hike at a rapid pace, and a desire to support sterling will likely drag the BoE along with them," says Goodwin.

"Given the fragile backdrop, this makes rate cuts in 2023 more likely," says Goodwin. They anticipate 75 basis points of rate reductions in 2023 when it becomes apparent that the BoE overreacted. Forecasts for a weaker Pound relative to the Euro reflect this anticipation; Oxford Economics predicts that the Pound to Euro exchange rate will be at 1.16 from the end of the third quarter of 2022 through the end of the first quarter of 2023.

The Market Awaits US Inflation Report (EUR/USD), EUR/GBP Bullish, Canadian Dollar “skewed to the downside” - 2 EUR/GBP Price Chart

Canadian dollar “skewed to the downside”

According to foreign exchange strategists at Barclays, the forecast for the Canadian Dollar in the near term is "skewed to the downside." The Bank of Canada may decide to scale down its plans to raise interest rates, according to Barclays in its normal weekly currency strategy briefing paper. The bank also notes that the prolonged decrease in oil prices may have an impact. With a reading of -30.6k in July, according to official figures released last week, Canada experienced its second straight loss in employment, falling short of the average estimate of +15k new positions. Despite this, the unemployment rate stayed close to long-term lows at 4.9 percent, while pay growth held steady at 5.4 percent annually.

The Market Awaits US Inflation Report (EUR/USD), EUR/GBP Bullish, Canadian Dollar “skewed to the downside” - 3 GBP/CAD Price Chart

Sources: finance.yahoo.com, dailyfx.com, poundsterlinglive.com

Fed is expected to hike the rate by 50bp, but weaker greenback and Treasury yields don't play in favour of the bank

Rebecca Duthie

Remote Editor and writer Intern
FXMAG.COM

Rebecca has a bachelors degree in Investment Management, a Post Graduate Diploma in Financial Planning and is currently enrolled in a Masters program in International Management with a Specialization in International Finance.