Markets Await Central Bank Decisions: Fed Pauses, ECB Raises Rates
Investors anticipate the Fed to pause its rate hikes while the ECB is expected to raise rates, with post-decision commentary from central banks key for market direction
The next few days hold significant importance for global financial markets as both the Federal Reserve (Fed) and the European Central Bank (ECB) are set to announce their latest monetary policy decisions. Market expectations are for the Fed to pause its fourteen-month hiking cycle, while the ECB is projected to raise rates by 25 basis points. These outcomes are already factored into the market, and the focus now shifts to the post-decision commentary from both central banks.
Before these policy decisions, the May US inflation report will be released, with analysts anticipating a moderation in price pressures, although not at a rapid pace. Any surprises in the inflation data today could introduce volatility to the US dollar ahead of the Fed's decision on Wednesday.
EUR/USD Testing Resistance Ahead of US Inflation Report
The EUR/USD currency pair is currently testing a previous level of resistance just below 1.0800. Today, it reached a fresh two-week high. Unless there is a significant deviation from expectations in the US Consumer Price Index (CPI) data, the pair is likely to remain range-bound ahead of the Fed's decision. The retail trader data suggests a mixed trading bias for EUR/USD, with 59.86% of traders net-long.
British Pound Strengthens on Positive UK Jobs Report
The British Pound is experiencing a boost following the release of the latest UK jobs report. The unemployment rate dropped back to 3.8%, while wages rose by a robust 7.2%. These figures provide further cause for concern to the Bank of England (BoE) in its battle against inflation and are likely to strengthen the resolve of BoE hawks to continue hiking the UK Bank Rate. The EUR/GBP currency pair has been on a consistent downward trend, reflecting expectations of a higher terminal rate in the UK. It recently hit a multi-month low around 0.8540, and further downward movement is anticipated, with 0.8500 as the next support level.
EUR/USD and EUR/GBP Outlook
EUR/USD is trading near three-week highs, supported by German inflation figures that confirmed a 14-month low of 6.1% in May. The currency pair faces resistance levels at $1.0804 and $1.0832, while support can be found at $1.0734. On the other hand, EUR/GBP has recovered from its ten-month low, and a bullish engulfing pattern on the daily chart suggests the formation of an interim bottom. A breakthrough of the downtrend line and the May 5 high at £0.8636 is required for a lasting bullish reversal. The £0.8568 level is expected to provide support in case of a decline.
GBP/USD Rallies on Favorable UK Unemployment Data
GBP/USD is heading towards its Monday high of $1.2599 after the release of better-than-expected UK unemployment data. Resistance levels to watch out for are the May peak at $1.2679 and the 9 and 11 May highs at $1.264. On the downside, support can be found along the 55-day simple moving average at $1.2466.
US Inflation Eases, Fed Expected to Pause Rates
US inflation eased in May, with the Consumer Price Index (CPI) dropping to 4.0%, its lowest level since March 2021. The core rate remained high at 5.3%, supporting policymakers who advocate for further rate hikes to maintain the 2% inflation target. Market expectations for a rate hike at the upcoming Fed meeting have fluctuated, ranging from 75% to 99%. The European Central Bank (ECB) is projected to raise rates by 25 basis points, aiming to bring the deposit rate to 3.50%. ECB President Lagarde maintains a hawkish stance, prioritizing the restoration of inflation to the 2% target.
EUR/USD Technical Analysis
EUR/USD recently tested resistance at 1.0802 and is currently trading at 1.0803. The currency pair has support levels at 1.0734 and 1.0682. The near-term trend remains unclear due to a mixed trading bias.
US Dollar and GBP/USD Analysis
The US dollar initially dropped after the release of US inflation data but found support around the 103.00 level. Resistance levels to watch out for are the trendline and the 103.82 level, while support can be found at 103.00 and 102.50.
GBP/USD, on the other hand, has shown strength, supported by a longer-term trendline and recent bouncebacks. Resistance levels are at 1.2667 and 1.2680, while support is seen along the 55-day simple moving average at 1.2466.
Upcoming Monetary Policy Decisions and Potential Market Impact
This week will see monetary policy decisions from the Federal Reserve, European Central Bank, and Bank of Japan. The outcome of these meetings could lead to increased volatility in the days ahead. The focus will be on the Summary of Economic Projections and accompanying press conferences. The US dollar has experienced some retracement after the CPI release but remains above the 103.00 level. GBP/USD could be an attractive market for scenarios of USD weakness, while the euro is struggling to gain traction against the dollar.
