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Despite the rally, the risks for EURUSD, GBPUSD are skewed to the downside
Rising optimism about returns in risk assets and narrowing gap in the expected pace of tightening between the Fed and other central banks were the main drivers of broad USD sell-off on Tuesday. The dollar index (DXY) dropped to 106.40, however, selling pressure in the second half of the day eased yesterday, the price entered short-term consolidation and today it rebounded to the area of 107 at the start of European session. Risk assets came under selling pressure as well, major equity indices declined by 0.5% on average.
The idea that the gap between the Fed and other central banks gained traction after reports that the ECB could still raise rates by 50 bp on Thursday. In addition, strong UK employment data increased the chances that the Bank of England will also deliver a 50 bp rate hike at the meeting in August. The EU and UK money markets price in nearly 200 bp tightening by the ECB by May 2023, the same for the Bank of England. However, there is a substantial risk that markets will scale back their expectations of ECB and BoE tightening, given fragile growth forecasts for the European and British economies. At the same time, the prospect of a 200bp Fed rate hikes confirmed by the official opinion of the FOMC (Dot Plot) looks more reliable due to the fact that the US economy is better protected from global challenges, such as reduced gas supplies from Russia. For this reason, the risks for EURUSD, GBPUSD are skewed to the downside.
The UK inflation report released today increased the odds that the Bank of England's current tightening course will send the economy into stagflation. Annual inflation exceeded the forecast and amounted to 9.4%. Monthly inflation accelerated to 0.8%. The rise in import prices, which is also ahead of forecasts, indicates that either retailers will have to put up with further margin cuts or raise prices, so a 10% year-on-year increase in food prices is likely not to be the limit and accelerate towards the end of the year.
At the same time, core inflation seems to have peaked and started to slow down to 0.4% vs. 0.5% forecast. There are other signs that inflationary pressures in supply chains, which were one of the key drivers of inflation in 2021, have begun to ease - used car prices have continued to decline and are now 8% lower than their peak in January.
GBPUSD reacted negatively to the report bouncing off from the short-term resistance area:
EURUSD rose above 1.02 yesterday after reports that the ECB considers a 50bp rate hike on Thursday. ECB Chief Economist Lane will reportedly make a formal proposal at the meeting, and markets are now trying to estimate the number of members of the Governing Council who will support this proposal. At the moment, it is known that only three officials spoke in favor of raising the rate by 50 bp, the markets estimate the probability of such an outcome at 50%.
Even with a hawkish outcome of the meeting, the ECB will have to try to support the European currency, given the worsening growth forecasts for the EU economy. EURUSD strengthening potential tomorrow may be limited by the level of 1.0350 as part of a rebound from the 1.00 level, after which the price will test the upper limit of the short-term downtrend:
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Rising optimism about returns in risk assets and narrowing gap in the expected pace of tightening between the Fed and other central banks were the main drivers of broad USD sell-off on Tuesday. The dollar index (DXY) dropped to 106.40, however, selling pressure in the second half of the day eased yesterday, the price entered short-term consolidation and today it rebounded to the area of 107 at the start of European session. Risk assets came under selling pressure as well, major equity indices declined by 0.5% on average.
The idea that the gap between the Fed and other central banks gained traction after reports that the ECB could still raise rates by 50 bp on Thursday. In addition, strong UK employment data increased the chances that the Bank of England will also deliver a 50 bp rate hike at the meeting in August. The EU and UK money markets price in nearly 200 bp tightening by the ECB by May 2023, the same for the Bank of England. However, there is a substantial risk that markets will scale back their expectations of ECB and BoE tightening, given fragile growth forecasts for the European and British economies. At the same time, the prospect of a 200bp Fed rate hikes confirmed by the official opinion of the FOMC (Dot Plot) looks more reliable due to the fact that the US economy is better protected from global challenges, such as reduced gas supplies from Russia. For this reason, the risks for EURUSD, GBPUSD are skewed to the downside.
The UK inflation report released today increased the odds that the Bank of England's current tightening course will send the economy into stagflation. Annual inflation exceeded the forecast and amounted to 9.4%. Monthly inflation accelerated to 0.8%. The rise in import prices, which is also ahead of forecasts, indicates that either retailers will have to put up with further margin cuts or raise prices, so a 10% year-on-year increase in food prices is likely not to be the limit and accelerate towards the end of the year.
At the same time, core inflation seems to have peaked and started to slow down to 0.4% vs. 0.5% forecast. There are other signs that inflationary pressures in supply chains, which were one of the key drivers of inflation in 2021, have begun to ease - used car prices have continued to decline and are now 8% lower than their peak in January.
GBPUSD reacted negatively to the report bouncing off from the short-term resistance area:
EURUSD rose above 1.02 yesterday after reports that the ECB considers a 50bp rate hike on Thursday. ECB Chief Economist Lane will reportedly make a formal proposal at the meeting, and markets are now trying to estimate the number of members of the Governing Council who will support this proposal. At the moment, it is known that only three officials spoke in favor of raising the rate by 50 bp, the markets estimate the probability of such an outcome at 50%.
Even with a hawkish outcome of the meeting, the ECB will have to try to support the European currency, given the worsening growth forecasts for the EU economy. EURUSD strengthening potential tomorrow may be limited by the level of 1.0350 as part of a rebound from the 1.00 level, after which the price will test the upper limit of the short-term downtrend:
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.