Weekly Market Outlook: June 10th - June 16th
Forex
USD
Market odds of a rate cut at this week’s policy meeting are almost zero and traders will focus mostly on the Fed’s forward guidance.
The dollar edged lower early last week, and the index hovered close to the 104.1 level. Then on Friday, the dollar surged after the release of the US NFPs and the dollar index skyrocketed to 105.0. US treasury yields followed a similar pattern, with the US 10-year bond yield dropping to 4.28% then rising to 4.42% on Friday.
One of the key factors that are driving the dollar right now is the US rate outlook. As expected, the US Federal Reserve kept interest rates unchanged at its latest policy meeting, within a target range of 5.25% to 5.50%. The US Federal Reserve has held interest rates steady since last July.
This coming week we have the Fed rate decision on Wednesday and, on the same day, the release of the US inflation report. Markets expect the Fed to keep interest rates steady on Wednesday. Fed officials have stressed that more evidence of cooling inflation is required before a policy change can be considered. Market odds of a rate cut at June’s policy meeting this week are almost zero and traders will focus mostly on the Fed’s forward guidance.
However, there is a chance of a rate cut in September. It all comes down to US inflation, which is why Wednesday’s inflation report is so crucial to the Fed’s rate outlook. Odds of a rate cut in September rose above 70% early last week, as US inflation showed signs of cooling last week. Market odds of a September rate cut dipped to 50% on Friday, however, after the release of the US labor report.
Currently, only 25-50 basis points of rate cuts are priced in within the year. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly. The uncertainty around Fed rate expectations is likely to continue in the coming months causing volatility in Forex markets.
The US labor report released on Friday indicated that the US labor market is stronger than expected, boosting the dollar. US Non-Farm Payrolls (NFPs) showed that 272K new jobs were created in May, far exceeding expectations of 185K and April’s 165K print. Average Hourly Earnings, which is an indicator of consumer inflation, rose by 0.4% in May against a 0.3% raise expected and 0,2% growth in April. The US unemployment rate, however, rose to 4.0% in May from 3.9% in April.
US unemployment claims on Thursday rose to 229K for the week ending on May 31st exceeding expectations of 220K and a print of 221K the week before. ADP Non-Farm Employment Change data on Wednesday showed that the number of employed people in the US rose by just 152K in May, disappointing expectations of 173K and dropping below April’s print of 188K. JOLTS Job Openings on Tuesday fell short of expectations putting pressure on the dollar. The number of job openings in the US rose by 8.06M in April, missing expectations of 8.37 M. Moreover, March’s print was revised downwards to 8.36M.
Final Services PMI data on Wednesday were optimistic, showing increased growth in the services sector. The Services PMI index rose to 54.8 in May from 51.3 in April, with a higher print above 50 indicating that the sector is expanding at a more rapid pace. The Institute for Supply Management (ISM) Services PMI index, which is considered to carry more weight, was even more encouraging. ISM Services PMI moved out of contractionary territory and started to expand, with a print of 53.8 in May up from 49.4 in April.
Manufacturing PMI data on Monday, on the other hand, showed that the US Manufacturing sector continues to contract. The ISM Manufacturing PMI index remained below the threshold of 50 required to denote industry expansion for the second consecutive month in May. The index dropped to 48.7 in May from 49.2 in April against expectations of a 49.8 reading, indicating the sector is contracting at a faster pace.
US CPI data for April showed that disinflation in the US is finally progressing. Monthly inflation rose by just 0.3% in April, falling below expectation of a 0.4% raise. More importantly, headline inflation in April eased to 3.4% on an annual basis from 3.5% in March, which was in line with expectations. Core inflation, which excludes food and energy, came in at 3.6%, its lowest reading in three years.
Core PCE Price index data showed that inflationary pressures in the US are easing. This is the Federal Reserve’s preferred inflation gauge and may affect the Fed’s rate outlook. Core PCE Price index rose by just 0.2% in April from 0.3% in March against expectations of 0.3% growth. Core PCE came at 2.8% on an annual basis, which was in line with expectations, marginally exceeding March’s print of 2.7%.
The US economy expanded by just 1.3% in the first quarter of the year falling considerably below the 3.4% expansion registered in Q4 of 2023. The US economy is expanding at an increasingly slower pace putting pressure on the dollar, as GDP data have shown expansion by 4.9% in the third quarter of 2023. In addition, the Preliminary GDP Price Index rose by just 3.0% in Q1, which represents a downward revision of 0.1% from the previous estimate.
EUR
The ECB lowered its Main Refinancing Rate by 25 basis points to 4.25% on Thursday but the rate cut had been fully priced in.
The Euro gained strength last week after the ECB decided to start reducing interest rates on Thursday, and EUR/USD rose above the 1.090 level. The currency rate then plummeted to the 1.080 level on Friday as the dollar jumped. If the EUR/USD pair declines, it may find support at 1.072, while resistance may be encountered near 1.098.
The Euro gained strength on Thursday even after the ECB announced its first rate cut after keeping rates at record highs since September. The ECB lowered its Main Refinancing Rate by 25 basis points to 4.25% on Thursday. Markets were anticipating this, however, and a rate cut had been fully priced in. As a result, markets reacted to what was perceived as hawkish forward guidance from the ECB, boosting the Euro.
Eurozone inflation remains sticky and may slow down the pace of future rate cuts. ECB President Christine Lagarde’s statement after the meeting was perceived as slightly hawkish. Lagarde did not give many hints on the ECB’s policy outlook and stated that the central bank’s policy will remain data-driven. Market odds of future rate cuts went down after Lagarde’s statement boosting the Euro.
On the other hand, though, Thursday’s rate cut has created a policy gap between the ECB and the Fed, as the Fed is not expected to start cutting interest rates before the final quarter of the year. The discrepancy between the ECB’s and the Fed’s policy outlook is putting the Euro at a disadvantage against the dollar.
On the data front, Final Services PMI data on Wednesday showed that Eurozone business activity expanded at its quickest rate in a year in May. Final Services PMI came at 53.2 in May, which was in line with expectations. The EU services sector is expanding rapidly as shown by a print above the threshold of 50 that denotes industry expansion.
Final Manufacturing PMI data released on Monday for the Euro Area, on the other hand, showed that the EU manufacturing sector continues to contract. EU Manufacturing PMI came in at 47.3 in May, which was in line with expectations, but exceeded April’s 45.6 print. The EU manufacturing sector continues to contract, as evidenced by a print below the threshold of 50 that denotes industry expansion, but the rate of contraction has been reduced considerably.
Eurozone inflation data came out hotter than anticipated last week, propping up the Euro. German CPI data released on Wednesday showed that German inflation rose to 2.4% year-on-year in May from 2.2% in April. Monthly inflation in Germany, however, rose by only 0.1% in May against expectations of 0.2% and a 0.5% print in April.
More importantly, flash CPI released last week for the EU showed that headline inflation in the Euro Area accelerated to 2.6% year-on-year in May up from 2.4% in April and exceeding the forecast of 2.5%. Core CPI, which excludes food and energy, rose to 2.9% on an annual basis in May from 2.7% in April against expectations of a 2.7% print. Inflationary pressures in the Eurozone are not easing as fast as anticipated, which might hold up the ECB’s plans to lower interest rates.
The Eurozone economy expanded by 0.3% in the first quarter of the year, which was in line with preliminary estimates. GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero. The EU economy contracted by 0.1% in the third quarter of 2023 and barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1.
GBP
Business activity in the UK is expanding, boosting the Sterling as evidenced by PMI data released last week.
GBP/USD rose to the 1.281 level early last week then plummeted to 1.272 on Friday as the dollar rallied. If the GBP/USD rate goes up, it may encounter resistance near 1.289, while support may be found near 1.264.
The BOE kept interest rates steady at its latest monetary policy meeting. The BOE maintained its official rate at 5.25% but showed signs of preparing for a dovish pivot.
Business activity in the UK is expanding, boosting the Sterling as evidenced by PMI data released last week. Final Services PMI came in at 52.9 in May, which was in line with expectations. The British Services sector continues to expand as indicated by a print above the level of 50. The rate of expansion, however, was reduced as May’s print of 52.9 is considerably lower than April’s 55.0 reading.
The British Manufacturing outlook is also improving, according to PMI data released on Monday, boosting the Sterling. The UK Manufacturing sector was at its fastest pace in over two years in May with Manufacturing PMI rising to 51.2 in May from 49.1 in April. The British manufacturing sector has moved out from contractionary territory and has started to expand, as indicated by a print above the threshold value of 50.
Inflationary pressures in the UK are not easing as fast as anticipated reducing expectations of BOE rate cuts. British headline inflation eased to 2.3% in April on an annual basis from 3.2% in March from 3.4%, exceeding expectations, however, of a more drastic drop to 2.1%. Annual Core CPI, which excludes food and energy, fell to 3.9% in April from 4.2% in March, again surpassing expectations of a 3.6% print.
The BOE had updated its inflation outlook earlier this year, predicting that inflation would drop to the BOE’s 2% target in the second quarter of the year. The BOE’s forecasts were not confirmed, however, which may force BOE policymakers to keep interest rates at restrictive levels for longer.
Currently market odds of a BOE rate cut in June are very low and even a rate cut in August is considered unlikely. Markets are pricing in a rate cut in September with a high probability, while a rate cut by November is fully priced in. Rate cut expectations shifted from two rate cuts and a total of 50 basis points of rate cuts in 2024 to a single rate cut and only a 25 bp reduction in rates within the year.
The British economy slipped into recession last year, contracting by 0.3% in the final quarter of 2023. Monthly GDP data for February released last week, however, revealed that the British economy has narrowly avoided slipping into recession and has expanded by 0.1%. More importantly, January’s GDP was revised upwards to show an expansion of 0.3%. The British economy is fragile and may force the BOE to pivot to a more dovish policy.
JPY
Reports that the BOJ will consider slowing its bond purchases at its policy meeting on Friday are boosting the Yen.
USD/JPY was driven by the dollar’s volatility last week. The currency rate dropped to the 154.5 level mid-week then jumped to 157.0 on Friday as the dollar surged. If the USD/JPY pair declines, it may find support near 153.5. If the pair climbs, it may find resistance near 157.7.
Recommended by LinkedIn
The BOJ kept all policy settings unchanged at its latest policy meeting, despite the Yen’s recent weakness. The BOJ had pivoted to a more hawkish policy at its previous meeting in March, ending its negative interest rate policy and raising the benchmark interest rate into the 0% - 0.1% range. The Yen continues to weaken as there is still a significant disparity between interest rates offered by the BOJ and those from other major central banks.
The next BOJ interest rate decision is this week June 14th. The BOJ has already hiked rates once and is expected to keep interest rates steady this week. Reports that the central bank will consider slowing its bond purchases at its policy meeting on Friday are boosting the Yen. BOJ Governor Kazuo Ueda hinted that it would be appropriate to reduce the central bank's bond-buying as it prepares to exit its massive monetary stimulus program.
The Yen’s weakness is causing concern to Japanese officials who have been warning traders against speculative short selling of the Yen. Yen intervention concerns remain high, as Japanese authorities have been warning repeatedly that an intervention to support the currency might be imminent. BOJ Deputy Governor Ryozo Himino stated on Tuesday that the central bank needs to be vigilant of the impact the Yen's fluctuations could have on inflation.
Japanese authorities have intervened to support the currency in the past and may do so again if the Yen continues to decline. Concerns about an imminent intervention have been keeping Yen short sellers in check, providing some support for the currency.
On the data front, Japan’s manufacturing sector showed marked improvement in May according to PMI data released on Monday. Final Manufacturing PMI data showed that the Japanese manufacturing sector moved out of contractionary territory in May and started to expand, with a print of 50.4 up from 49.6 in April.
Inflation in Japan remains weak. Tokyo Core CPI rose to 1.9% in May from 1.6% in April, which was in line with expectations, but remained below the BOJ’s 2% target. Headline inflation dropped to 2.2% year-on-year in April from 2.6% in March, which was in line with expectations. BOJ Core CPI dropped to 1.8% on an annual basis in April, falling short of expectations of 2.2% and dropping from 2.2% in March according to data released on Tuesday. Low inflation in Japan is preventing the BOJ from raising interest rates putting pressure on the Yen.
Preliminary GDP data for Q1 of 2024 for Japan showed that the country has slipped into recession. Japan’s economy shrank by 0.5% in the first quarter of the year against expectations of a 0.3% drop. Japan’s economy registered a small expansion by 0.1% in the final quarter of 2023, showing that the country’s economy is shrinking. Recession concerns limit the odds of a BOJ hawkish pivot in the coming months.
Gold
Odds of a Fed rate cut in September were at 70% early last week, boosting gold prices, but plummeted below 50% on Friday, putting pressure on gold prices.
Gold benefitted from the dollar’s weakness early last week, rising to $2,390 per ounce. Gold prices plummeted to $2,290 per ounce on Friday, however, as the dollar rallied. If gold prices rise, resistance may be encountered near $2,360 per ounce, while if gold prices decline, support may be encountered near $2,280 per ounce.
Gold prices are affected by central banks’ interest rates. A restrictive monetary policy hinders economic growth lowering the global economic outlook and putting pressure on gold prices. The US Federal Reserve kept interest rates unchanged at its latest policy meeting, within a target range of 5.25% to 5.50%.
The uncertainty around the US Fed rate outlook is causing volatility in gold prices. Fed policymakers have expressed that the progress of disinflation in the first quarter of the year was disappointing and that interest rates would need to remain at high levels for longer for inflation to cool sufficiently.
Market odds of a rate cut at June’s policy meeting next week are almost zero and traders will focus mostly on the Fed’s forward guidance. Odds of a Fed rate cut in September were at 70% early last week, boosting gold prices, but plummeted below 50% on Friday after the release of the US labor report, putting pressure on gold prices.
Gold prices have been typically directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar edged lower early last week, and the index hovered close to the 104.1 level. Then on Friday, the dollar surged after the release of the US NFPs and the dollar index skyrocketed to 105.0. US treasury yields followed a similar pattern, with the US 10-year bond yield dropping to 4.28% then rising to 4.42% on Friday.
Gold prices have experienced a meteoric rise recently and are trading in overbought territory. Geopolitical tensions raise the appeal of safe-haven assets boosting gold prices. Concerns that the crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets keeping gold prices high.
Oil
Oil prices dipped after the OPEC meeting on June 2nd and continued to decline last week as markets digested OPEC’s announcement.
Oil prices dipped early last week in the aftermath of OPEC’s decision and WTI price dropped below $73.0 per barrel. Oil prices edged higher later in the week and WTI price touched $76.0 per barrel on Friday. If WTI price declines, it may encounter support near $71.4 per barrel, while resistance may be found near $80.8 per barrel.
Oil prices dipped after the OPEC meeting on June 2nd and continued to decline last week as markets digested OPEC’s announcement. OPEC+ has decided to extend most of its voluntary production cuts into 2025 to boost oil prices. OPEC, however, revealed plans to restore oil supply within the next year. The organization announced that it would gradually phase out oil production cuts and laid out plans for restoring production levels within 2025. Markets had already priced in the extension of oil production cuts and the news that OPEC eventually plans to unwind the cuts drove oil prices down.
Oil prices are kept in check by high central banks’ interest rates. The ECB decided on Thursday to lower its Main Refinancing Rate by 25 basis points to 4.25%, boosting oil prices.
The US Federal Reserve kept interest rates unchanged at its latest policy meeting within a target range of 5.25% to 5.50%. The US Fed is keeping interest rates at a 23-year high, restricting economic growth and limiting the oil demand outlook as a result. Odds of Fed rate cuts have become more moderate, putting pressure on oil prices, as policymakers have stated that they do not intend to start reducing interest rates until there is more evidence of disinflation.
Supply concerns provide support for oil prices, as the crisis in the Middle East threatens to disrupt oil distribution. Tensions around the Red Sea area raise concerns that hostilities may spread further in the Middle East, affecting oil supply and distribution.
Cryptocurrencies
Fed rate cut expectations fluctuated strongly last week, affecting risk sentiment and causing volatility in crypto markets.
Bitcoin price was volatile last week, rising to $71,500 mid-week, then dipping below the key $70,000 level over the weekend. If BTC price declines, support can be found at $65,800, while further resistance may be encountered at $72,000.
Ethereum price slipped last week, dropping below the $3,700 level over the weekend. If Ethereum's price declines, it may encounter support near $3,600, while if it increases, resistance may be encountered near $4,000.
Cryptocurrency prices are affected by central banks’ interest rates. High interest rates are restricting economic growth putting pressure on risk assets, while the promise of rate cuts boosts crypto markets.
The US Federal Reserve kept interest rates unchanged at its latest policy meeting within a target range of 5.25% to 5.50%. The Fed’s forward guidance was hawkish, indicating that interest rates will remain at high levels for longer.
Fed rate cut expectations fluctuated strongly last week, affecting risk sentiment and causing volatility in crypto markets. Increased Fed rate cut expectations renewed risk sentiment early last week propping up crypto markets. Fed rate cut odds in September rose to 70% early last week, boosting crypto markets, but plummeted below 50% on Friday after the release of the US labor report, putting pressure on risk assets.
Crypto markets have also been under pressure by the war in Gaza. Fears that the war will spread in the Middle East are promoting a risk aversion sentiment putting pressure on risk assets such as cryptocurrencies.
Read the full article for more information and to check this week's important Forex calendar events.
The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.