Forex Trading: Focus on the Fed and US CPI as Markets Await Key Policy Meetings

Global markets could be heavily influenced by major central banks holding rate-decision meetings this week, as well as crucial inflation data to be unveiled for the United States.  

Markets overview
It's a week filled with crucial macro events that will greatly impact the markets, with traders closely watching the monetary policy meetings of the Federal Reserve (Wednesday), ECB, and BoJ (Thursday).

At its June FOMC meeting, the Federal Reserve is projected to maintain its federal funds rate target range at 5.0-5.25% while maintaining an upward bias on future policy adjustments.
Markets presently assess a 75% chance that the Federal Reserve will keep interest rates unchanged. The Fed will also provide its quarterly macroeconomic estimates, which will include revised growth and inflation projections.

To add even more spice to the main event of the week, the US will reveal the May inflation data on Tuesday. The market expects a decline in the annual inflation rate from 4.9% to 4.1%, and a slight decrease in core inflation from 5.5% to 5.3%. However, any upward surprises in the data could lead to significant movements in rates and currencies. Other events that could provoke reactions from the US dollar include the release of May retail sales on Thursday and the June Michigan Consumer Sentiment Index on Friday.

Interest rates are expected to rise by 25 basis points (bp) to 4% by the European Central Bank (ECB). Investors will pay close attention to the wording used on subsequent hikes. The ECB is highly expected to keep the door open and continue to base policy choices on upcoming data.

The Bank of Japan (BoJ) is anticipated to stick with its policy rate, and changes to its yield curve control (YCC) framework may be made later, probably in July.

Elsewhere, China will publish critical economic data such as industrial production, retail sales, and fixed asset investment figures. Other noteworthy releases include Germany's ZEW Business Confidence, the United Kingdom's April trade balance and GDP, and Australia's consumer and business confidence, as well as the unemployment rate.

Chart of The Week: US Interest Rates Are Expected To Further Rise Above Inflation 

Open trades from past weeks:
•    Short GBP/CAD: Opened on June 5, at 1.6651; Take Profit 1.605; Stop Loss 1.693; P&L current -0.7%. 
•    Short EUR/NOK: Opened on June 5, at 11.7969; Take Profit 11.25; Stop Loss 12; P&L current +1.9%. 
•    Short EUR/USD: Opened on May 30, at 1.0717; Take Profit 1.05; Stop Loss 1.083; P&L current -0.4%. 
•    Buy USD/CHF: Open at 0.9030; Take profit at 0.94, Stop loss 0.89; P&L current -0.1% 
•    Long DXY index: Opened on May 23, at 103.5; Target Price 106; Stop Loss 102.17; P&L current -0.1%
•    Short AUD/USD: Opened on May 16, at 0.6690; Target Price 0.636; Stop Loss 0.6825; P&L current -1.1%.
•    Short XAG/USD: Opened on May 16, at $23.88; Target Price $22; Stop Loss $24.9; P&L current -1.3%.
•    Long WTI spot: Opened on May 16 at $70.8; Target Price $80; Stop Loss $66.3;
P&L current -3%.
•    Short GBP/USD: Opened on May 8, at 1.2654, Target Price 1.227; Stop Loss 1.30; P&L current +0.6%
•    Long EUR/JPY: Opened on May 8, at 149.16, Target Price 160; Stop Loss 142; P&L current +0.8%
•    Order Long XAU/USD: Open at 1,900; Target Price 2,100; Stop Loss 1,830.
•    Order Buy USD/JPY: Open at 138.25; Take profit 146.5; Stop Loss 135; Risk-reward-ratio of 2.55
Closed trades:
•    Long Brent (XBR/USD): Opened at $77.14; Take Profit $85; Stop Loss $73.6. Stop loss hit. 

New Trades for the week

Long USD/MXN: Opened at 17.30; Take Profit 18.50; Stop Loss 16.45; Risk-reward-ratio of 2.1 USDMXN_2023-06-12_10-29-40_d5f23

The Mexican peso (MXN) has emerged as one of the strongest currencies this year, with an impressive 11.8% gain against the US Dollar. Several factors have contributed to the MXN's robust performance, including better-than-expected US labor market conditions and the absence of recession risks. Additionally, the attractive interest rate differentials between Banxico and the Federal Reserve, along with a trend of "friend-shoring" where manufacturing supply chains are relocated from hostile countries like China to neighboring Mexico, have further bolstered the peso.

However, it is our belief that the peso's significant appreciation against the dollar may have reached its peak, and a mean reversion pattern could potentially unfold. In the first half of the year, the peso has already achieved nearly double the gains of its strongest year ever (2012) when it recorded a 7% increase for the entire calendar year. If the Federal Reserve signals slowdowns in growth and employment in its forthcoming macroeconomic forecasts, it could act as a bearish factor for the Mexican peso.

From a technical perspective, we are initiating a long position based on a bullish RSI (Relative Strength Index) reversal. Despite prices reaching multi-year lows, the momentum indicator failed to reach new lows, suggesting a possible exhaustion of the bearish trend and the emergence of bullish momentum. Our target is set at 18.50, slightly above the April highs, while we will place a stop at 16.45, representing the lows seen in November 2015.

Short NZD/USD: Opened at 0.6142; Take Profit 0.59; Stop Loss 0.62.5; Risk-reward-ratio of 2.45

The Kiwi dollar has experienced a modest rebound in June, driven by a resilient global risk sentiment in equity markets and an improvement in the short-term interest rate differentials between New Zealand and the United States, as depicted in the chart below. However, we anticipate potential weakness for the New Zealand dollar in the coming weeks due to increasing market volatility and policy uncertainties, particularly with significant macro events on the horizon such as the Reserve Bank of New Zealand (RBNZ) interest rate decision and the release of New Zealand's Q2 inflation rate.


From a technical standpoint, we observe the NZD/USD pair making an attempt to test the 200-day moving average at its current levels, coinciding with the 38.2% retracement level between the highs of 2023 and the lows of 2022. This could potentially serve as a critical juncture where bearish momentum may resurface, as the overall trend has now shifted toward the downside.

With a 1-month timeframe in mind, we consider 0.59 as an attractive target for the NZD/USD pair. This level aligns with the 61.8% retracement of the aforementioned trend. To manage risk, we recommend setting a stop-loss order at the highs observed on May 24, specifically at 0.6250.

Long CAD/CHF: Opened At 0.6776; Take Profit 0.7055; Stop Loss 0.6650; Risk-reward ratio of 2.5

The Canadian dollar remains one of our favorite currency plays for the summer, as we anticipate it will benefit from the overall strength of the US dollar and a recovery in energy prices throughout the summer.

Having already achieved profitable outcomes from CAD-long trades against the Japanese yen (JPY) and New Zealand dollar (NZD) in recent weeks, we are now initiating a long trade on the CAD/CHF currency pair.
The Bank of Canada surprisingly hiked interest rates last week and inflation reaccelerated in April, thus keeping policymakers on a hawkish bias.  

In early May, there are indications that the pair has shifted its previous bearish trend, which began in June 2022. This shift is supported by a bullish divergence observed in the RSI, a breakout above the 50-day moving average (dma), and the formation of an ascending channel pattern.

We expect the Canadian dollar to continue its ascent in the coming weeks, potentially surpassing the 200-day moving average and extend its gains towards the 61.8% Fibonacci retracement level, calculated from the lows of 2023 to the highs of September 2022. To manage risk, we have set the stop loss at 0.6665, aligning with the levels of the 50-day moving average, which is expected to provide reliable support.