Forex Trading: All Eyes On US CPI. What’s Next For GBP/USD, CAD/JPY, EUR/NZD?
Market Review: What Happened Last Week
Last week, the US dollar experienced a slight decline as traders lowered their expectations for two Federal Reserve rate hikes in 2023. While a 25-basis-point hike for the July meeting is almost fully priced, doubts linger regarding an additional hike in September or November, with probabilities estimated at 24% and 35% respectively.
The most recent US labor market report provided mixed statistics, allaying some concerns about an exceptionally hot job market. While the growth in nonfarm payrolls in June was 209,000, marking the smallest increase in two and a half years and falling short of market expectations of 225,000, the jobless rate dipped slightly to 3.6%, and wage growth over the past twelve months rose to 4.4%.
Overall, the US economy continued to demonstrate resilience, marked by the unexpected surge in the ISM Services PMI to 53.9 in June, signaling robust growth in the services sector for the past four months, and surpassing expectations of 51.
During its July meeting, the Reserve Bank of Australia kept its cash rate at 4.1%, stating that it needed more time to evaluate the impact of previous rises and that inflation in the country had passed its peak.
The Norwegian krone (NOK) emerged as the best-performing G10 currency, gaining 1.7% against the US dollar. The currency continues to benefit from the hawkish stance of the Norges Bank, which raised interest rates more than anticipated last month. On the other hand, the Swedish krona (SEK) declined by 0.5% against the dollar, and the Canadian dollar (CAD) dipped by 0.3% against the USD.
Investors are now looking ahead to consumer and producer inflation data scheduled for Wednesday and Thursday, as well as speeches from several Federal Reserve officials throughout the week. These events are likely to shape market sentiment and influence future expectations on central banks’ policies.
Forex Market: What To Expect This Week
In the United States, traders will keep an eye on the following events for the week:
- CPI Inflation Report on Wednesday: Economists expect headline inflation to decline from 4% year-over-year to 3.1% in June, which would be the lowest print since March 2021. For core inflation, the consensus expects a decline from 5.3% to 5%, the lowest since November 2021.
- PPI Inflation Report on Thursday: Producer inflation is expected to have rebounded by 0.2% month-on-month in June.
- University of Michigan Consumer Sentiment on Friday: The preliminary estimate for the consumer sentiment index for July is expected to have improved marginally from 64.4 to 65.5.
- Fed speakers: From Monday to Thursday, several Fed officials will offer public remarks, including Barr, Daly, Mester, Bullard, Bostic, Kashkari, Waller.
For the Euro Area, traders will monitor:
- Germany inflation rate (final reading) on Tuesday.
- ZEW economic sentiment (Euro area and Germany) on Tuesday
- ECB minutes of the June meeting on Thursday:
Other data to follow:
- Reserve Bank of New Zealand’s interest rate decision on Tuesday: Markets expect rates to remain unchanged at 5.5%
- Bank of Canada’s interest rate decision on Wednesday: Markets expect a 0.25% hike to 5%
- UK Employment change and unemployment rate on Tuesday: Economists predict a 3.8% jobless rate in May and 158,000 job additions for the month of April.
- UK GDP, industrial and manufacturing production on Thursday: A slew of negative readings is anticipated, including a monthly GDP of -0.4% in May, as well as industrial and manufacturing production figures of -0.4% and -0.5%, respectively.
Chart Of The Week: US Inflation Is Seen Falling At 2 and ½ Year Lows
New Trades For The Week
Short GBP/USD: Opened at 1.2815; Take Profit at 1.238; Stop Loss at 1.30; Risk-reward ratio of 2.4
Federal Reserve officials scheduled to make public appearances this week are expected to convey their intention to implement two rate hikes in 2023, as previously indicated in the last meeting. While headline inflation is expected to have declined to 3.1%, the focus will primarily be on core inflation, excluding food and energy, which could potentially reach around 5%, still significantly higher than the Fed’s target of 2%. This suggests that the dollar is likely to see buyers.
After surging 4% against the dollar since early June, the British pound (GBP) could now face some challenges due to negative economic data expected for the UK this week.
GBP/USD displayed a technical pattern known as a double top at the 1.285 level last Friday, followed by a bearish reversal on Monday. The Relative Strength Index (RSI) is currently trending lower and showing a bearish divergence, indicating that the bullish phase may be coming to an end. We anticipate a retracement towards the levels observed in early June. The next support levels to watch are 1.26 (23.6% retracement of the 2022 high-to-low range and 50-day moving average), 1.235 (38.2% retracement), and 1.238 (200-day moving average). Our target is the lower support at 1.238, which is in close proximity to the 50% retracement of the 2022 range at 1.2330. To manage risk, we suggest setting the stop loss at the psychological level of 1.30, which also served as a significant support level in March/April of 2022.
Long CAD/JPY: Opened at 107.3; Take Profit at 111; Stop Loss at 105.6; Risk-reward ratio of 2.2
Following the upcoming Bank of Canada meeting, we anticipate a further widening of interest-rate differentials between the Canadian dollar and the Japanese yen. The BoC is expected to raise rates by 0.25%, bringing them to 5%, the highest level in over two decades.
The attractive and high carry of the Canadian dollar is once again a bullish factor that might strengthen CAD against JPY.
The minor dip witnessed last week presents an appealing entry point for those seeking to join the mature phase of the rally.
The CAD/JPY pair has been trading within a rising channel since late March, experiencing a notable 14% increase. We believe there is potential for an extension above the June 2023 highs at 109.5. The subsequent resistance level to monitor is the 2022 high at 110.6. Beyond that level, attention will turn to the December 2007 high at 116.85, although we suggest considering a profit target at 111 in the short term. The stop-loss level is positioned at 105.5, slightly below the 23.6% retracement of the 2022 high-to-low range.
Long EUR/NZD: Opened at 1.7715; Take Profit at 1.8225; Stop Loss at 1.748; Risk-reward ratio of 2.2
The Reserve Bank of New Zealand (RBNZ) is likely to follow in the footsteps of the Reserve Bank of Australia and pause interest rate hikes this week, ending a streak of twelve consecutive hikes. This decision is expected to disappoint NZD bulls who also face the risk of a reversal in global risk sentiment, particularly considering the upcoming speeches from central bank officials and major economic data releases in the United States this week. Conversely, the euro is expected to welcome the fairly hawkish European Central Bank (ECB) minutes from its previous meeting, during which the board raised interest rates by 0.25% and signaled further hikes ahead.
In the EUR/NZD currency pair, a rebound was observed during the latter part of last week after five consecutive sessions of losses. Bullish momentum appears to be gathering traction, as evidenced by the upward trend in the RSI, which crossed the 50 level mark last week. Buyers were active during pullbacks at the 38.2% retracement level of the 2022 high-to-low range following the formation of a head-and-shoulder top pattern. Our analysis suggests that there is potential for a retest of the 1.80 level, followed by targets at 1.808 (2023 highs) and 1.8225 (August 2020 highs).
Open trades from past weeks:
- Long USD/CHF: Opened on July 3 at 0.90; Take profit at 0.93; Stop Loss at 0.8870; P&L -1.2%.
- Long AUD/JPY: Opened on July 3 at 96.33; Take Profit at 102; Stop Loss at 93.70; P&L -1.9%.
- Long USD/SEK: Opened on June 27 at 10.71; TP at 11.30; SL at 10.5; P&L +1%.
- Long CHF/JPY: Opened on June 19 at 158.58; TP at 171.62; SL at 152.5; P&L +1%.
- Short NZD/CAD: Opened on June 19 at 0.8205; TP 0.79; SL 0.8320; P&L -0.1%.
- Long USD/MXN: Opened on June 12 at 17.30; TP 18.50; SL 16.45; P&L -1.2%.
- Short NZD/USD: Opened on June 12 at 0.6142; TP 0.59; SL 0.62.5; P&L -0.7%.
- Long CAD/CHF: Opened on June 12 at 0.6776; TP 0.7055; SL 0.6650; P&L -1.2%.
- Short EUR/NOK: Opened on June 5 at 11.7969; TP 11.25; SL 12; P&L +1.9%.
- Short XAG/USD: Opened on May 16, at $23.88; TP $22; SL $24.9; P&L +3.5%.
- Long WTI spot: Opened on May 16 at $70.8; TP $80; SL $66.3; P&L +3.4%.
- Long EUR/JPY: Opened on May 8, at 149.16, TP 160; SL 142; P&L +4.7%.
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