EUR/USD Encapsulates the Forces of a Stronger USD and Weaker Euro
Euro dollar experienced a volatile week initially rising after encouraging US CPI data but then upward revisions to both the Fed funds and inflation outlooks spurred on the US dollar into the weekend.
The pain encapsulates 2 forces at work with the first being a stronger U.S. dollar upon recent Fed forecast revisions, and the second being a vulnerable euro in the wake of political uncertainty in France. We've seen a flight to safety in the European bond market led by German Bunds - inflating the risk premium across Europe which historically has led to a weaker currency.
This week we look to the 1.0700 for a potential pause in recent selling. Neither of the two currencies have major data releases planned for the week, offering up the potential for a reprieve for EUR/USD although, the RSI has not yet reached oversold conditions – something bears will be aware of. The pair will likely take its cue from political developments and the bond market this week.
EUR/USD Daily Chart
Source: TradingView, prepared by Richard Snow
Bank of England to Tee up a Rate Cut this Summer?
It is largely expected that the Bank of England will vote to keep rates on hold this week despite recent encouraging inflation numbers and unimpressive growth data for April. Adding to the list is the recent spike in claimant data (initial jobless claims) to levels not seen since early 2021.
Unlike the US, the UK labour market has been easing in a fairly consistent manner which is something that will factor into the Bank's thinking this week. However, services inflation is still too high for comfort and BOE officials have communicated their determination in maintaining restrictive monetary policy until such time as it subsides sufficiently.
Looking at the implied interest rate cuts for the rest of the year the market may be under appreciating the probability of a rate cut before November or even September. At present, a rate cut at the November meeting is fully priced in with the September meeting eyed as a strong possibility.
Implied Interest Rate Probability (UK Bank Rate)
Source: Refinitiv, prepared by Richard Snow
EUR/GBP has depreciated quite markedly in the last few weeks as the pound has quietly gone about its business and enjoyed its superior interest rate differential. The pair broke below 0.8472 last week – a notable pivot point. The pair is likely to be watched closely in the runup to the French elections continues alongside top tier UK data/events.
0.8340 is the next level of support which may require a pullback before another leg to the downside. A retest and rejection of 0.8472 may keep bears interested. However, should the BoE alter its messaging to accommodate a more dovish view on rates, market pricing will have to adjust – leaving sterling vulnerable. EUR/GBP levels to the upside include 0.8515 followed by 0.8560. The RSI on the daily chart has recovered from oversold territory – potentially extending the counter-trend move at the start of the week.
EUR/GBP Weekly Chart
Source: TradingView, prepared by Richard Snow
If you're puzzled by trading losses, why not take a step in the right direction? Download our guide, "Traits of Successful Traders," and gain valuable insights to steer clear of common pitfalls
