GBP/USD eases from daily high, still well bid around 1.1050 area as traders await FOMC minutes

mixed signals about BoE's bond-buying program prompt some short-covering around GBP/USD.

Subdued USD price action provides an additional lift, though the uptick lacks bullish conviction.

Investors now look to FOMC minutes for a fresh impetus ahead of the US CPI report on Thursday.

The GBP/USD pair stages a goodish bounce from the 1.0925 area, or a nearly two-week high set earlier this Wednesday and snaps a five-day losing streak. Spot prices, however, struggle to capitalize on the move and retreat around 40-50 pips from the vicinity of the 1.1100 round-figure mark.

The British pound attracts some buyers amid reports that the Bank might be willing to extend its purchases beyond Friday and prompts short-covering around the GBP/USD pair. This, along with subdued US dollar price action, offers additional support to the major. That said, BoE Governor Andrew Bailey said on Tuesday that the central bank will stop buying UK government bonds on October 14. Apart from this, the dismal UK macro data contributes to capping the upside for the major.

The UK Office for National Statistics reported that the economy unexpectedly shrank by 0.3% in August, reinforcing the BoE's prediction for a recession this year. Furthermore, expectations that the Fed will continue to tighten its monetary policy at a faster pace to tame inflation acts as a tailwind for the greenback. This further holds back traders from placing bullish bets around the GBP/USD pair ahead of the crucial FOMC meeting minutes, due later during the US session.

The focus will then shift to the latest US consumer inflation figures on Thursday, which should play a key role in influencing the Fed's future rate-hike path. This, in turn, will drive the USD demand in the near term and provide a fresh directional impetus to the GBP/USD pair. In the meantime, elevated US Treasury bond yields might underpin the greenback and continue to keep a lid on any meaningful gains for the major amid concerns about the UK government's fiscal plans.

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Gold Price Forecast: XAU/USD likely to extend range play around $1,660 

Gold price is turning south once again after facing rejection at higher levels.

The metal is defending gains amid a broadly weaker US dollar, risk-aversion.

XAU/USD battle lines are well-defined around $1,660 ahead of key US events.

Gold price is moving back and forth in a familiar range above $1,650, as the investors refrain from placing any directional bets amid rife geopolitical tensions concerning Russia and Ukraine, aggressive Fed rate hike bets and surging oil prices. Meanwhile, the US dollar is trading choppy but slightly on the downside, limiting the downside in the bullion. The UK tax policy U-turn put a sudden bid under GBP/USD, inducing fresh weakness in the dollar while helping the metal defend mild gains. Attention turns towards the US ISM Manufacturing PMI after the euro area and the UK S&P Global final Manufacturing PMIs failed to impress the market. The main event risk this week, however, remains the US Nonfarm Payrolls data due for release this Friday.

Gold Price: Key levels to watch

The Technical Confluence Detector shows that the gold price is looking to challenge the $1,660 support area, where the previous day’s low, Fibonacci 38.2% one-month and Fibonacci 23.6% one-week coincide.

The SMA10 one-day at $1,657 will be seen as the next stop for sellers. Further down, the confluence of the SMA50 four-hour and Fibonacci 38.2% one-week around $1,654 could be tested.

The pivot point one-day S2 and SMA100 one-hour meeting point at $1,650 will be the line in the sand for buyers.

On the flip side, the Fibonacci 38.2% one-day at $1,665 offers immediate resistance to bulls, above which a run towards the $1,670 level cannot be ruled out. That level is the convergence of the Fibonacci 61.8% one-day and the pivot point one-day R1.

The previous day’s high of $1,675 will be next on the buyers’ radar, followed by the previous year’s low at $1,677.

About Technical Confluences Detector

The TCD (Technical Confluences Detector) is a tool to locate and point out those price levels where there is a congestion of indicators, moving averages, Fibonacci levels, Pivot Points, etc.  If you are a short-term trader, you will find entry points for counter-trend strategies and hunt a few points at a time. If you are a medium-to-long-term trader, this tool will allow you to know in advance the price levels where a medium-to-long-term trend may stop and rest, where to unwind positions, or where to increase your position size.

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NZD/USD struggles near its lowest level since April 2020 as another big Fed rate hike looms

• NZD/USD drops to its lowest level since April 2020 amid sustained USD buying interest.
• Retreating US bond yields, the risk-on mood caps the buck and limits losses for the pair.
• Investors now seem to move to the sidelines and await the crucial FOMC policy decision.

The NZD/USD pair recovers a few pips from its lowest level since April 2020 touched in the last hour and is currently placed in neutral territory, around the 0.5885 region. That said, any meaningful recovery still seems elusive as investors gear up for another supersized rate hike by the Federal Reserve.

The stronger US CPI report released last week reaffirmed expectations that the USD central bank will continue to tighten its monetary policy at a faster pace. This remains supportive of a strong follow-through US dollar move up to a fresh 20-year peak, which, in turn, should continue to act as a headwind for the NZD/USD pair.

That said, a softer tone surrounding the US Treasury bond yields and a generally positive risk tone keep a lid on any further gains for the safe-haven greenback. Apart from this, slightly oversold conditions on short-term charts offer some support to the risk-sensitive kiwi and help limit losses for the NZD/USD pair.

Apart from this, the intraday bounce could further be attributed to some repositioning trade ahead of the highly-anticipated FOMC policy decision, scheduled to be announced later during the US session. The Fed is widely expected to stick to its aggressive policy tightening path and hike interest rates by at least 75 bps.

Apart from this, the focus will be on the updated economic projections and the dot plot. Furthermore, Fed Chair Jerome Powell's remarks at the post-meeting press conference will be looked upon for clues about future rate hikes. This, in turn, will influence the USD and provide a fresh directional impetus to the NZD/USD pair.

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US Dollar Index to extend upward momentum on a break above 111 – SocGen

The US Dollar Index (DXY) moves sideways slightly above 109.50. Economists at Société Générale expect the index to enjoy further gains on a break past 111.

Short-term downtrend likely on a dip under 107.60

“If the index establishes itself above the high formed earlier this month at 111 – which is also a graphical level, the up move is expected to extend further towards next projections at 112.60/113.00.” 

“It is worth noting that the daily MACD has started posting negative divergence. Although this is not a reversal signal, it does point towards receding upward momentum.”

“Defending the 50-DMA at 107.60 would be essential for persistence in uptrend. Should a break materialize, a short-term downtrend is likely.”

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ECB officials are acknowledging the risks of recession

“We believe EUR/USD remains on track to test the September 2002 low near 0.9615.”

“European Central Bank (ECB) executive board member Fabio Panetta stressed that monetary policy ‘needs to be strictly data dependent, taking fully into consideration the condition of the euro-area economy. This implies first of all being fully aware that the probability of a recession is increasing in the euro area because of the consequences of the pandemic, the shock to commodity prices of recent months, because of the war and its consequences for trade and uncertainty’.”

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GBP/USD falls towards 1.2000 as USD crawls higher ahead of data

GBP/USD returns to the red as the US dollar sees resurgent demand.

Lack of UK political news and risk-off flows weigh on cable.

The pair recaptures 21 DMA but RSI still remains bearish.

GBP/USD is extending its pullback from three-week highs of 1.2091 in the European session, as risk-off flows dominate amid the worsening European gas crisis and an imminent recession in Germany.

Investors seek refuge in the traditional safe-haven asset, the US dollar, as the buck picks up fresh bids to recapture 106.50 against its major peers. The ongoing sell-off in the US Treasury yields fail to deter the dollar bulls. The greenback also finds demand, as investors turn cautious ahead of the Fed’s expected 75 bps rate hike announcement.

Meanwhile, various factors continue to limit the bullish attempts in the pound. A lack of any encouraging on the UK political front, with candidates Liz Truss and Rishi Sunak battling out the leadership race. Ahead of next week’s BOE rate decision, money markets suggest a bold 50 bps than a conservative 25 bps increase. However, economists are much less certain, with 25 out of 54 polled by Reuters expecting a half-point hike, according to the latest Reuters poll.

Friday’s CFTC data showed IMM speculators reduced their GBP exposure by 10% in the fortnight to July 19, with gross GBP longs cut by 7,675 contracts to 33,850, per Reuters. The pair now awaits the US Durable Goods Orders and New Home Sales data. The main event risk for this week, however, remains the FOMC decision due on Wednesday.

Looking at the cable’s daily chart, the pair closed Monday above the bearish 21-Daily Moving Average (DMA), then at 1.2006.

Although with the 14-day Relative Strength Index (RSI) lurking below the midline, sellers have returned and look to retest the 21 DMA resistance turned support, now at 1.1997.

A sustained break below the latter will expose Monday’s low of 1.1960, below which a test of the 1.1900 level will be inevitable.

On the flip side, if bulls manage to defend the 21 DMA, then a fresh advance towards the descending 50 DMA at 1.2238 cannot be ruled out.

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AUD/USD struggles to gain traction, flat-lined near monthly low ahead of US PCE inflation data

 

AUD/USD staged modest bounce, though struggled to find acceptance above the 0.6900 mark.

Recession fears weighed on investors’ sentiment and undermined the perceived riskier aussie.

The Fed’s hawkish outlook lifted the USD closer to a 20-year peak and favours bearish traders.

Investors now look forward to the US Core PCE Inflation for May for a fresh directional impetus.

The AUD/USD pair struggled to capitalize on its modest intraday bounce from the vicinity of the monthly low and remained below the 0.6900 mark heading into the North American session.

Concerns that a more aggressive move by major central banks would pose challenges to global economic growth continued weighing on investor' sentiment. This was evident from a generally weaker tone around the equity markets, which provided a fresh lift to the safe-haven US dollar and acted as a headwind for the risk-sensitive aussie.

In fact, the USD shot closer to a two-decade high and was also underpinned by Fed Chair Jerome Powell's overnight hawkish remarks, reaffirming a faster policy tightening path. Speaking at the ECB's annual forum, Powell said that the Fed remains focused on getting inflation under control and the market pricing is pretty close to the dot plot. 

Hence, the market focus will remain glued to the release of the Fed's preferred inflation gauge, the Core PCE Price Index. The data would influence the USD price dynamics and provide a fresh impetus to the AUD/USD pair. In the meantime, the USD bulls seemed rather unaffected by the ongoing decline in the US Treasury bond yields. 

The fundamental backdrop supports prospects for an extension of the recent depreciating move for the AUD/USD pair, though bearish traders might wait for sustained weakness below the 0.6850 area. Spot prices might then aim to challenge the YTD low, around the 0.6830-0.6825 region touched in May, before eventually dropping to the 0.6800 mark.

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USD/JPY flirts with daily low, still comfortable above 135.00 mark ahead of US data/Powell

USD/JPY extended the overnight pullback from a 24-year high and edged lower for the second straight day.

Speculations that authorities could intervene, along with recession fears underpinned the safe-haven JPY.

Modest USD strength, the Fed-BoJ policy divergence support prospects for the emergence of some dip-buying.

The USD/JPY pair witnessed some selling for the second straight day on Thursday and moved further away from a 24-year high, around the 136.70 region touched the previous day. The pair maintained its offered tone through the mid-European session and was last seen trading just below mid-135.00s, down over 0.60% for the day.

Traders turned cautious and opted to lighten their bullish bets around the USD/JPY pair amid speculations that any further depreciation of the Japanese yen might force some form of practical intervention. Apart from this, the worsening global economic outlook drove haven flows towards the JPY and exerted downward pressure on the major.

Investors remain sceptic that major central banks could hike interest rates to curb soaring inflation without affecting economic growth. Adding to this, the disappointing release of the flash Eurozone PMI prints for June further fueled worries about a possible recession and boosted demand for traditional safe-haven assets.

Bearish traders further took cues from declining US Treasury bond yields, though the emergence of fresh US dollar buying helped limit deeper losses for the USD/JPY pair, at least for now. The USD drew support from firming expectations that the Fed would stick to its aggressive policy tightening path to combat stubbornly high inflation.

In fact, the markets have been pricing in another 75 bps rate hike move at the upcoming FOMC policy meeting in July. The bets were reaffirmed by Fed Chair Jerome Powell's remarks on Wednesday, saying that the ongoing rate increases will be appropriate. In contrast, the Bank of Japan remains committed to keeping interest rates very low.

It is worth recalling that the BoJ last week decided to maintain the massive stimulus programme and vowed to defend the 0.25% cap for the 10-year JGB yield to support a still-fragile economy. This, along with a turnaround in the global risk sentiment, assisted the USD/JPY pair to find support ahead of the 135.00 psychological mark.

The fundamental backdrop supports prospects for the emergence of some dip-buying around the USD/JPY pair. Hence, the negative move witnessed over the past two trading sessions might still be categorized as a corrective pullback and is more likely to be bought into, warranting some caution for aggressive bearish traders.

Next on tap is the US economic docket, featuring the release of the usual Weekly Jobless Claims data and the flash PMI prints for June. Traders will also take cues from Fed Chair Jerome Powell's second day of testimony. Apart from this, the US bond yields, the USD price dynamics and the broader risk sentiment might provide some impetus to the USD/JPY pair.

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EUR/USD remains vulnerable near 1.0400 amid ECB news, choppy USD

EUR/USD is struggling to extend the recovery above 1.0400.

The US dollar remains choppy despite risk-aversion at full speed.

ECB officials said to want new policy instrument ready by the July meeting

EUR/USD is attacking 1.0400, unable to sustain the recovery near the 1.0425 region, as EUR bulls remain unimpressed by the latest European Central Bank (ECB) news.

Reuters reported that European Central Bank (ECB) officials are said to want a new instrument, which will be used to counter the fragmentation issue, ready by the July Governing Council meeting.

Further, the upside attempts in the pair remain elusive, as the risk-on market profile keeps the sentiment around the US dollar buoyed. The rebound in the longer-dated US Treasury yields on the 75 bps Fed rate hike is also underpinning the dollar demand.

Meanwhile, investors assess the cautious policy guidance adopted by the Bank of England (BOE) this Thursday after it hiked rates by 25 bps, as expected. The GBP/USD slump-induced support received by EUR/GBP is cushioning the losses in the shared currency against the dollar, as of writing.

Attention now turns towards a slew of second-tier US economic releases and the Wall Street open for fresh trading impetus on EUR/USD.

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EUR/JPY Price Analysis: Further gains seen above 136.80

EUR/JPY alternates gains with losses in the sub-136.00 area.

Further consolidation looks likely in the near term.

EUR/JPY trades in a volatile fashion after climbing as high as the 136.50 region earlier on Thursday.

Extra range bound appears on the cards for the cross in the short-term horizon, while gains could accelerate on a break above recent peaks in the 136.80 region. Beyond the latter, the next target of note comes at the May high at 138.31 (May 9).

In the meantime, while above the 200-day SMA at 131.32, the outlook for the cross is expected to remain constructive.

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AUD/USD keeps the red near 0.6900 mark, downside seems cushioned amid softer USD

Disappointing Chinese macro data prompted fresh selling around AUD/USD on Monday.

A softer risk tone was seen as another factor that undermined the perceived riskier aussie.

Sliding US bond yields kept the USD bulls on the defensive and helped limit deeper losses.

The AUD/USD pair remained on the defensive through the first half of the European session and was last seen trading with modest intraday losses, around the 0.6900 round-figure mark.

Following an early uptick to the 0.6960 area, the AUD/USD pair met with a fresh supply and touched an intraday low around the 0.6890 region in reaction to shockingly weaker Chinese macro releases. The data underscored the damage caused by COVID-19 lockdowns in the world's second-largest economy and weighed on the China-proxy Australian dollar.

Apart from China's zero-COVID-19 policy, the war in Ukraine has been fueling concerns about softening economic growth amid the prospects for a more aggressive policy tightening by the Fed. This, in turn, tempered investors' appetite for perceived riskier assets, which was evident from a softer tone around the equity markets and further undermined aussie.

The anti-risk flow dragged the yield on the benchmark 10-year US government bond further away from the recent peak of 3.20%. This, in turn, kept the US dollar bulls on the defensive and extended some support to the AUD/USD pair. Nevertheless, the fundamental backdrop supports prospects for an extension of the bearish trend witnessed over the past one month or so.

Market participants now look forward to the release of the US Empire State Manufacturing Index for a fresh impetus later during the early North American session. The data, along with the US bond yields, will influence the USD price dynamics. Traders will further take cues from the broader market risk sentiment for short-term opportunities around the AUD/USD pair.

The focus would then shift to the release of the Reserve Bank of Australia monetary policy meeting minutes on Tuesday. This will be followed by the US Retail Sales and Industrial Production figures. Apart from this, remarks by several FOMC officials, including the Fed Chair Jerome Powell, will be looked upon for clues about the possibility of a 75 bps rate hike move, which will drive the USD demand and determine the near-term trajectory for the AUD/USD pair.

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US Dollar Index Price Analysis: Rising bets for extra gains

DXY looks to challenge Thursday’s highs near 105.00.

Further upside should target the 105.60/65 region.

DXY keeps the bullish bias well in place north of the 104.00 hurdle at the end of the week.

Considering the ongoing price action, further gains in the index remains well on the cards and with the immediate hurdle at the round level at 105.00 ahead of 105.63 (December 11 2002 high). Further up, the index is expected to challenge the December 2002 high at 107.31.

The current bullish stance in the index remains supported by the 8-month line around 97.00, while the longer-term outlook for the dollar is seen constructive while above the 200-day SMA at 96.28.

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EUR/USD: Bulls could not hold the upside, back to 1.0600

EUR/USD faces decent resistance near 10640.

Germany Construction PMI retreated to 46.0 in April.

German 10Y bund yields flirt once again with 1.0%.

The upside momentum in EUR/USD seems to have run out of legs around multi-day highs near 1.0640 on Thursday.

EUR/USD meets resistance near 1.0640

After two consecutive daily advances, including fresh tops around 1.0640, EUR/USD now comes under some selling pressure and challenges once again the 1.0600 neighbourhood.

The corrective move in the pair comes pari passu with the recovery in the German 10y bund yields to the boundaries of the key 1.0% area along with the modest rebound in US yields along the curve.

In the euro docket, earlier results saw German Factory Orders contract at a monthly 4.7% in March, while the Construction PMI eased to 46.0 in April (from 50.9). Across the ocean, weekly Claims will be the only release of note.

What to look for around EUR

EUR/USD jumped to the 1.0640 region following the FOMC’s hangover, where it appears to have run into some resistance. The outlook for the pair still remains tilted towards the bearish side, always in response to dollar dynamics, geopolitical concerns and the Fed-ECB divergence. Occasional pockets of strength in the single currency, in the meantime, should appear reinforced by speculation the ECB could raise rates at some point around June/July, while higher German yields, elevated inflation and a decent pace of the economic recovery in the region are also supportive of an improvement in the mood around the euro.

Key events in the euro area this week: Germany Factory Orders, Construction PMI (Thursday) – Germany Industrial Production (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. Speculation of ECB tightening/tapering later in the year. Impact on the region’s economic growth prospects of the war in Ukraine.

EUR/USD levels to watch

So far, spot is down 0.24% at 1.0592 and a breach of 1.0470 (2022 low April 28) would target 1.0453 (low January 11 2017) en route to 1.0340 (2017 low January 3 2017). On the upside, the next hurdle emerges at 1.0641 (weekly high May 5) followed by 1.0936 (weekly high April 21) and finally 1.1000 (round level).

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USD/CAD holds comfortably above 1.2600 mark amid broad-based USD strength

• USD/CAD gained some positive traction on Monday, though lacked follow-through buying.
• Retreating crude oil prices undermined the loonie and extended support amid a stronger USD.
• The Fed’s hawkish outlook, elevated US bond yields, the risk-off mood all benefitted the buck.

The USD/CAD pair maintained its bid tone heading into the North American session and was last seen trading just a few pips below the daily high, around the 1.2630-1.2625 region.

A combination of factors assisted the USD/CAD pair to build on last week's goodish rebound from the 1.2520 area and gain traction for the third successive day on Monday. A modest pullback in crude oil prices weighed on the commodity-linked loonie and extended support to spot prices amid sustained US dollar buying interest.

Crude oil pulled back from the three-week high after data out of China pointed to economic weakness and fueled worries over slowing demand amid COVID-19 curbs. That said, concerns over tight global supply and a potential European Union (EU) embargo on Russian gas, helped limit the downside for the black liquid, at least for now.

On the other hand, the USD stood tall near the two-year high and continued drawing support from expectations for a more aggressive policy tightening by the Fed. Investors seem convinced that the Fed would hike rates at a faster pace to curb soaring inflation. This, along with elevated US Treasury bond yields, underpinned the buck.

Against the backdrop of the Fed's hawkish outlook, concerns that the worsening Ukraine crisis would put upward pressure on already high inflation pushed the US bond yields to a fresh multi-year peak. Apart from this, the risk-off mood - as depicted by a weaker tone around the equity markets - further benefitted the safe-haven greenback.

That said, relatively thin liquidity conditions on the back of a holiday in Europe held back bulls from placing aggressive bets. The USD/CAD pair, so far, has been struggling to find acceptance above the very important 200-day SMA, which, in turn, warrants some caution before positioning for any further near-term appreciating move.

There isn't any major market-moving economic data due for release on Monday, either from the US or Canada. Hence, the US bond yields, along with the broader market risk sentiment, will play a key role in influencing the USD demand. Traders will further take cues from oil price dynamics to grab some short-term opportunities.

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Breaking: ECB leaves rates unchanged at -0.50% as expected, reiterates QE to end in Q3

The European Central Bank left its benchmark deposit rate unchanged at -0.50% on Thursday as unanimously expected by analysts. The central bank also reiterated its guidance that net asset purchases (Quantitative Easing or QE) should end in Q3. 

ECB Statement:

"Russia’s aggression in Ukraine is causing enormous suffering.

It is also affecting the economy, in Europe and beyond.

The conflict and the associated uncertainty are weighing heavily on the confidence of businesses and consumers.

Trade disruptions are leading to new shortages of materials and inputs.

Surging energy and commodity prices are reducing demand and holding back production.

How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions and on possible further measures.

At the same time, economic activity is still being supported by the reopening of the economy after the crisis phase of the pandemic.

Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs.

Inflation pressures have intensified across many sectors.

At today’s meeting the Governing Council judged that the incoming data since its last meeting reinforce its expectation that net asset purchases under its asset purchase programme should be concluded in the third quarter.

Looking ahead, the ECB’s monetary policy will depend on the incoming data and the Governing Council’s evolving assessment of the outlook.

In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy.

The Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability.

Asset purchase programme (APP)

Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June.

The calibration of net purchases for the third quarter will be data-dependent and reflect the Governing Council’s evolving assessment of the outlook.

The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.

Any adjustments to the key ECB interest rates will take place some time after the end of the Governing Council’s net purchases under the APP and will be gradual.

The path for the key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and by its strategic commitment to stabilise inflation at 2% over the medium term.

Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.

Pandemic emergency purchase programme (PEPP)

The Governing Council intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024.

In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time.

This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic.

Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.

Refinancing operations

The Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy.

The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance.

As announced, it expects the special conditions applicable under TLTRO III to end in June this year.

The Governing Council will also assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.

The Governing Council stands ready to adjust all of its instruments within its mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at its 2% target over the medium term.

The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the Governing Council’s efforts to achieve its goal more effective.

Within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today."

Market Reaction

The euro saw a substantial drop in reaction to the latest ECB policy announcement. EUR/USD has dipped to around the 1.0875 area from around 1.0915 prior to the release and now trades with on the day losses of around 0.1% versus earlier gains of around 0.3%.  

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GBP/USD supported above 1.3000 ahead of key US CPI release

GBP/USD continues to trade support to the north of the 1.3000 level in the run-up to the release of key US March Consumer Price Inflation data at 1330BST. Mixed UK jobs data released earlier in the session didn’t give cable traders much to go off of, hence the indecisive trading conditions that have prevailed thus far this session.

On the one hand, the UK jobless rate fell to a fresh post-pandemic low of 3.8% as expected in February, taking it even further below its pre-Covid levels. On the other hand, British earnings growth, when adjusted for inflation, slumped the most since 2013, highlighting the cost-of-living crisis faced in the UK even before the start of the Russo-Ukraine war and tax/energy price hikes as of Q2.

According to ING, "for the time being, this kind of data can probably support market expectations of a Bank of England Bank Rate above 2.00% by year-end (versus 0.75% currently)”. But the bank cautioned that any sterling strength as a result of BoE tightening expectations would likely play out versus the euro or yen, not the US dollar.

Indeed, the US dollar continues to trade on the front foot on Tuesday ahead of the release of US CPI data that should further reinforce expectations for Fed tightening. The DXY currently trades above 100 and just below its highest levels since May 2020 and more gains may be in store if the recent trend of higher US yields and lower US (and global) equities continues. ING think that in a continued strong dollar environment, GBP/USD is at risk of slipping towards 1.2850.

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 Euro gains respite from Macron's French election lead

The euro looked set to snap a seven-day losing streak versus the dollar on Monday, as the single currency rallied after French leader Emmanuel Macron beat far right challenger Marine Le Pen in the country's first round of presidential voting.

Investor concerns about the future direction of the euro zone's second-biggest economy have weighed on the euro and added to worries over the economic costs of war in Ukraine.

Meanwhile, the dollar has been pushed higher by rising U.S. yields and expectations the Federal Reserve will act quickly to stem inflation. One of the big fallers has been the Japanese yen, which fell to a fresh seven-year low versus the dollar.

Macron will face Le Pen in what promises to be a tightly fought French presidential election runoff on April 24.

Nonetheless, Macron's lead in the first round provided some respite for the euro - lifting it by as much as three quarters of a percent in Asian trading hours to $1.0955. It was last up 0.3% at $1.09080.

Currency analysts said the contest remained on a knife-edge with negative implications for the euro.

"The narrower than expected victory for President Macron will keep alive fears that there is an outside chance that Le Pen can become president," analysts at MUFG said in a note.

"The first-round results and the opinion polls pointing towards a close result in the second round will remain a modest weight on the euro in the coming weeks."

The dollar index - which tracks the greenback against a basket of six peers - was broadly flat on the day, just shy of the 100 mark hit last week for the first time in nearly two years.

As the dollar has gained ground, investors have seen little reason to exit bets against the yen while the Bank of Japan holds yields near zero.

The yen fell as much as 1% on the day to 125.55 yen per dollar, its lowest level since 2015.

"There's nothing there to frighten people out of dollar/yen positions," said National Australia Bank (OTC:NABZY)'s head of foreign exchange Ray Attrill. "So onwards and upwards for dollar/yen."

Sterling was broadly flat versus the dollar at $1.30380.

The Russian rouble weakened in jittery trade, reversing some of the previous week's gains, after the central bank decided to relax temporary capital control measures.

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NZD/USD declines to over three-week low, around mid-0.6800s amid modest USD strength

 

• NZD/USD witnessed selling for the third straight day and retreated further from the YTD high.
• The Fed’s hawkish outlook, elevated US bond yields underpinned the USD and exerted pressure.
• A positive risk tone might cap the safe-haven USD and limit losses for the perceived riskier kiwi.

The NZD/USD pair continued losing ground through the mid-European session and dropped to over a three-week low, around mid-0.6800s in the last hour.

The pair prolonged this week's sharp retracement slide from the 0.7035 region, or the highest level since November 2021 and witnessed some follow-through selling for the third successive day on Friday. The downward trajectory was exclusively sponsored by the blowout US dollar rally, bolstered by the Fed's hawkish outlook.

In fact, the March 15-16 FOMC minutes released on Wednesday showed that policymakers were prepared to hike interest rates by 50 bps at upcoming meetings. Moreover, there was a general agreement about reducing the Fed's massive near $9 trillion balance sheet at a maximum pace of $95 billion per month to tighten financial conditions.

GBP/USD remains on the defensive near three-week low, just above mid-1.3000s

The GBP/USD pair remained on the defensive through the early European session and was last seen trading just a few pips above the three-week low, around the 1.3055 region.

The pair witnessed some selling during the first half of the trading on Wednesday and dropped to the lowest level since March 16, though showed resilience below the mid-1.3000s. The US dollar gained traction for the fifth successive day and shot to a nearly two-year peak, which, in turn, exerted some downward pressure on the GBP/USD pair.

The markets seem convinced that the Fed would hike interest rates by 100 bps over the next two meetings to combat stubbornly high inflation. Moreover, Fed Governor Lael Brainard said on Tuesday that the US central bank could start reducing its balance sheet at a rapid pace as soon as the May meeting and provided a goodish lift to the buck.

Expectations for a more aggressive Fed pushed the yield on the 2-year US government bond, which is highly sensitive to rate hike expectations, to its highest level since January 2019. Moreover, the yields on the 5-year and the benchmark 10-year bonds jumped to their highest since December 2018 and April 2019, respectively.

Hence, the market focus will remain glued to the FOMC monetary policy meeting minutes, due for release later during the US session. In the meantime, fading hopes for a diplomatic solution to end the war in Ukraine and concerns about more Western sanctions on Russia over its alleged war crimes should benefit the safe-haven greenback.

The fundamental backdrop seems tilted in favour of bearish traders and supports prospects for a further near-term depreciating move for the GBP/USD pair. With technical indicators still far from being in the oversold zone, spot prices seem vulnerable to sliding back to challenge the YTD low, around the 1.3000 psychological mark.

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 Dollar Edges Lower Ahead of Fed Minutes; Aussie Dollar Soars

The U.S. dollar traded in a tight range Tuesday, while the euro edged lower on talk of additional sanctions on Russia and the Australian dollar received a boost from a hawkish central bank.

At 3:00 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded marginally lower at 98.955, just below the one-week high of 99.083 reached overnight. 

The dollar has been drifting this week so far as investors await the arrival of the minutes from last month’s Federal Reserve policy meeting, due on Wednesday. 

Expectations are building that the central bank will move more aggressively at its meeting in May, especially after a jobs report that showed nonfarm payrolls increasing by 431,000 jobs last month while the unemployment rate fell to a new two-year low of 3.6%.

Ahead of the Fed minutes, Tuesday sees the release of ISM’s non-manufacturing PMI data for March, at 10:00 AM EST (1400 GMT), which is expected to show increased momentum in March, while speeches from Fed policymakers Neel Kashkari, Lael Brainard and John Williams will also be closely studied.

Elsewhere, AUD/USD rose 0.9% to 0.7607, jumping to a nine-month high, after the Reserve Bank of Australia left its benchmark interest rate unchanged at 0.1% at its latest policy setting meeting, but indicated that rate hikes were coming.

Australia’s central bank dropped its pledge to be "patient" on tightening policy in its statement following the decision, a phrase that has featured in every post-meeting release since November 2021, suggesting that it is going to hike sometime soon.

EUR/USD was largely unchanged at 1.0972, hovering above a one-week low, on talk of fresh sanctions on Moscow following alleged atrocities on civilians by Russian forces in the Ukrainian town of Bucha.

German Chancellor Olaf Scholz said that Putin and his supporters would "feel the consequences" of events in Bucha, while Biden's national security advisor, Jake Sullivan, stated that new U.S. sanctions against Moscow would be announced this week.

“It still seems that the EU is some way from weaning itself off Russian oil,” said analysts at ING, in a note. “Presumably, any moves from the EU toward a Russian oil embargo would see crude prices spike higher again and the euro come under pressure.”

USD/JPY fell 0.2% to 122.58, dropping back further from the multi-year high of 125.10 reached in late March after Bank of Japan Governor Haruhiko Kuroda stated that the recent pace of appreciation was "somewhat rapid," and policymakers are watching moves "carefully."

GBP/USD rose 0.1% to 1.3133, USD/CNY was flat at 6.3638, while USD/TRY rose 0.1% to 14.7092 the day after Turkey’s inflation jumped to a fresh 20-year high in March, with consumer prices rising an annual 61.1% through last month.

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