Financial Market Analysis: Markets Brace for US CPI Data, Positioning for Potential Fed Policy Shift Amid European Election Uncertainty
Monday, 10 June, Week 24: This report provides a comprehensive analysis of the DXY and major currency pairs, examining their recent performance and potential trajectory over the next five days. Each section includes three scenarios: upward support, indifference, and downward pressure, along with a synopsis of relevant risk events.
DXY
The DXY has been trading sideways over the past five weeks, reflecting uncertainty about the future path of US monetary policy.
Strengthen: If US CPI data exceeds forecasts, supporting a hawkish Fed, and if European election uncertainty fuels safe-haven demand.
Hold Steady: If US CPI data meets expectations, prompting the Fed to maintain its course, and if European elections yield a balanced outcome.
Weaken: If US CPI data disappoints, signalling a dovish Fed, and if pro-EU parties win decisively in the European elections.
Risk Events:
12 June (Wednesday): US CPI data
6-9 June (Thursday-Sunday): European Parliament elections
EUR/USD
EUR/USD has been on an upward trend over the past five months, but has stalled over the past five weeks.
Appreciate: If US CPI data is lower than expected, weakening the USD, and if pro-EU parties secure a clear victory in the European elections.
Consolidate: If US CPI data aligns with forecasts and the European elections result in a fragmented parliament.
Depreciate: If US CPI data exceeds predictions, strengthening the USD, and if Eurosceptic parties perform well in the European elections.
Risk Events:
12 June (Wednesday): US CPI data
18 June (Tuesday): German ZEW Economic Sentiment Index
GBP/USD
GBP/USD has enjoyed a five-month rally, but has stalled in recent weeks.
Appreciate: If US CPI data falls short of expectations, weakening the USD, if UK inflation eases, and if progress is made on Brexit issues.
Stay Flat: If US CPI data aligns with forecasts, the BoE maintains its current policy, and uncertainty persists around the UK general election and Brexit negotiations.
Depreciate: If US CPI data surpasses predictions, strengthening the USD, and if concerns about the UK economy and the possibility of a Labour election victory with a softer Brexit stance increase.
Risk Events:
11 June (Tuesday): UK Unemployment Rate, UK Average Weekly Earnings Growth, UK Average Earnings Excluding Bonuses YoY
12 June (Wednesday): US CPI data
14 June (Friday): UK Balance of Trade
19 June (Wednesday): UK Inflation Rate, UK Producer Prices Change
20 June (Thursday): UK Interest Rate Decision, UK Consumer Confidence
USD/JPY
USD/JPY has been trading within a range over the past five weeks, reflecting uncertainty about the future path of US and Japanese monetary policy.
Appreciate: If US CPI data exceeds forecasts, bolstering a hawkish Fed stance, and if the BOJ maintains its accommodative policy.
Consolidate: If US CPI data aligns with expectations and the BOJ holds its course.
Depreciate: If US CPI data falls short of predictions, signaling a potentially dovish Fed, and if pro-EU parties win decisively in the European elections.
Risk Events:
11 June (Tuesday): Japan Producer Prices Change
12 June (Wednesday): US CPI data
14 June (Friday): Japan Interest Rate Decision, EA Balance of Trade
17 June (Monday): Japan Tertiary Industry Index
18 June (Tuesday): Japan Balance of Trade, German ZEW Economic Sentiment Index
19 June (Wednesday): UK Inflation Rate, UK Producer Prices Change
20 June (Thursday): UK Interest Rate Decision, UK Consumer Confidence, Japan Core Inflation Rate, Japan Inflation Rate
USD/CAD
USD/CAD has weakened over the past five weeks, driven by a recent BoC rate cut and positive Canadian economic data.
Appreciate: If US CPI data exceeds forecasts, bolstering the USD, and if concerns about the Canadian housing market and a global slowdown persist.
Consolidate: If US CPI data aligns with expectations, the BoC maintains its current stance, and uncertainty lingers around the European elections.
Depreciate: If US CPI data falls short of predictions, weakening the USD, if the BoC's recent rate cut and potential for further easing are factored in, and if pro-EU parties secure a clear victory in the European elections.
Risk Events:
11 June (Tuesday): Canada Building Permits MoM
12 June (Wednesday): US CPI data
14 June (Friday): Canada Interest Rate Decision, EA Balance of Trade
17 June (Monday): Canada Housing Starts
18 June (Tuesday): Japan Balance of Trade, German ZEW Economic Sentiment Index
19 June (Wednesday): UK Inflation Rate, UK Producer Prices Change
20 June (Thursday): UK Interest Rate Decision, UK Consumer Confidence, Canada New Housing Price Index MoM, Japan Core Inflation Rate, Japan Inflation Rate
21 June (Friday): Canada Producer Price Inflation MoM, Canada Raw Materials Prices, Canada Retail Sales MoM
Geopolitics and Market Themes
Russia-Ukraine War: The ongoing war in Ukraine continues to cast a shadow over global markets, contributing to risk aversion and uncertainty.
Russia is expected to make tactical gains in Ukraine in the coming months, capitalising on Kyiv's manpower and equipment shortages.
Western support for Ukraine remains strong, but there are growing concerns about the long-term sustainability of aid.
The war has disrupted global supply chains, particularly for energy and agricultural products, contributing to inflationary pressures.
The war has increased demand for safe-haven assets, such as the USD and gold.
European currencies, particularly the EUR, have weakened against the USD due to the war's impact on the European economy.
Energy prices remain elevated, with the potential for further volatility depending on the war's trajectory.
Israel-Hamas War: The recent escalation of violence between Israel and Hamas has added to geopolitical uncertainty, impacting risk appetite and market sentiment.
Israel has reoccupied Gaza and is expected to shift its focus to Hezbollah in Lebanon, raising the risk of a wider conflict.
Western and Arab states are calling for a ceasefire, but a diplomatic solution remains elusive.
The conflict has heightened tensions in the Middle East, with the potential for spillover effects in the region.
The conflict has contributed to risk aversion, boosting demand for safe-haven assets.
Oil prices have risen due to concerns about potential supply disruptions in the Middle East.
The Israeli Shekel has weakened against the USD amid heightened uncertainty.
Global Interest Rate Hikes: Central banks worldwide are raising interest rates to combat persistent inflation, impacting economic growth and market sentiment.
The US Federal Reserve has paused its rate hiking cycle, but is expected to keep rates elevated for an extended period.
The European Central Bank recently cut interest rates, but signalled that further cuts are contingent on inflation slowing as expected.
The Bank of England is expected to cut rates later in the year, but remains concerned about inflation.
Rising interest rates are increasing borrowing costs for businesses and consumers, weighing on economic growth.
Higher interest rates are supporting the USD, as investors seek higher yields.
Currencies in countries with lower interest rates, such as the EUR and JPY, have weakened against the USD.
Rising interest rates are weighing on stock markets, as investors anticipate slower economic growth.
Persistent Inflation: Inflation remains elevated in many countries, eroding consumer purchasing power and prompting central banks to maintain tight monetary policies.
Inflation in the United States has moderated, but remains above the Federal Reserve's 2% target.
Inflation in the Eurozone has rebounded, raising concerns about the ECB's ability to bring inflation under control.
Inflation in the United Kingdom has eased, but remains above the Bank of England's 2% target.
Persistent inflation is pressuring businesses to raise prices, further contributing to inflationary pressures.
Inflation is supporting demand for inflation-hedging assets, such as gold.
Currencies in countries with higher inflation, such as the GBP, have weakened against the USD.
Persistent inflation is creating uncertainty for businesses and consumers, weighing on economic growth and market sentiment.
UK General Election: The upcoming UK general election, scheduled for 4 July 2024, has introduced a layer of political uncertainty, with potential implications for economic and fiscal policy.
The Conservative Party, currently in power, is facing a challenge from the Labour Party, with polls suggesting a tight race.
The two main parties have distinct policy platforms, particularly on fiscal matters, creating uncertainty about the future direction of economic policy.
The outcome of the election could have significant implications for the UK's relationship with the EU, trade policy, and regulatory environment.
The GBP has exhibited some volatility in recent weeks, reflecting the uncertainty surrounding the election outcome.
A Conservative victory is generally perceived as more market-friendly, potentially leading to a stronger GBP.
A Labour victory could lead to increased fiscal spending and a more interventionist approach to economic policy, potentially weighing on the GBP.
Conclusion
The confluence of major risk events, including the US CPI data release and the European Parliament elections, is creating a heightened sense of uncertainty in forex markets. The US CPI data will be crucial in shaping expectations for Fed policy, while the European elections could have significant implications for the EUR and the broader political landscape in Europe. Geopolitical tensions, particularly the ongoing wars in Ukraine and the Middle East, will continue to contribute to market volatility. Traders should closely monitor these events and adjust their positions accordingly.
References
Federal Reserve: https://www.federalreserve.gov/
U.S. Bureau of Economic Analysis: https://www.bea.gov/
U.S. Bureau of Labor Statistics: https://www.bls.gov/
U.S. Census Bureau: https://www.census.gov/
European Central Bank: https://www.ecb.europa.eu/
EUROSTAT: https://ec.europa.eu/eurostat/
Centre for European Economic Research (ZEW): https://www.zew.de/en/
Bank of England: https://www.bankofengland.co.uk/
Office for Budget Responsibility: https://obr.uk/
Office for National Statistics: https://www.ons.gov.uk/
Bank of Japan: https://www.boj.or.jp/en/
Cabinet Office, Japan: https://www8.cao.go.jp/
Ministry of Finance, Japan: https://www.mof.go.jp/english/
Bank of Canada: https://www.bankofcanada.ca/
Statistics Canada: https://www150.statcan.gc.ca/n1/en/home
Bloomberg: https://www.bloomberg.com/
Reuters: https://www.reuters.com/
Trading Economics: https://tradingeconomics.com