USD Weakness Anticipated as Traders Eye Fed Rate Cuts Amidst Geopolitical Tensions
Market Analysis for Week Number 22 2024
Monday, 27 May 2024 - Week 21: This briefing provides a comprehensive analysis of the EUR/USD, GBP/USD, and EUR/GBP currency pairs, drawing upon fundamental data and recent market developments. It is intended for Forex traders seeking insights into the potential drivers of currency movements over the next five weeks. The briefing examines the previous five weeks and five days of price action, providing context for the current market landscape. It then offers a five-week and five-day outlook for each currency pair, incorporating insights from fundamental reports, economic indicators, and geopolitical events.
EUR/USD
Looking Back: Over the past five weeks, the EUR/USD has experienced a notable upward trend, reaching a two-month high of 1.085 on 15 May. The swing high for this period was 1.089 (17 May), while the swing low was 1.062 (16 April). This upward movement can be attributed to several factors, including:
Easing inflationary pressures in the Euro Area, with the annual inflation rate falling to 2.4% in April, its lowest level since February 2022.
A relatively robust Euro Area labour market, with the unemployment rate remaining at a record low of 6.5% in March.
Expectations of a more hawkish monetary policy stance from the European Central Bank (ECB) compared to the Federal Reserve, with the ECB signalling its willingness to maintain interest rates at their current level for an extended period if necessary.
Over the past five days, the EUR/USD has traded within a narrower range, with a swing high of 1.085 (24 May) and a swing low of 1.070 (26 May). This consolidation can be attributed to a combination of factors:
Profit-taking following the recent rally in the euro.
Renewed concerns about the global economic outlook, stemming from the ongoing conflict between Israel and Hamas and its potential impact on oil prices.
Uncertainty surrounding the timing of the Federal Reserve's first rate cut, with recent strong US economic data pushing back expectations for an imminent cut.
Latest and Looking Ahead: The EUR/USD is likely to continue to find upward support over the next five weeks, driven by the following factors:
The ECB's commitment to maintaining a relatively hawkish monetary policy stance, with interest rates expected to remain at their current level or potentially rise further in the coming months.
The Euro Area's economic recovery, albeit moderate, is underway, supported by a resilient labour market and an improving trade balance.
The ongoing weakness in the USD, driven by expectations of Fed rate cuts and concerns about the US economic outlook.
This outlook aligns with the forecast made in the EUR Fundamental Analysis report, which projected the EUR/USD to trade at 1.08 by the end of this quarter and 1.06 in 12 months. Trading Economics also forecasts the EUR/USD to trade at 1.08 by the end of the quarter.
Over the next five days, the EUR/USD could experience some volatility due to the release of several key economic data points, including:
US Consumer Confidence (May) - Tuesday, 28 May: A weaker-than-expected reading could weigh on the USD and provide some support for the EUR/USD.
GE CPI (May) - Wednesday, 29 May: A lower-than-expected reading could weigh on the EUR and potentially lead to a decline in the EUR/USD.
US Fed Beige Book - Wednesday, 29 May: The report will be closely watched for clues on the Fed's thinking on the economy and monetary policy. A dovish tone could weigh on the USD and support the EUR/USD.
EA Economic Sentiment (May) - Thursday, 30 May: A stronger-than-expected reading could boost the EUR and potentially lead to an increase in the EUR/USD.
GBP/USD
Looking Back: Over the past five weeks, the GBP/USD has experienced a notable upward trend, reaching a two-month high of 1.275 on 14 May. The swing high for this period was 1.286 (8 March), while the swing low was 1.235 (22 April). This upward movement can be attributed to several factors, including:
Investors scaling back expectations for Bank of England interest rate cuts.
Positive market reaction to Prime Minister Rishi Sunak's call for general elections on July 4th.
A weaker USD, driven by expectations of Fed rate cuts and concerns about the US economic outlook.
Over the past five days, the GBP/USD has traded within a narrower range, with a swing high of 1.274 (24 May) and a swing low of 1.252 (9 May). This consolidation can be attributed to a combination of factors:
Profit-taking following the recent rally in the pound.
Renewed concerns about the UK economic outlook, stemming from the ongoing conflict between Israel and Hamas and its potential impact on oil prices.
Uncertainty surrounding the outcome of the upcoming UK general election.
Latest and Looking Ahead: The GBP/USD is likely to come under downward pressure over the next five weeks due to a confluence of factors:
Persistent political uncertainty surrounding the upcoming general election, which could lead to shifts in fiscal policy and impact the GBP.
A softening UK labour market, with the unemployment rate rising to 4.3% in the three months to March 2024, the highest reading since May to July 2023.
The Bank of England's cautious approach to monetary policy easing despite moderating inflation, with the MPC voting to maintain Bank Rate at 5.25% in its May meeting.
This outlook aligns with the forecast made in the GBP Fundamental Analysis report, which projected the GBP/USD to trade at 1.26 by the end of this quarter and 1.24 in 12 months. Trading Economics also forecasts the GBP/USD to trade at 1.26 by the end of the quarter.
Over the next five days, the GBP/USD could experience some volatility due to the release of several key economic data points, including:
US Consumer Confidence (May) - Tuesday, 28 May: A weaker-than-expected reading could weigh on the USD and provide some support for the GBP/USD.
US Fed Beige Book - Wednesday, 29 May: A dovish tone from the Fed could weigh on the USD and support the GBP/USD.
UK CBI Industrial Trends Orders (May) - Tuesday, 28 May: A weaker-than-expected reading could weigh on the GBP and potentially lead to a decline in the GBP/USD.
EUR/GBP
Looking Back: Over the past five weeks, the EUR/GBP has traded within a relatively narrow range, with a swing high of 0.875 (1 May) and a swing low of 0.862 (22 April). This range-bound trading can be attributed to a combination of factors:
Both the EUR and GBP have strengthened against the USD during this period, driven by expectations of Fed rate cuts and concerns about the US economic outlook.
The upcoming UK general election has created uncertainty for the GBP, limiting its upside potential.
The ECB's hawkish stance has provided support for the EUR, but concerns about the Euro Area's economic recovery have limited its gains.
Over the past five days, the EUR/GBP has traded within an even narrower range, with a swing high of 0.872 (22 May) and a swing low of 0.869 (23 May). This consolidation can be attributed to a combination of factors:
Profit-taking following the recent moves in both currencies.
Renewed concerns about the global economic outlook, stemming from the ongoing conflict between Israel and Hamas and its potential impact on oil prices.
Uncertainty surrounding the timing of the Federal Reserve's first rate cut.
Latest and Looking Ahead: The EUR/GBP is likely to come under upward pressure over the next five weeks, driven by the following factors:
The ECB's commitment to maintaining a relatively hawkish monetary policy stance, with interest rates expected to remain at their current level or potentially rise further in the coming months.
The potential for the UK general election to result in a change in government, which could lead to uncertainty and volatility for the GBP.
The UK's softening labour market and the Bank of England's cautious approach to monetary policy easing.
Over the next five days, the EUR/GBP could experience some volatility due to the release of several key economic data points, including:
US Consumer Confidence (May) - Tuesday, 28 May: A weaker-than-expected reading could weigh on the USD, potentially leading to a rise in both the EUR and GBP and an increase in the EUR/GBP.
UK CBI Industrial Trends Orders (May) - Tuesday, 28 May: A weaker-than-expected reading could weigh on the GBP, potentially leading to a rise in the EUR/GBP.
GE CPI (May) - Wednesday, 29 May: A lower-than-expected reading could weigh on the EUR, potentially leading to a decline in the EUR/GBP.
US Fed Beige Book - Wednesday, 29 May: A dovish tone from the Fed could weigh on the USD, potentially leading to a rise in both the EUR and GBP and an increase in the EUR/GBP.
EA Economic Sentiment (May) - Thursday, 30 May: A stronger-than-expected reading could boost the EUR, potentially leading to a rise in the EUR/GBP.
CONCLUSION
The Forex market is currently navigating a complex and uncertain landscape, with geopolitical risks, shifting monetary policy expectations, and mixed economic data influencing currency movements. The USD is facing downward pressure due to expectations of Fed rate cuts, while the EUR is finding support from the ECB's hawkish stance. The GBP is caught between the potential for a change in government following the upcoming general election and the Bank of England's cautious approach to monetary policy easing.
Forex traders should closely monitor economic data releases, central bank communications, and geopolitical developments to assess the evolving outlook for the major currencies and adjust their trading strategies accordingly.
References:
Office for Budget Responsibility (OBR): March 2024 Economic and fiscal outlook report - Provides insights into the UK's fiscal policy landscape, including projections for borrowing, debt, and the tax burden.
Bank of England: May 2024 Monetary Policy Report and Minutes - Offers insights into the MPC's latest monetary policy decisions, projections for inflation and economic growth, and the rationale behind its policy stance.
Office for National Statistics (ONS): Official UK economic data releases, including GDP, labour market, inflation, and trade reports - Provides a comprehensive overview of the UK's economic performance.
U.S. Bureau of Economic Analysis: Official US economic data releases, including GDP, trade, and personal income and spending reports - Provides a comprehensive overview of the US economic performance.
U.S. Bureau of Labor Statistics: Official US labour market and inflation data releases, including nonfarm payrolls, unemployment rate, and CPI reports - Provides a detailed picture of the US labour market and inflation dynamics.
Federal Reserve: FOMC minutes and statements, including the statement released on 1 May 2024 - Offers insights into the Fed's latest monetary policy decisions, projections for inflation and economic growth, and the rationale behind its policy stance.
Budget of the U.S. Government, Fiscal Year 2025: Outlines the US government's proposed spending and revenue plans for FY 2025, providing insights into the potential impact of fiscal policy on the USD.
These official government documents provide valuable insights into the economic and monetary policy landscapes of the UK and the US, enabling Forex traders to make more informed trading decisions.