Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there. In this week’s edition, we discuss the EUR/USD, AUD/USD and USD/CAD forecast and look forward to the macro events in the week ahead.
- US dollar forecast: USD hit by dovish Fed talk, debt deal passage
- NFP (Friday), ISM (Monday) and CPI among key data ahead of FOMC's meeting
- AUD/USD forecast: Broken supported reclaimed as RBA rate decision looms
- USD/CAD forecast: Loonie reverse ahead of BOC rate decision
US dollar forecast: USD hit by dovish Fed talk, debt deal passage
Risk sentiment has improved markedly with the passage of the US debt ceiling deal through Congress. This kept European currencies supported on Friday morning, keeping the GBP/USD elevated above 1.25 and EUR/USD near 1.08 handle. We have also seen a sharp rally in the likes of the AUD/USD and CAD/USD. Gold and silver have benefitted from a weaker US dollar as well.
As well as a better risk appetite, the greenback has also come under pressure because of surprisingly less hawkish comments from a couple of Fed officials, preferring to ‘skip’ a rate increase in June. Whether that view will get more support will now depend on the two or three key data releases until the FOMC’s meeting. This includes Friday’s jobs report and CPI on June 13th.
What to watch: US nonfarm payrolls (Friday) and ISM services PMI (Friday)
Speculation over whether the Fed would hike interest rates in June or not caused significant dollar movements this week. Initially, it was higher but then slumped after Jefferson’s ‘skip’ comments. Whether the rate hike probabilities shift significantly again will now depend on three key data releases between now and the FOMC’s next meeting on Jun 14. These include the latest ISM services PMI for May, due on Monday, and last month’s inflation figures due on 13th June.
But first, it is all about the US jobs report, which is due for release shortly. Headline nonfarm payrolls is expected to show nearly 200K net new jobs added into the economy in May and wages rose 0.3% on the month. Anything hotter, could lend some support to the dollar.
But in light of this week’s reversal, the dollar bears will be eyeing weakness in jobs data to support the ‘skip’ or ‘pause’ narrative. If that happens, watch the EUR/USD for continuation above 1.0750 key level, which it reclaimed on Thursday.
AUD/USD forecast: Broken support reclaimed as RBA rate decision looms
The AUD/USD has come back strongly along with copper prices in the last two days, although both will still need to show evidence that they clearly formed a base given concerns over China, and a looming rate decision by the RBA next week.
For the Aussie, the key level to watch is 0.6585, which was previously support until it was broken last week, before being reclaimed back by the bulls this week. On the upside, 0.6650 was also an important level in the past, so a move above this level, if seen, would add to the bullish signs. Ultimately though the AUD/USD will need to create a higher high at some point down the line to signal a complete reversal in the trend.
What to watch: RBA rate decision (Tuesday)
Australia’s consumer prices rose 6.8% year-over-year in April on a jump in fuel prices and strong gains in housing. This was well above expectations and suggest sticky inflation will likely keep pressure on the central bank. However, soft data out of China had kept the AUD undermined, until its sharp recovery this week. Will that bullish momentum continue going forward?
USD/CAD forecast: Loonie reverses ahead of BOC rate decision
A hawkish surprise from the BOC next week could send the USD/CAD below 1.3300, assuming it doesn’t get there before hand, with the US jobs report due to be released shortly.
Recent data out of Canada suggests the North American nation is holding its own rather well. First quarter GDP, for example, was stronger than expected, suggesting the economy has maintained a lot of momentum. What’s more, recent inflation reports have revealed a steady rise in core goods prices while we have also seen an unexpected surge in shelter prices. In terms of employment, well there are not many concerns here. In recent months, we have also seen above-forecast jobs data, with the headline employment change beating expectations in every single of the past 8 months. The May jobs report will be published next Friday, a full week after the US nonfarm payrolls report is published.
The breakout above the trend line couldn’t hold, which means we now have a failed breakout scenario on the USD/CAD. This means the USD/CAD is most likely heading to levels where trapped traders’ stops would be resting. One of those levels was below 1.3500, the base of last Wednesday’s breakout. This area has now been cleared. The bigger liquidity pools are likely to be below 1.33 and 1.32, given the multi-month higher lows that have been created between these levels.
This bearish technical setup will become invalidated should rates go on to climb back above 1.3550 resistance in the coming days.
What to watch: BOC rate decision Wednesday, June 7
At this meeting, we are doubtful the BOC will deliver a hike as it will want to await more data to support the case for a hike. The BOC lifted rates to the current 4.5% at its January 25 meeting and has since sat pat for the next two meetings in March and April. But improving Canadian data suggests the central bank could provide an additional 25 bps in the upcoming months.
If Canadian data continues to point towards an economy remain hot, then this should increase the odds of an additional 25 bps hike from the BOC in the upcoming months. At its next meeting on Wednesday, look out for hawkish comments.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
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