Rally in euro and pound may end quickly

The unexpected crisis in the US banking sector has crushed all hopes for a new acceleration in the pace of interest rate hikes. Goldman Sachs economists said they no longer see the Fed raising rates next week, even after US authorities took steps to contain the crisis caused by the collapse of Silicon Valley Bank and Signature Bank. This caused two-year Treasury bond yields to fall by 18 basis points to 4.34%, reaching its sharpest three-day drop since October 1987. Expectations of a less aggressive policy stance and sharp demand for German bonds also affected the euro.

Most likely, Fed officials will announce a pause in interest rate hikes this week ahead of their meeting on March 21-22. Economists were expecting to see around 0.25% to 0.5% increase earlier, but everything changed since last Sunday, when US authorities had to act very quickly in order to contain the spreading of SVB's problem to other US banks. The Fed had to open an emergency line of credit, allowing banks to pledge a range of high-quality assets to obtain cash for a period of one year. They also pledged to fully protect uninsured depositors in SVBs, as well as relax lending conditions through the Fed's discount window. These measures should provide liquidity shortages to banks.

Now, the Fed is expected to raise the rate by a quarter point next week, which means that the peak will be around 5.1% in six months, slightly lower than the previously projected 5.74%.

The current situation is quite negative for dollar as it most certainly raises risk appetite. However, market players should keep in mind that if the crisis in the US banking sector is not solved quickly, it will spread to other regions, which will result in a collapse in other currencies such as euro and pound.

Ahead is an important US report, that is, the inflation data for February this year. Economists are predicting that the index will show a 0.4% increase, slightly lower than the previous month's 0.5%. Yearly data should be 5.5%, which is also lower than the 5.6% earlier.

Demand for euro has intensified after all the news, so buyers have a chance to continue building the new upward trend. However, the quote needs to stay above 1.0700 as only by that will euro go beyond 1.0730 and head towards 1.0770 and 1.0800. Should the quote decline below 1.0700, EUR/USD will slip to 1.0666.

In GBP/USD, bulls also control the market, but the quote needs to stay above 1.2130 so that pound could have the chance to break through 1.2170 and head towards 1.2215 and 1.2265. If bears manage to gain control, the pair may dip to 1.2080 and 1.2050.

Hot forecast for EUR/USD on 15/03/2023

The US media has already found the culprit in the banking crisis, and of course it is the Federal Reserve. They're saying that everything happened because the Fed has aggressively lifted interest rates. Supposedly, the main reason why two banks went bankrupt was because of the central bank. Now they are demanding that the Fed immediately start reducing interest rates and switch on the printing press and put out the fire with money. Furthermore, critics of the Fed have another reason to celebrate. Yesterday, we learned that US inflation slowed from 6.4% to 6.0%. It is decelerating for the eighth straight month, and in such circumstances, it will be very difficult for Fed Chairman Jerome Powell to explain the need not only to further raise interest rates, but also to do anything other than lower the refinancing rate.

Inflation (United States):

The dollar, on the other hand, will continue to be under pressure, as it loses ground not only because of the banking crisis in the United States and the clouds gathering over the Fed. Apparently, the banking crisis is already starting to spill over to Europe as well. We're talking about macro data, which are starting to point to more and more problems in the United States, and the stabilization of the situation in the euro area. In particular, the rate of industrial production decline in Europe should be replaced by growth from -1.7% to 0.5%.

Industrial production (Europe):

In the United States, the growth rate of retail sales should slow down from 6.4% to 4.3%. And if all of these forecasts are confirmed, the dollar will have no choice but to keep losing ground.

Retail Sales (United States):

The euro continued to rise against the U.S. dollar after a brief pullback. It passed 1.0700 earlier, which played the role of support, strengthening the bullish sentiment in the market.

On the four-hour chart, the RSI technical indicator is moving in the upper area of 50/70, which indicates bullish sentiment among traders. On the daily chart, the RSI recently climbed above the 50 midline, which indicates a change in sentiment.

On the four-hour and one-hour charts, the Alligator's MAs are headed upwards, which corresponds to the upward cycle from the middle of last week. On the daily chart, the primary signal will show change in trading sentiment, as the moving lines are intertwined with each other.

Outlook

The technical signal that shows change in sentiment, which indicates that the euro will gradually recover against the decline in February, will emerge if the price stays above 1.0800. Until then, that level will act as resistance, relative to which it is possible to reduce the volume of long positions on the euro.

The complex indicator analysis unveiled that in the intraday and short-term periods, technical indicators are pointing to bullish

Trading Signal for GOLD (XAU/USD) for March 17 - 20, 2023: key level $1,921 (21 SMA - symmetrical triangle)

Early in the European session, Gold (XAU/USD) is trading around 1,927, above the 21 SMA, and within a symmetrical triangle formed in the last 48 hours.

The outlook for gold remains bullish. If it consolidates above the daily pivot point (1,920), it could continue rising to reach 1,945, the level which coincides with the third weekly resistance.

A technical bounce around the 21 SMA located at 1,921 could give us the opportunity to resume buying with targets at 1,937 and 1,945.

On the contrary, in case gold breaks the uptrend channel formed since March 10 and consolidates below 1,917 in the next few hours, we could expect a further bearish movement and the instrument could reach 5/8 Murray located at 1,906 and finally could fall towards the EMA 200 located at 1,882.

According to the 1-hour chart, gold has upside potential. It is likely that if it trades above 1,920 (21 SMA), we could expect it to reach the resistance zone of 1,945.

Our trading plan is to watch a key level of 1,921 which could set the trend for gold. If it trades below this level in the next few hours, it will be considered an opportunity to sell and could accelerate the bearish movement until the price covers the gap left at 1,867.

Hot forecast for GBP/USD on 20/03/2023

The US industrial production report turned out to be much worse than expected and the previous data was revised from 0.8% to 0.5%. And instead of slowing to 0.2%, the industrial production showed a decline of 0.2% year-on-year. These results made it possible for the pound to fully recover its losses, which the pound suffered right after the Credit Suisse announcement, which triggered the euro's fall and eventually pulled the pound down. The single currency has not returned to its previous values and it will probably do that during the day. Moreover, we found out that Credit Suisse has been purchased by another Swiss bank - UBS. So it looks like Europe managed to save the emerging bank crisis, which gives investors optimism of course. Anyway, the GBP has won back its losses, and now it will wait for the euro. So, a temporary stagnation is the most likely outcome. Moreover, the macroeconomic calendar is totally empty today.

Industrial Production (United States):

GBP/USD ended last week with growth. As a result, it came close to the local high of the uptrend, which indicates the bullish sentiment prevails.

On the four-hour, one-hour and one-day charts, the RSI technical indicator is moving in the upper area of the indicator, which confirms the signal of growth of the volume of long positions on the euro.

On the four-hour and one-day charts, the Alligator's MAs are headed upwards, which corresponds to the bullish momentum.

Outlook

We can assume that keeping the price stable above 1.2200 will strengthen long positions in the market, which in turn will open the way towards 1.2300. However, falling below 1.2100 may lead to another move towards the psychological level of 1.2000.

The complex indicator analysis unveiled that in the intraday, medium-term and short-term periods, technical indicators are pointing to bullish sentiment.

EUR/USD and GBP/USD trading plan for beginners on March 23, 2023

Details of the economic calendar on March 22
The U.S. Federal Reserve raised its benchmark interest rate for the eighth time in a year. During the March meeting, the regulator expectedly raised the interest rate by 25 basis points to 4.75–5%. The central bank also stressed some additional policy firming ahead.

As for the banking sector, Fed Chairman Jerome Powell has repeatedly said that the U.S. banking system is reliable and stable. According to him, recent events are likely to tighten credit conditions for households and businesses and put pressure on economic activity, hiring, and inflation.

Analysis of trading charts from March 22
EUR/USD broke through the 1.0800 resistance level during the inertial movement. As a result, there was an increase in the volume of long positions, which indicated the recovery of the euro relative to the decline in February.

GBP/USD jumped above 1.2300 during the general sale of dollar positions. This move indicates a subsequent price recovery from the fall in February.

Economic calendar for March 23
The Bank of England will hold a meeting today, where interest rate is expected to be raised by 25 basis points to 4.25%. Of particular interest will be the regulator's commentary on future actions. Note that inflation data released yesterday showed an acceleration in growth to 10.4%. This may serve as a basis for a further interest rate hike.

Time targeting:

Bank of England meeting results – 12:00 UTC

EUR/USD trading plan for March 23
Based on the technical signal that the euro is overbought in the intraday period, we can assume that a pullback will appear on the market. During which, there will be a regrouping of long positions. However, speculators may ignore signals from technical analysis in vain. In this case, the price may move towards the local high of the medium-term upward trend (1.1033).

GBP/USD trading plan for March 23
A stable holding of the price above the level of 1.2300 allows the further growth of the British currency up to complete recovery. However, it is worth taking into account the technical factor of overbought, which can reach a critical point in this price move.

Hot forecast for EUR/USD on 27/03/2023

At first glance, preliminary estimates of PMIs in Europe turned out to be very good. At 55.6, the services Purchasing Managers' Index hit a 10-month high in March, up from 52.7 in February, with a forecast of 52.3 points. In other words, it should have declined, but instead it rose. Due to that the flash composite output index, which should have decreased from 52.0 to 51.3 points, rose more-than-expected to 54.1 in March. Only the manufacturing PMI fell to a four-month low of 47.1 from 48.5 in the previous month, though it should have increased to 49.8 points. To a certain extent this was what prevented the euro from rising further.

Composite PMI (Europe):

And after the opening of the US trading session, the euro fell, because in America, not only were the same PMIs better than forecasts, in fact, they turned out to be much better. The US Manufacturing PMI in March was 49.3 points, up from the previous value of 47.3 points. It was expected to have fallen to 47.0 points. Meanwhile, the Services PMI jumped to 53.8 points instead of increasing from 50.6 to 51.0. As a result, the composite purchasing managers index rose from 50.1 points to 53.3 points, with a forecast of 49.0 points.

Composite PMI (United States):

Today, the macroeconomic calendar is completely empty and the market is likely to consolidate around the reached values.

The euro entered a bearish correction after it sharply rose last week. The pair broke through a resistance level of 1.0800. As a result, the volume of short positions increased.

On the four-hour chart, the RSI downwardly crossed the 50 middle line, thus reflecting bearish sentiment among traders.

On the same chart, the Alligator's MAs are intertwined, signaling a slowing bull cycle. On the one-day chart, the Alligator's MAs are still headed upwards.

Outlook

Based on the corrective phase, its scale has already reached the possible limit. Therefore, the euro can still recover and climb above 1.0800. However, in case the bearish sentiment persists, and the quote stays below 1.0700, the market situation may still change.

The complex indicator analysis points to a correction in the short-term and intraday periods.

Oil prices have many positive factors for growth

Oil prices were up and down on Wednesday afternoon. The West Texas Intermediate (WTI) for May delivery was trading at $73.39 a barrel, up 0.36% on the New York Mercantile Exchange.

Oil prices have been hit especially hard by the banking crisis - falling all of 13% two weeks ago. However, last week ended with the price rising by about 3%.

Oil prices were also moving up on Tuesday. The market, obviously, overestimated the prospects amid a decline of exports from Iraq's Kurdistan and considering the dynamics of stocks in the United States. The activity of M&A in the US banking sector was also extremely positive.

Recall that oil pumping from Kurdistan through the Kirkuk-Ceyhan pipeline was suspended. It means that 370 million barrels a day of oil from Kurdistan and another 75,000 from the fields of northern Iraq simply would not come to the world market. And it's all about the International Chamber of Commerce, which decided that the supply of this oil is illegal.

It is clear that oil prices benefit from this supply cut in light of an already tight market. However, we don't know how long the Kurdish supply will stop.

Meanwhile, strikes are ongoing in France, leading to the shutdown of some major refineries, in particular the TotalEnergies plant in Gonfreville-l'Orcher, which processed 240,000 barrels of oil a day. And on Monday, the strike at the refinery was extended for another three days, which created a temporary but very negative impact on crude oil consumption in the European Union. At the same time, problems with fuel availability at gas stations are worsening in France, adding to the already significant pressure on consumers' costs.

Meanwhile, a weekly review by the Energy Information Administration of the U.S. Department of Energy reported that the country's commercial oil inventories fell by 7.5 million barrels, or 1.6%, last week.

According to the terms of the OPEC+ agreement, the allowed production level for Russia in February was 10.478 million bpd. In other words, Russia did not produce about 537,000 bpd in the reporting month in order to reach its full production quota.

Since December 5, oil sanctions came into force, according to which the European Union does not accept the Russian oil, which is transported by sea. In addition, the G7 countries, Australia and the European Union imposed a price cap on Russian oil transported by sea at $60 per barrel, and more expensive oil can no longer be transported and insured. Russia, in response to such measures, banned from February 1 to supply oil to foreign parties if the contracts directly or indirectly provide for the use of the marginal price fixing mechanism.

Gold to climb above $2,000​​​​​​​

Throughout this week, many analysts predicted that gold could jump to $2,000 and even above. The yellow metal met expectations and reached the specified peaks. Now the primary task for the precious metal is to sustain its gains, experts believe.

Weak data on the US labor market has acted as a strong driving force behind gold's rally. Recall that in February, the number of job openings in the US labor market (JOLTS) dropped to 9.93 million, the lowest level since May 2021. Notably, in January 2023, the figure was 10.56 million. According to analysts, the current data indicates a cooling labor market. Previously, Fed officials, including Chairman Jerome Powell, emphasized that the overheated US labor market hinders the regulator in their efforts to curb inflation. Therefore, the Federal Reserve is confidently moving towards its goal, specifically achieving a 2% inflation rate.

Experts estimate that the current JOLTS reports have reinforced market expectations of the Fed's shift to a softer approach to monetary policy. Currently, the majority of analysts (almost 60%) expect the regulator to keep the key interest rate in a range of 4.75% - 5% per annum at the May meeting. At the same time, some experts anticipate a 25 basis-point rate hike.

After the JOLTS reports were released, the yellow metal broke through the level of $2,000 per troy ounce. On Tuesday evening, April 4, gold prices jumped from $1,990 to $2,020 within 20 minutes. Later, the precious metal stabilized at around $2,010, reaching the highest level since March 2022. On Wednesday, April 5, gold slightly appreciated, rising to $2,040 per troy ounce.

According to experts' estimates, the precious metal added 2% amid a weaker greenback. As a result, the US dollar index, which measures the performance of the dollar against a basket of six currencies, fell by 0.55% to 101.58. However, despite a decline in the dollar and a rise in the precious metal, Commerzbank economists believe that gold may enter a correction and lose value. This is facilitated by a recent increase in oil prices, which worries market participants and increases the risk of another inflationary spiral.

Currently, the value of gold is being formed by "fears of the dollar as economic factors do not provide substantial support for the US currency," David Lennox, an analyst at Fat Prophets, said. In addition, demand for the yellow metal as a safe-haven asset increased amid the recent banking crisis and geopolitical tensions.

Economists at Swiss investment bank UBS assume that gold will gain ground in the near future, proving its traditional "safe-haven" status in the current uncertain environment. Amid recent turmoil in the financial market, spot gold prices surpassed the $2,000 mark, reaching a 12-month high. The yellow metal gained momentum due to falling yields in the US, a weaker dollar, and increased risk appetite, experts estimated.

According to UBS forecasts, in the current situation, gold will reach the target mark of $2,100 per troy ounce in 2023. Previously, bank analysts expected the metal to achieve this height by the end of March 2024. However, things have changed, and the precious metal is now actively gaining value. This can be attributed to the global banking crisis. Against this background, gold prices soared to an all-time high, rising above $2,000 per troy ounce. A subsequent minor correction did not change investors' views. Market participants remained bullish on the precious metal.

Another factor contributing to higher gold prices is increased demand from central banks seeking to diversify their investments. Notably, gold is a great choice for investors to hedge against potential financial risks amid possible monetary policy easing. Market players are currently pricing in such a scenario.

Many analysts believe that by the end of this year, the FOMC may move to lower interest rates. However, this step is not favorable to gold. A perfect driving force for gold would be a situation where the Fed and the ECB begin to cut rates earlier than anticipated, while inflation targets are not met. In this case, demand for gold as a safe-haven asset will increase sharply. However, there is an alternative scenario. It suggests that the precious metal will trim some of its early gains if higher oil prices raise concerns about another inflationary spiral and further interest rate hikes.

Among recent forecasts, there is an almost fantastic one. Some economists expect gold prices to reach $3,000 per troy ounce. They believe it is a matter of time as the financial system has faced serious shocks. Against this background, interest in safe-haven assets is growing, primarily in gold. After the metal overcomes the barrier of $2,000 per troy ounce, it will probably head toward a new high. This scenario is possible in the long run.

Hot forecast for GBP/USD on 10/04/2023

There is nothing surprising about the fact that the market stood still on Friday despite the release of the US Department of Labor report, as both Europe and North America were observing Good Friday. However, the contents of the report were quite interesting. It was not about the unemployment rate, which remained unchanged as expected, but about the number of new non-farm jobs created, which was only 236,000. It was expected to be 250,000, while in the previous month 326,000 new jobs were created. In other words, the US labor market is clearly losing momentum, which of course increases the chances of a gradual easing of the monetary policy of the Federal Reserve. And it will naturally put pressure on the dollar. The only thing is to wait for the market's reaction after the opening of the US trading session, since Europe is still observing a holiday.

Number of new non-farm jobs created (United States):

The GBPUSD pair is in the stage of a pullback from the resistance level of 1.2500. As a result, the pound has lost about 0.8%, which is approximately 110 pips. Despite the ongoing pullback, the uptrend persists, as shown by the recent update of the local high of the medium-term.

On the four-hour chart, the RSI downwardly crossed the 50 middle line, during the pullback. In the intraday period, the signal points to the growth in the volume of short positions.

The Alligator's MAs are intertwined in the 4-hour time frame, signaling a slowing bull cycle. In the daily chart, the Alligator's MA's are still heading upward, reflecting a bullish cycle.

Outlook

We can assume that the pullback serves as a time of regrouping trading forces, during which a new wave of growth is possible. However, in order to make this a reality, a number of technical conditions must be met. First and foremost, the current pullback should end. The 1.2380/1.2400 area may serve as a support. A subsequent signal in favor of growth is when the price trades within the level of 1.2500, and as a result, the volume of long positions may increase.

As for the bearish scenario, traders consider it as a full-size correction, where the current pullback will remain towards the level of 1.2300.

The complex indicator analysis unveiled that in the intraday and short-term periods, technical indicators are pointing to the pullback. Meanwhile, in the medium-term periods, the indicators are reflecting an upward cycle.

EUR/USD. The inflation report has bumped the dollar. Welcome to the 1.10th figure?

The EUR/USD pair approached the limits of the 10th figure, impulsively rising to 1.0990. The greenback fell across the market, reacting to the US inflation report, and the dollar index updated its weekly low. However, despite the upward momentum, bulls have not yet been able to test the 10th figure, let alone consolidate above the 1.1000 mark. The fact is that the inflation report is somewhat contradictory: while the Consumer Price Index continues to fall, the core index showed an upward dynamic. Therefore, the 1.1000 level holds steady, although the positions of the dollar bulls have noticeably shaken.

In the language of dry numbers:

The CPI fell quite sharply in March - by 1% compared to the February value. With a forecasted decline to 5.6% (according to other estimates - to 5.2%), the indicator came out at 5.0% in annual terms (in February, the index was at 6.0% y/y). This is the weakest growth rate since May 2021. In monthly terms, the index was also in the "red", reaching 0.1% (with a forecasted growth of 0.3%).

At the same time, the core CPI, excluding food and energy prices, came out at the forecasted level: in annual terms, the indicator rose to 5.6%. Notably, for the last 5 months, the core index consistently declined from 6.6% (in September 2022) to 5.5% (in February 2023). For the first time in the last six months, the growth rate of the core CPI accelerated.

The report indicates that energy prices in March fell by 6.4% after February's growth of 5.2% (in particular, gasoline prices dropped by 17.4%). Food prices in March rose by 8.5% after an increase of 9.5% in February. Used cars became cheaper by 11.6% (in February, a decline of 13.6% was recorded). Overall, most price categories showed easing price pressure - even rent. This segment is important because high rental prices have prevented underlying inflationary pressure from easing. However, according to some experts' estimates, in the mid-term (in the coming months), a further decline in rental inflation can be expected.

Market reaction

Markets reacted quite significantly to the sharp drop in inflation. The US dollar index fell within a few hours from 101.85 to the current low of 101.16. If the current rates persist, the index will test the hundredth figure – for the first time since early February. Treasury yields also fell: in particular, the yield on 10-year government bonds has currently dropped by 5 basis points (i.e., to 3.378%), while the yield on 2-year notes has fallen by 7.9 basis points, to 3.945%.

On the other hand, gold is showing an uptrend: June gold contracts on the New York Comex exchange have impulsively risen by almost 1% to $2,037 per troy ounce.

The dollar is also getting weaker amid growing hawkish expectations. According to data from the CME FedWatch Tool, the probability of a 25 basis point rate hike in May is currently over 70% (72.2%). On Tuesday, the chances of this scenario being realized were estimated at 60% (and accordingly, the probability of maintaining the status quo was 40%).

Conclusions

Despite the growth of hawkish expectations, the dollar remains under significant pressure, even in the EUR/USD pair. In my opinion, this is due to the assumption that the anticipated 25-point rate hike at the May meeting will be the last in the current cycle of monetary tightening. The recent "banking crisis" did not go unnoticed – including for the Federal Reserve, which significantly softened its position after the March shocks in the banking sector. It is unclear how these events will affect lending and, consequently, economic activity in the United States in the mid- and long-term. Therefore, in addition to the expected completion of the current tightening cycle, the Fed also has the option to lower rates in the second half of this year. Whether the Fed will use this option or not is an open and debatable question, but the mere fact of such a discussion will put pressure on the greenback. By the way, according to Fed Chairman Jerome Powell, such a scenario "is not a base case" (meaning it is not completely ruled out). At the same time, the European Central Bank shows a more hawkish stance, allowing, in particular, a 50-point rate hike in May.

Thus, the fundamental background for the pair continues to favor the growth of EUR/USD. The report weakened the dollar across the market and triggered a bullish momentum for the pair, and so bulls approached the limits of the 10th-figure closely. A slight "blemish" in the report, in the form of a rise in core CPI, did not allow traders to impulsively overcome the support level of 1.1000, but the bullish sentiment prevails.

The technical picture indicates that on the daily chart, the pair is between the middle and upper lines of the Bollinger Bands indicator, as well as above all the lines of the Ichimoku indicator (including above the Kumo cloud). This combination suggests that we go for long positions. The resistance level (the target of the bullish movement) is located at 1.1030 – this is the upper line of the Bollinger Bands indicator on the same chart.

EUR/USD. "Red hue" of US inflation, dovish rhetoric from Williams, and the high of the year

On Thursday, the EUR/USD pair overcame the resistance level of 1.1030, which corresponds to the upper line of the Bollinger Bands indicator on the daily chart. The price has updated the annual high (1.1034), which was set in early February. The pair is moving towards the 1.11th figure as a result of the previous momentum, when the dollar fell across the market on Wednesday, reacting to the Consumer Price Index. Another inflation report was published in the US, which provided more support to the bulls. This is the Producer Price Index, which came out in the "red", reflecting the slowdown of US inflation.

The "red hue" of the PPI

So, the PPI disappointed the dollar bulls again. The index came out at 2.7% in annual terms, versus an estimate of a 3.0% decline. This is the weakest growth rate since January 2021. The indicator has been consistently declining for nine straight months. The core PPI, excluding food and energy prices, also fell significantly, reaching 3.4% (the weakest growth rate since March 2021). This component of the report has been declining since April last year.

It is noteworthy that, following the two inflation reports, the probability of a rate hike at the May meeting has only increased, despite the significant drop in the CPI and PPI. According to data from the CME Group FedWatch Tool, there's a 66% chance of a quarter point rate hike in May. This is because core inflation has accelerated. The core CPI, excluding food and energy prices, rose to 5.6% in annual terms. Meanwhile, the core index had been consistently declining for the last five months. This fact has led to the assumption that the Federal Reserve will be forced to raise the rate once again, possibly at the next meeting. As a reminder, the Fed's updated median forecast also assumes one more rate hike in 2023.

But all these hawkish circumstances, as they say, light up but do not fuel the dollar bulls. Despite the growth of hawkish expectations, the dollar continues to plunge across the market.

Is the Fed ready to take a step back?

In my opinion, this situation is related to the growing dovish expectations in the long term. Rumors that the Fed will lower the rate closer to the end of the current year are being circulated more and more recently. And after the recent statement by the New York Fed Chief John Williams (who has a permanent voting right in the Committee and is considered one of the most influential Fed officials), these rumors have gained practical significance.

In an interview with Reuters, Williams said that if inflation decreases, then "the Federal Reserve will have to lower rates." At the same time, he acknowledged that the central bank is likely to raise the rate again in May, as the Bank "needs to see a decrease in core inflation." However, the market focused its attention on the dovish aspects of his speech. In fact, Williams admitted the realization of such a scenario within the current year.

I would like to remind you that after the March meeting, Fed Chairman Jerome Powell also did not deny such a development of events. He diplomatically noted that this scenario "is not the base case."

Conclusions

The US dollar index continues to plunge, reacting to the decline in inflation indicators. Following the CPI, the PPI also came out in the red. Prior to this, the core PCE index also demonstrated a downtrend.

Inflation in the US is slowing down, and this is putting pressure on the greenback, even despite a slight acceleration in the core CPI index. Overall, in my opinion, the market has come to several conclusions: 1) in May, the Fed will likely go for another quarter point rate hike ; 2) this will be the last in this cycle of monetary tightening; 3) if the current pace of declining inflation indicators persists, the Fed will, in a few months, update the discussion on lowering the rate (Williams brought this up the other day, admitting the realization of a dovish scenario).

All these conclusions are on the side of the EUR/USD bulls.

The technical picture for the pair shows similar signals. On all higher charts (from H4 and above), the pair is either at the top or between the middle and top lines of the Bollinger Bands indicator. In addition, on the daily chart, the Ichimoku indicator has formed one of its strongest bullish signals - the "Parade of Lines". Therefore, it would be wise to use any corrective pullbacks to open long positions – with the first, and for now, the main price target of 1.1100.

Euro locks in profit

When American exceptionalism turns into doom, the US dollar has nothing left to do but flee the battlefield. In Forex, there is a growing opinion that only the US will face a recession in 2023, while the eurozone will manage to avoid an economic downturn, and China will be vigorously recovering. This is in stark contrast to last year's events when, due to the armed conflict in Ukraine and the energy crisis, the currency bloc was on the verge of collapse, and EURUSD fell below parity for the first time in 20 years. Today, the market has different realities.

The release of US retail sales data only heightened investors' concerns about a significant slowdown in GDP. The indicator shrank for the second consecutive time, significantly stronger, at 1% MoM, than Bloomberg experts estimated. If consumer spending collapses following the crisis in the real estate and banking sectors, a recession will become inevitable. The Federal Reserve will have to make a dovish pivot in 2023, no matter what the central bank says otherwise. This will weaken the US dollar.

Dynamics of retail sales in the US

Markets are currently set for a 25 basis point increase in the federal funds rate in May, followed by a 75 basis point decrease in the second half of the year. Such a balance of power became possible after consumer prices slowed from 6% to 5% and the first slump in producer prices in two years on a monthly basis. US inflation is clearly slowing down, allowing investors to argue that the Fed has done its job and the monetary tightening cycle is nearing its end.

In Europe, the picture is different. There, European Central Bank officials are very aggressive amid record core inflation levels. It needs to be broken, and the short-term market predicts a further 75 basis point increase in the deposit rate, to 3.75%. At the same time, derivatives believe that at the next Governing Council meeting in May, the cost of borrowing will increase by 31 basis points. So the chances of +50 basis points still remain, which contributes to the rise in EURUSD quotes. In terms of the interest rate swap market, the euro is still undervalued compared to the USD.

Dynamics of EURUSD and interest rate swap differentials

In my opinion, the decline in the main currency pair in response to the disappointing US retail sales data is the result of speculators taking profits on long positions after a sharp EURUSD rally throughout the week leading up to April 14. When everyone is buying, there is an excellent opportunity to sell, so there is no need to be surprised by the seemingly unexpected strengthening of the US dollar. It's just the peculiarities of trading.

Technically, on the daily chart, EURUSD bounced off the upper limit of the fair value range at 1.0675-1.0975. No asset can grow indefinitely, and the correction seems like a necessary breather. At the same time, the uptrend persists, and a bounce off support levels at 1.097 and 1.09 should be used to establish long positions.

Pension funds and hedge funds opt for gold

Despite hopes for lower inflation, the world's pension funds are still not taking risks. They are increasing their interest in gold, expanding their positions. According to the latest risk management report by Ortec Finance, published on Thursday, the company's analysts stated that they are 90% confident in a decline in inflation. Worldwide, more than half of the managers of government pension funds with a total of over $3 trillion in assets under management assume that inflation will be 3.3% or even lower this year. This assumption is already much lower than last year's survey, which predicted inflation at around 6.4%. The survey also showed that only 10% of global asset managers believe inflation will exceed 6%.

A week after the U.S. Department of Labor published data on the Consumer Price Index, which grew less than expected over the last 12 months to 5%, the survey results appeared. However, despite the optimism of fund managers that inflation will continue to decline, they are still not taking risks, increasing their positions in gold and other commodities.

According to the study, about 70% of the surveyed fund managers said their plans include increasing their participation in commodities. Specifically, 40% decided to increase their investments in gold; 42% said they increased their bond holdings.

Analysts believe that hedge funds' interest in gold should continue to support the precious metal and push prices to historical highs. Nevertheless, analysts noted that their bullish positions in gold are currently low compared to last year.

According to the latest data from the Commodity Futures Trading Commission, asset managers have long positions in gold of 104,000 contracts, about 27% of the peak in 2022 when prices exceeded $2,000 an ounce. Also, holdings in gold-backed exchange-traded products show there are fewer investors compared to the previous period. In March, gold-backed ETFs received a net inflow for the first time in 10 months.

Now, the world's largest gold ETF, SPDR Gold Shares (NYSE: GLD), contains 926.57 tons of gold. This is less than in March 2022, when it contained 1,100 tons.

Hot forecast for GBP/USD on 26/04/2023

It was assumed that new home sales in the United States would decrease by -0.5%, but suddenly, they jumped as much as 9.6%. So, investors who were initially prepared to sell the dollar further had instead begun to open longs on the dollar. The results of the housing prices report didn't even stop them, the growth rate of which slowed from 5.3% to 4.0%. Especially since estimates were a slowdown to 3.9%. And so, US macro data turned out to be better than forecasts. And the sales data was simply delightful.

New home sales (United States):

And today, the dollar may continue rising. This time, the reason should be orders for durable goods. According to forecasts, they can grow by 0.6%. So, the dollar should continue to grow. But only if the actual data matches the forecasts. And not like yesterday, when they turned out to be completely opposite.

Orders for durable goods (United States):

The GBP/USD pair sharply switched to a decline, losing about 0.8% of its value. However, this movement did not lead to anything crucial. The quote still moves within the sideways range of 1.2350/1.2550.

During the downward cycle, on the four-hour chart, the RSI technical indicator crossed the midline 50 downwards. The RSI points to an increase in the volume of short positions for the British pound.

On the four-hour chart, the Alligator's MAs have multiple intersections with each other, which corresponds to a signal of stagnation. In the mid-term, it is directed upwards, which coincides with the trend direction.

Outlook

Traders can work within a flat because the range width is sufficient for speculative activity, as evidenced by the recent price jump. The main strategy is still focused on the outgoing momentum from the flat, which, in a technical perspective, may indicate the succeeding price movement.

In terms of the complex indicator analysis, we see that in the short-term and intraday periods, technical indicators are pointing towards different directions due to the stagnation. In this case, it points to a bearish sentiment due to the downward momentum. In the mid-term period, the indicators are reflecting an upward cycle.

Slowing global inflation called into question. RBA raises rates, possible revision of RBNZ rate forecast. Review of USD, NZD, AUD

The US Manufacturing ISM report showed an increase in positivity, with the index rising from 46.3 to 47.1. However, at the same time as the sector's recovery, we should take note that a number of sub-indices favor higher inflation – prices jumped from 49.2 to 53.2, employment increased by 3.3 points, to 50.2, and new orders are still in contraction territory.

After a pause, which optimists declared the end of the banking crisis, another bank went bankrupt - First Republic Bank. After the purchase of FRB, JPMorgan shares rose more than 2%, as JPMorgan acquired $30 billion in assets, while losses were shared with FDIC, i.e., the state. The rescue of another bank has led to the fact that FDIC has virtually exhausted all reserves, a number of small regional banks are in line for rescue, and as the crisis escalates, it will be increasingly difficult.

US Treasury Secretary Yellen warned Congress that, by optimistic estimates, the government will not be able to fulfill its financial obligations by June 1 if Congress does not raise the debt ceiling by then. Republicans have already prepared a bill providing for a $1.5 trillion increase in the debt ceiling, with a simultaneous reduction in spending of more than $4.5 trillion.

Markets will trade with low volatility until the outcome of the Federal Reserve meeting is announced. The main intrigue lies in whether the Fed will maintain the prospect of another rate hike, as there are clear signs that inflation is ready to resume growth after a pause. Q1 PCE data clearly confirms this.

Against this backdrop, oil prices have fallen again, as have commodity currencies, as the trend towards a slowdown in global inflation is called into question.

NZDUSD

The focus is on the Q1 labor market report overnight on Wednesday, with expectations moderately positive. In February, the Reserve Bank of New Zealand forecasted an increase in the unemployment rate from 3.5% in Q1 to 4.8% by the end of the year, but at the same time, a sharp increase in wages. The RBNZ expects annual growth from 4.3% at the end of 2022 to 4.9% in Q2, which will strengthen inflation expectations.

There is also another unexpected news - from June 1, the RBNZ plans to ease lending conditions. Such a decision may require a higher rate to curb inflation growth, but so far, the market has not reacted, expectations for the RBNZ's May meeting remain stable, the bank will raise the rate by 0.25%, this outcome is already priced in and will not have a significant impact on the Kiwi rate.

The net long position in NZD decreased by $43 million for the reporting week to -$200 million, with a slight bearish bias. The calculated price goes down, signaling a strengthening of bearish sentiment.

NZDUSD did not reach the support level of 0.6079, but the upward retracement is unlikely to be strong. The nearest resistance is at 0.6240/50, where we expect the growth to end and the downward reversal to follow. The next support is the mid-channel area, coinciding with the local low of 0.6105, followed by 0.6020.

AUDUSD

The Reserve Bank of Australia surprised the markets considerably, not only did it raise the rate by a quarter point to 3.85%, but it also significantly changed the tone of the accompanying statement compared to that of April's. The statement reiterates the thesis that "some further tightening of monetary policy may be required," but emphasizes that the RBA wants to achieve this in "a reasonable timeframe," this thesis is repeated twice, unlike the previous forecast of inflation normalization in 2025. It paid more attention to wage growth.

The results of the RBA meeting are undoubtedly a bullish factor for the Aussie. Futures reacted with an increase in the probability of another 25 bps hike, and the Australian dollar became the leader in daily growth, pulling the NZD along with it.

Apparently, the RBA sees a threat of higher inflation or at least a more prolonged one, and the threat is real.

The net short position in AUD decreased by $234 million to -$2.615 billion, with bearish positioning. The calculated price lost momentum and shows signs of turning south, the forecast is neutral.

AUDUSD continues to trade in a horizontal channel, the decline expected a week ago turned out to be slightly deeper, but the subsequent bullish momentum on the background of the unexpected RBA decision quickly lost momentum. We suppose that till the end of the Fed meeting, trading will be in a narrow range, and further direction will be chosen based on the presence or absence of hawkish wording in the final statement of the Fed. By the end of the week, I expect the pair to fall to the border of the range at 0.6565.

Markets cautious ahead of the US inflation report. Overview of USD, EUR, GBP

Markets were cautious on Wednesday morning as they await the results of talks between Biden and House Speaker McCarthy on the US debt ceiling. Both sides are not willing to consider short-term solutions that would allow raising the borrowing ceiling and are not ready for compromises. A quick solution should not be expected, and perhaps there will be a threat of a technical default while a solution is being worked out.

The US labor market report for April contained rather contradictory data. Overall, the data was stronger than forecasts - 253,000 new jobs were created (forecasted 179,000), however, the data for the past 2 months was revised downward by 185,000, which offset all the positive news. The average hourly income was 0.5% against the forecast of 0.3%, which completely nullifies expectations of a rapid decline in inflation.

The US NFIB Small Business Optimism Index fell to its lowest level since 2013, at 89 points.

The key event of Wednesday is the US Consumer Price Index. Forecasts do not imply changes - monthly inflation growth rates are expected at 0.4%, annual rates at 6%, and any deviation from the forecasts may cause a strong market reaction.

EUR/USD

The European Central Bank raised its rate by 25 basis points, which was lower than the expected 50 basis points, and decided to stop the reinvestment of the APP program from July 1, which matched the forecasts.

Inflation estimates have not changed overall, and the reasons why the ECB refrained from raising the rate by 50 basis points can be sought in recent events in the banking sector. Perhaps banks perceive the threat of a large-scale banking crisis more seriously than it seemed; the latest survey showed that lending rates have fallen sharply, and lending conditions have tightened.

Comments on the ECB's unexpected decision were numerous and often contradictory. In general, their tone boils down to the statement that "the battle with inflation is far from being won," and the slowdown in rate hikes will allow keeping rates high on a longer trajectory. Indeed, a decline in overall inflation due to falling energy prices is evident, but core inflation has a completely different trajectory.

ECB President Lagarde mentioned several times at the press conference that the tightening of credit conditions has begun to spread to the real economy. Overall, Lagarde tried to appear hawkish, but markets reacted neutrally to the ECB meeting's outcome.

The net long position in the euro increased by 0.6 billion during the reporting week, reaching 23.8 billion, with speculative positioning remaining confidently bullish. The calculated price, however, has decreased slightly, suggesting the development of a corrective bearish movement.

A week earlier, we assumed that EUR/USD would begin to decline towards support at 1.0910. There is no reason to abandon this scenario yet; support has not been reached, but the chances of a further decline remain high. In case of a confident breakthrough at 1.0910, we assume further movement towards support at 1.0875.

GBP/USD

The Bank of England will hold another monetary policy meeting on Thursday. Market expectations suggest an interest rate hike of 25 basis points to 4.5% and a cumulative increase of 50-75 basis points by the third quarter. Forecasts for inflation, the labor market, and GDP will also be published.

The UK is experiencing more robust inflationary pressure than the US or the Eurozone, with overall inflation above 10% YoY and core inflation consistently above 6% without signs of slowing down.

According to the CFTC report, the net long position in the pound decreased during the reporting week from 0.5 billion to 0.1 billion, with positioning being neutral. The calculated price, however, continues to stay above the long-term average, so chances for continued growth remain. Overall, the pound looks stronger than the euro at present.

The pound updated its local high, getting to 1.2668 the medium-term target of 1.2750 has not been reached, but it is still valid. Support at 1.2575, if GBP/USD stays above this level, restoring growth and updating the high is possible. In case the corrective decline develops, a decline to the support area 1.2430/50 is possible, where there will be an attempt to create a basis for renewal of growth. There are no grounds for stronger decrease yet.

Hot forecast for EURUSD on 12/05/2023

Yesterday, everything revolved exclusively around the Bank of England meeting. And its results were the reason why the euro got significantly weaker. More precisely, the pound was falling, and through the dollar index, it pulled other currencies with it. And it's not so much about the BoE hiking interest rates by 25 bps, but rather about the following comments. Despite another increase in inflation, the British central bank signaled that it may pause rate hikes. It turns out that the BoE is not so much engaged in the fight against rising consumer prices, but rather follows in the wake of the larger central banks. Even though this is not in line with the emerging economic situation in the UK itself. Which has spooked investors.

So the euro's fall was not only impressive, but it also had nothing to do with the economic dynamics directly in the eurozone itself. Moreover, the single currency has gone beyond the range in which it has been for almost a whole month. Based on this, we can assume that today we will see a kind of rebound, and a return to the usual limits from 1.0950 to 1.1050.

During an intensive downward movement, the EUR/USD pair reached the 1.0900 level, which points to a change in the volume of short positions. As a result, a slowdown-pullback occurred relative to this level.

On the four-hour chart, the RSI indicator is moving in the lower area of 30/50, which corresponds to the downward cycle, as well as the touch of the 1.0900 level.

On the daily chart, two out of three of the Alligator's MAs intertwined, which could be an initial sign of a slowdown in the medium-term trend. On the 4-hour chart, it reflects a bear cycle, which corresponds to the current movement.

Outlook

In this situation, traders are considering an option of forming a pullback, which will eventually return the euro to its previous price ranges. However, if the pullback turns out to be false and the quote remains below the 1.0900 level in the daily period, then in this case, a technical signal about forming a full-scale correction through an uptrend may emerge.

The comprehensive indicator analysis in the short-term points to a pullback. In the intraday period, the bearish sentiment is still in force.

Hot forecast for GBP/USD on 15/05/2023

The first estimate of the UK's GDP for the first quarter was supposed to show the danger of an approaching recession, as the economic growth rate could slow from 0.6% to 0.3%. But in fact, it dropped to 0.2%. So, the recession is getting closer. And naturally, this had a negative impact on the pound. Another thing is that a noticeable reaction only started at the opening of the US trading session. And the fall of the pound, and along with it the euro, largely coincided with rumors about a new package of sanctions against Russia.

Change in GDP (United Kingdom):

The discussion is about the possibility of introducing a complete ban on pipeline gas supplies. That is, a ban on gas supplies to Europe. It seems like the West has already abandoned energy supplies from Russia, when in fact, supplies are still being transported. And they are carried out precisely through pipelines. If such a ban is introduced, Europe will face an even greater energy deficit. It may well cope with this problem, as happened last year, but the cost of energy will become even higher, which will have an even more serious impact on European industry. This means that Europe will be the main victim. This is exactly what caused the fall of European currencies. Today's eurozone industrial production report, the growth rate of which is expected to slow from 2.0% to 1.1%, could confirm these fears. So, following the euro, the pound may fall even further.

The GBP/USD pair has lost about 200 points in value over the past week. This momentum has led to a full-scale correction, which is shown by the medium-term uptrend.

On the four-hour chart, the RSI indicator has fallen into the oversold zone during a sharp price change, which indicates an abundance of short positions in the English currency.

On the same time frame, the Alligator's MAs are headed downwards, which corresponds to the direction of the correctional movement.

Outlook

In this situation, a technical signal shows that the pair is oversold in the intraday period. This may indicate a slowdown and as a result, the end of the correction. However, we are dealing with a momentum and trend, in which speculators may simply ignore that technical signal. In this case, keeping the price below the value of 1.2440 may push the pair to fall towards the 1.2350 level.

The complex indicator analysis points to a downward cycle in the short-term and intraday periods. In the medium-term, the indicator is still providing a bullish signal.

Gold stumbles due to Fed rate hike expectations

Gold exhibited mixed performance this week, rising strongly and then pulling back from recent peaks. Analysts believe that gold's rally is currently on hiatus, and that the precious metal is ready to move in a different direction. Uncertainty surrounding the Federal Reserve's interest rate trajector is contributing to gold's slowed momentum.

At the start of the week, gold marginally increased, but gave up part of its gains and slipped by 0.80%. This was due to ambiguous macroeconomic data from the US, which nonetheless showed signs of resilience. US retail sales were also notably robust. According to current data, industrial production in America bounced back in April, while the manufacturing sector is facing difficulties.

Retail sales excluding autos went up by 0.4% m/m, which matched forecasts. Year-over-year, sales rose by 1.6%, below last month's 2.4%. Experts believe it indicates that the US economy is slowing down.

US industrial production grew by 0.5% m/m in April. Year-on-year, it rose to 0.2% from 0.1% in the previous months. According to the latest data, manufacturing production increased by 1% m/m. Furthermore, an uptick in automobile production was observed, bolstering the US dollar and dampening gold's upside prospects.

Macroeconomic factors and higher US government bond yields have weighted down on the precious metal. Consequently, gold has slightly declined. Its downward movement has accelerated by week's end. The precious metal has now bounced downwards from the key level of $2,000 per ounce. On Thursday morning, 18 May, XAU/USD was trading at $1,977, trying to recoup losses, but with limited success.

As the precious metal slides down, investors are now focused on new US data, which is set to be published later today. The next batch of data will help investors assess the state of the US economy and predict the Fed's next interest rate move. In addition, the US Department of Labor will release the initial unemployment claims report. Preliminary forecasts indicate that jobless claims fell by 10,000 in the first week of May after rising by 22,000 earlier, reaching its highest level since October 2021.

Uncertainty regarding the US debt ceiling is another important factor for gold. Continuing discussions on the issue has yet to find a solution. Earlier, US President Joe Biden met with Congress representatives to address the issue. Analysts estimate the current situation has pushed up the precious metal, which benefits from anxiety in the market. Gold is universally considered to be a traditional safe-haven asset that can protect the holder's capital.

Higher industrial production in the US has boosted the market. As a result, traders and investors are pricing in the possibility of another interest rate hike in mid-June. Analysts suggest that the change in market expectations has triggered another dollar movement, weighing down on gold.

Gold's noticeable decline has been attributed not only to the mixed US macroeconomic data, but also to the Federal Reserve's current decisions on interest rates. As a result, the precious metal is approaching its April lows. Analysts believe that due to increased expectations of another key rate hike, the gold correction will continue.

At the moment, Fed representatives maintain a hawkish stance, believing that this approach would make it easier to bring inflation under control and return it to the target of 2% in the future. This also affects possible upcoming rate moves. According to Fed officials, the rate has not yet reached a level that would allow a rollback of policy tightening.

In this situation, the precious metal is stalling, but some analysts are confident that it could increase. Currency strategists at Credit Suisse believe that gold will eventually reach new highs and rise above the $2,070-$2,075 levels achieved in 2020 and 2022.

According to Credit Suisse, the gold market will soar to new highs following the completion of the current range phase, facilitated by a decrease in real yields in the US. In this situation, exceeding $2,075 would indicate a bullish breakout, opening the way to a new target range of $2,330-$2,360.

Technical analysis indicates that gold is approaching the 50-day moving average. Experts say that stabilizing above this level solidified the gold rally at the end of 2022 and confirmed it in March 2023. At the same time, the 61.8% retracement level, which moved from March lows to early May highs, is located at $1,977 per ounce.

Experts estimate that gold should avoid a sharp drop below $1,980. Such a scenario would be an important signal of market sentiment change, pushing gold down to a critical level of $1,950 per ounce.

If gold stabilizes near current levels, then the next growth impulse will help it refresh historical highs. In this situation, the technical target for gold bulls will be $2,250, which was reached during the last two-month rally. The long-term target will be the ambitious level of $2,640, which may be reached within 12 months.

Experts believe the correction of the precious metal will continue if the likelihood of another Fed rate hike increases in June. The regulator's next meeting is scheduled for June 13-14. Most analysts (72%) expect the key rate to remain at 5%-5.25%, while some anticipate another increase by 25 basis points.

EUR/USD. Steep plunge: The pair has hit multi-week price lows

The EUR/USD pair is plunging across all pairs, developing a downtrend. The EUR/USD bears managed to overcome the support level of 1.0770 (the upper limit of the Kumo cloud on the daily chart) – this is a multi-week price low (since March 27). The next barrier is at the 1.0650 mark (Kijun-sen line on the weekly chart). The key fundamental factor, thanks to which the greenback is gaining momentum, is still in force, so the downtrend is unlikely to weaken by the end of the current week. This refers to the threat of default in the U.S. The threat is not diminishing, but on the contrary, it's becoming stronger and more tangible with each day.

The situation is contradictory. On the one hand, everyone understands that the parties will eventually come to an agreement, as has been the case year after year. On the other hand, the world press continues to escalate the situation, modeling catastrophic scenarios if the US were to default on the national debt for the first time in history. And although there is a low probability of this scenario, it cannot be completely ruled out. Therefore, the conditional probability of "0.0 (...) 1%" is taken quite seriously by the market, with all the ensuing consequences.

Threat of Default or Groundless Panic?

The dollar is a beneficiary of the current situation. Due to the rising panic in the markets, the greenback is in high demand, including in the EUR/USD pair. Recent events suggest that in the coming days, American politicians are unlikely to find common ground on the issue of raising the debt limit. At least because the main "negotiator" - Joe Biden - is currently at the G7 summit in Japan. And although the US president cut his schedule, canceling a visit to Australia, he won't return to the US until Saturday. Therefore, at least until the end of this week, the situation will remain in a state of limbo, allowing the dollar bulls to feel confident in all currency pairs. The EUR/USD pair will not be an exception here.

Before heading to Japan, Biden declared he is confident, saying talks with congressional Republicans have been productive. According to him, he will maintain close contact with them during the trip and will hold face-to-face negotiations upon arrival. The White House head also reassured journalists that the U.S. would not default on the national debt.

Judging by the dynamics of the greenback, market participants reacted skeptically to Biden's optimistic statements, partly because he voiced similar rhetoric last weekend, ahead of another failed negotiation round. The seriousness of the situation is also indicated by the fact that Biden unexpectedly canceled planned trips to Australia and Papua New Guinea.

Therefore, traders' skepticism, in my opinion, is quite justified, as the parties only declare their intentions to make a deal, but it is assumed that the corresponding conditions put forward will be met.

As we know, the Republicans claim that an increase in the spending limit can only take place on the condition of significant spending cuts. In particular, they propose cutting tax credits for the purchase of electric cars and the installation of solar panels, as well as reducing government spending on education loan repayment. Democrats, on the other hand, reject such proposals and insist on raising the debt limit without any preliminary conditions.

To date, the sides have not been able to find a compromise, and this fact is supporting the safe dollar.

Growth of Hawkish Expectations

It should be emphasized that the dollar is strengthening its positions not only due to growing risk-off sentiments. The recent statements by Fed officials, which had a "hawkish hue", also lent support to the greenback. Despite the slowdown in US inflation, many members of the Fed do not rule out further steps to tighten monetary policy. For instance, Dallas Fed's head Lorie Logan stated that the incoming data "supports a rate hike at the next meeting."

This position, in one interpretation or another, was voiced by other representatives of the US central bank – specifically, Loretta Mester, Thomas Barkin, Raphael Bostic, and John Williams.

The market reacted to the tightening of rhetoric accordingly: according to the CME FedWatch Tool, the probability of a 25-point rate hike at the June meeting is currently 32%. For comparison, it should be noted that at the beginning of May, the chances of realizing a 25-point scenario were estimated at 5-8%.

Conclusions

The US dollar continues to enjoy high demand – firstly, amid risk aversion, and secondly – due to the growth of hawkish expectations regarding the future actions of the Fed. Such fundamental conditions contribute to the development of a bearish trend. If the Republicans and Democrats do not surprise the markets with an unexpected compromise, then the EUR/USD pair will likely keep heading towards the base of the 7th figure, and further to the support level of 1.0650 (the Kijun-sen line on the weekly chart).

EUR/USD. Week Preview. Buckle up, price turbulence expected

The EUR/USD pair failed to consolidate within the 7th figure by the end of the past week: at the end of Friday, EUR/USD bulls organized a small but swift counter-attack, which led the price to rise to the level of 1.0804. The corrective pullback was due to a weakening of the US currency, which came under pressure against the backdrop of Federal Reserve Chairman Jerome Powell's cautious rhetoric.

Powell suggested that the May rate hike could be the last in the current monetary tightening cycle. This unexpected plot twist surprised dollar bulls, afterwards the greenback fell across the market. Under other circumstances, this fundamental factor would have had a strong impact on the dollar for a quite long time. But under current conditions, Powell's dovish comments may take a back seat. The focus is on the political confrontation between Republicans and Democrats, as its failure to reach an agreement could lead to a default on the US national debt.

There is no doubt that this topic will be the "number 1 issue" for all dollar pairs. All other fundamental factors will take a back seat - including Powell.

Biden raises the stakes

Exactly one week ago - May 14 - the President of the United States announced that negotiations with Congress on raising the debt limit are "progressing," and more about their progress will be known literally "in the next two days". At the same time, he emphasized that he is optimistic about the prospects of reaching a compromise. In anticipation of the next round of negotiations, assistants to the US president and the Speaker of the lower house of Congress, Kevin McCarthy, began to form a "road map" to curb federal spending in order to resume negotiations on raising the debt limit.

The negotiations did take place - but ended in failure. The parties just "agreed to agree", but no more. Now the situation is up in the air. Another round of negotiations should take place after Biden completes his visit to Japan, where the G7 summit is being held. At the same time, he canceled his planned visit to Australia, which speaks volumes on the seriousness of the situation.

Important point: if the US president was initially optimistic about the negotiation process, today he has changed the tone of his rhetoric. For example, he stated that declaring a default is "personally out of the question" for him, but at the same time, he cannot guarantee that Republicans will not push the country into default by "doing something outrageous" (originally by Reuters agency - "Biden said he still believed he could reach a deal with Republicans, but could not guarantee that Republicans would not force a default by "doing something outrageous").

In this context, Biden called on Congress to work on the issue of raising the debt limit. He also emphasized that he would not agree to a bipartisan debt ceiling deal "exclusively on the terms of the Republicans". The US president expressed readiness to cut spending, but stated that he does not intend to fulfill all the demands of Republican congressmen.

The terrifying word: "default"

Judging by the escalation of the situation, a default no longer seems unthinkable. One can assume that Biden has decided to raise the stakes with his rhetoric before decisive negotiations, shifting the responsibility for possible default consequences onto the Republican party. However, in the context of forex traders' reaction, it doesn't really matter - whether it's a bluff or a real threat. Such statements from the US president are capable of significantly shaking the markets. Considering that the aforementioned comments were made during the weekend, dollar pair traders should prepare for a significant gap (in the case of the EUR/USD pair - a downward gap).

Overall, the upcoming week is packed with events. For example, on Monday, three representatives of the Federal Reserve (Bullard, Barkin, Bostic) will speak; on Tuesday, PMI indices will be published in Europe, and data on the volume of new home sales will be released in the US; on Wednesday, the minutes of the Fed's May meeting will be published along with a speech by European Central Bank President Christine Lagarde; on Thursday, data on the volume of pending home sales will be disclosed in America; and finally, on Friday, the most important inflation indicator - the core personal consumption expenditures index - will be published in the US.

But all these reports, as well as the speeches of Fed and ECB representatives, will remain in the shadow of the key topic of the upcoming week. The fate of the US national debt is the number 1 issue for dollar pair traders, so everyone will focus on its corresponding negotiations. Especially since there is not much time left until the "X hour": as the US Treasury previously warned, on June 1, the country's government may declare a debt default if Congress cannot raise the debt limit.

Conclusions

Under such fundamental circumstances, it is extremely difficult to predict the possible trajectory of EUR/USD. We can only assume that at the start of the new trading week, risk-off sentiments in the markets will rise again, and this fact will provide significant support to the dollar. In this case, the pair will return to the area of the 7th figure with a target at 1.0700. But everything will depend on the negotiation between Republicans and Democrats. If they do find common ground and announce an increase in the debt limit, the spring will unwind in the opposite direction - against the dollar (especially in light of Powell's recent statements). If the negotiation saga drags on until next weekend, the dollar will continue to gain momentum, acting as a beneficiary of panic sentiments.

Considering the previous statements of Republicans, Democrats, and Biden himself, the negotiations will be very challenging - therefore, dollar pairs may once again find themselves in the area of price turbulence.

Hot forecast for GBP/USD on 23/05/2023

Throughout Monday, the pound was mostly stagnant, and this won't last for long, so the market will definitely come alive today. Especially since preliminary PMIs are scheduled for release. However, the forecasts for the UK are not optimistic. In particular, the services PMI is expected to fall from 55.9 to 55.3. However, the manufacturing PMI is likely to remain unchanged. Due to the services sector, the composite PMI is expected to fall from 54.9 to 54.7.

However, this will not lead to a significant decline in the pound. The situation in the United States is quite similar. Although the manufacturing PMI may increase from 50.2 to 50.3, the services PMI is likely to fall from 53.6 to 53.0. Therefore, the composite PMI will fall from 53.4 to 53.0. Considering the overbought condition of the dollar, weak US data will ultimately lead to an increase in the pound. Even If the UK releases weak reports.

The GBP/USD pair failed to enter a full-fledged recovery phase. The volume of long positions fell around the 1.2480 level, leading to a reversal.

On the four-hour chart, the RSI is moving in the lower area of the indicator, which may indicate a persistent bearish sentiment.

On the same time frame, the Alligator's MAs are headed downwards, confirming the corrective movement.

Outlook

The corrective cycle from the peak of the medium-term trend persists, as the downward cycle continues after a recent retracement. The volume of short positions will increase once the price stays below the 1.2390 level. Until then, the bearish sentiment may be replaced by a consolidation within the scope of the recent retracement.

The comprehensive indicator analysis in the short-term and intraday periods points to the downward cycle.

Gold's rally pauses, with new surge on horizon

Gold's upward momentum has paused after this week's mixed performance. However, analysts remain optimistic and believe that gold will surge to new highs. Despite the current setback, unfavorable external factors continue to drive capital inflows into gold, bolstering its future ascent.

This week, gold had a mixed performance, regaining ground after a two-day decline.The anticipation of the Federal Reserve's May meeting minutes fueled the precious metal's growth. On May 24, June futures on the New York Comex exchange edged up by 0.27% to reach $1,979 per ounce.

The Fed meeting minutes revealed that most policymakers believe further interest rate hikes are unwarranted. Additionally, the FOMC economic outlook projected the economic climate will worsen, as well as tighter lending conditions. Although officials foresee a moderate recession, they expressed concern over persistently high inflation, which currently is well above the 2% target. If inflation's decline remains sluggish, additional monetary policy tightening may be necessary.

These developments, combined with a stronger US dollar, sent gold into a retreat. On the evening of May 24, June futures on the New York Comex exchange slid by 0.45% to settle at $1,965 per ounce.

Gold currently faces considerable pressure from the surging USD, which has created headwinds for the precious metal. This week, gold stepped back from its key multi-year highs of $2,063-$2,075. However, Credit Suisse analysts believe that gold will eventually break through to new record highs.

Several factors, including concerns surrounding the US debt ceiling, have hindered gold's ascent for the time being. It has temporarily retreated from its key resistance level of $2,063-$2,075, the highs it hit in 2020 and 2022. Nonetheless, this appears to be a temporary setback. According to Credit Suisse, the next support level for gold stands at $1,949. A breakout below this level could push XAU/USD down to $1892 per ounce.

However, after this correction, analysts at the bank anticipate a resurgence in gold prices, driven by declining real yields in the United States. This drop is expected to intensify by the end of 2023. In a bullish scenario, gold could rally to $2,075, signifying a breakthrough for the precious metal. This would open the way towards new highs, particularly the range between $2,330 and $2,360, as highlighted by Credit Suisse.

Currently, gold's rally has taken a breather, settling at modest levels. On May 25, the price of gold stood at $1,963, ready to surge higher. The recent decline can be attributed to the US dollar's advance. The US currency gained strength against other major currenices ahead of the release of US economic data.

Investors are closely monitoring the US GDP data, which are set to release on Thursday, May 25th. Early forecasts suggest that the US economy has grown by 1.1% in the first quarter of 2023, in line with an earlier outlook by the US Commerce Department.

The greenback upsurge has also influenced the precious metal significantly. It is worth noting that gold is sensitive to signals emanating from the Federal Reserve. The current monetary policies of the regulator, coupled with the performance of USD, have a tangible impact on the precious metal's price. Hawkish signals from the Fed lend support to the dollar, making gold more expensive for foreign buyers. Conversely, dovish comments from FOMC policymakers weigh down on the American currency, driving gold higher.

Currency strategists at Commerzbank remain convinced that gold will move higher, as mounting default risks in the US make the precious metal more attractive for investors. In the event of a default, gold would come to the forefront, emerging as the most popular safe-haven asset. The bank underscores that the Federal Reserve will have ample opportunities to reduce interest rates, offering gold a competitive edge over other safe-haven assets such as the US dollar, the Swiss franc, and the Japanese yen.

UBS and Bank of America are particularly bullish on gold, expecting it to rise up to $2,200 per ounce. UBS currency strategists believe that gold will hit that level by March 2024, whereas analysts at Bank of America expects that level to be reached by the end of 2023. A key driver behind gold's assured growth lies in its sustained high demand from central banks.

Experts argue that the rise in gold prices requires the dollar to slide down gradually. UBS forecasts suggest that over the next 6-12 months, the greenback will experience a modest decline as the Federal Reserve prepares to conclude its monetary tightening cycle. This view is shared by the Bank of America, which expects the Fed's rate hike cycle to end, as well as substantial gold purchases by central banks.

Another factor favoring a gold rally is the mounting risk of a recession in the United States. Further key interest rate hikes and a deteriorating economic situation in the world's leading economy are making an economic downturn in the US more likely.

No progress in the negotiations on the U.S. debt ceiling. Markets are getting more nervous. Overview of USD, CAD, JPY

U.S. stock markets are down for the second straight day without any sign of an agreement on the debt ceiling, and the clock is ticking louder in anticipation of the "day of decision", which, according to current calculations, is set for June 1st, as confirmed by Treasury Secretary Yellen.

FOMC minutes reflect a somewhat contradictory nature of most comments. "Some" officials felt that additional tightening was probably warranted, while "some" concluded that it might be time to end the hikes. That's it, and understand it however you want.

Nevertheless, the futures market shows a weak momentum in favor of a more prolonged tightening. The probability of another rate hike on June 14th has reached 30%, and in July, it is already 44%, while expectations of the first cut have shifted to December.

Expectations for interest rates, albeit weak, are in favor of the US dollar, which continues to strengthen across the entire currency market.

On Thursday morning, Germany's GDP data for Q1 was published, which turned out to be noticeably worse than expected, causing EUR/USD to decline. This is another factor in favor of the dollar.

The main focus remains on discussions about the debt limit, and any specific details can sharply increase volatility.

USD/CAD

Bank of Canada Governor Tiff Macklem expressed concerns about inflation risks at the end of last week. Core inflation remains stable and shows no signs of decline, and the housing market is growing confidently, largely due to the highest migration rates to Canada among all developed economies.

The probability of the Bank of Canada reconsidering its decision to pause rate hikes, which was made in January, currently appears high. Scotiabank analysts expect that the rate could be raised as early as the next meeting in June. If these expectations are confirmed, the Canadian dollar will receive a strong driver for growth.

Speculative positioning on CAD remains consistently bearish, with a net short position of -3.2 billion at the end of the reporting week. The calculated price is below the long-term average, but there is no direction.

Trading continues near the mid-range values of the sideways range, without a clear direction, and there are currently no obvious reasons capable of causing a strong movement in either direction. A bit more likely is a movement towards the upper limit of the technical pattern at 1.3770/90.

USD/JPY

Bank of Japan Governor Kazuo Ueda delivered his first speech as the head of the central bank. He expressed a strongly dovish approach, giving no hints of any need for immediate action.

Regarding monetary policy, Ueda stated, "BoJ will patiently sustain the easy monetary policy." It appears that no adjustments to yield curve control are expected at the upcoming meeting on June 15-16, and expectations of possible changes are shifted to the next meeting on July 27-28.

It is also worth noting that the BOJ was the only major central bank that refrained from changing its monetary policy while others hastily raised rates to combat inflation. These efforts paid off as global inflation began to decline, and Japan experienced a decrease in external inflationary pressure without taking any action of its own. This reduces the need for the BOJ to take measures to change its policy.

The net short position on JPY increased by 0.3 billion during the reporting week to -5.9 billion, and the calculated price sharply increased, indicating the strength of the bullish momentum.

USD/JPY managed to update the previous local high at 137.92, and the yen reached resistance at 139.60 (50% retracement of the sharp decline from November to January), with the next resistance at the channel limit of 140.80/141.00. The main reason for the yen's weakness is that expectations regarding the BOJ's monetary policy change after the new leadership took office did not materialize, and now a downward reversal is possible only in the event of a sharp increase in demand for safe-haven assets or after a clear signal from the BoJ, which the markets do not expect before July.

Positive news contributes to an increase in risk demand, and the dollar braces to strengthen. USD, EUR, GBP overview.

The main news of the weekend was the agreement on the US debt limit, which may serve as a basis for increased risk demand at the beginning of the week. The House of Representatives is expected to vote on Wednesday.

It was reported that the debt ceiling will be approved until the 2024 presidential elections. Non-defense spending will remain at current levels in 2024 and will increase by only 1% in 2025. This is a compromise between Republican demands for sharp spending cuts and Democratic intentions to raise taxes.

The aggregate short position in the US dollar decreased by 3.3 billion to -12.1 billion during the reporting week. Overall, sentiment towards the dollar remains negative, but the trend may have changed.

Long positions on gold have noticeably decreased by 4 billion to -31.7 billion, which is also a factor in favor of the US dollar.

The core PCE deflator increased by 0.4% MoM, which is slightly higher than the consensus forecast of 0.3%. Despite the faster-than-expected price growth, real consumer spending rose by 0.5% MoM, surpassing the expected 0.3%. The rise in the PCE deflator shows that the fight against inflation is far from over, with the 3-month annualized core PCE deflator at 4.3%, the same amount as a year ago in April 2022.

The combination of higher spending and faster price growth is expected to lead to the Federal Reserve raising rates in June. Cleveland Fed President Loretta Mester, commenting on the released data, stated that "the data that came out this morning suggests that we still have work to do."

The CME futures market estimates a 63% probability of a Fed rate hike in June, compared to 18% the previous week, making the strengthening of the dollar in the changed conditions more than likely.

Monday is a banking holiday in the US, so by the end of the day, volatility will decrease, and we do not expect strong movements.

EUR/USD

The European Central Bank maintains a firm stance on continuing rate hikes as part of its fight against inflation. Preliminary inflation data for the eurozone will be published on June 1st, and the forecast suggests a slowdown in core inflation from 5.6% to 5.5%. If the data aligns with expectations, it will lower the ECB rate forecasts and put more pressure on the euro.

The net long position on the euro decreased by 2.013 billion to 23.389 billion during the reporting week, marking the first significant decline in the past 10 weeks. The calculated price is moving further south, indicating a high probability of further euro weakening.

EUR/USD has declined to 1.0730, where support has held firm, but we expect another attempt to test its strength, which will likely be more successful. Within a short-term correction, the euro may rise to resistance at 1.0735 or 1.0830, but the upward movement is likely to be short-lived and followed by another downward wave. Our long-term target is seen in the support zone of 1.0480/0520.

GBP/USD

The decline in UK inflation is once again being called into question. The core Consumer Price Index rose from 6.2% YoY to 6.8% in April, with yields sharply increasing. The retail sales report for April, published on Friday, showed that the slowdown in consumer demand remains more of a goal than reality itself.

Retail sales excluding fuel increased by 0.8% MoM, significantly higher than the forecast of 0.3%. If it weren't for the sharp decline in energy demand, both the monthly and annual retail growth would have been noticeably higher than expected.

Monday is a banking holiday in the UK, and there are no macro data this week that could influence Bank of England rate forecasts. Therefore, the pound will be traded more in consideration of global rather than domestic factors. We do not expect high volatility or significant movements.

The net long position on the pound slightly decreased by 84 million to 899 million during the reporting week. The bullish bias is small, and the positioning is more neutral than bullish. The calculated price is below the long-term average and is downward-oriented.

The pound has moved towards the support zone at 1.2340/50, but the decline has slowed down at this level. We expect the pound to fall, with the nearest targets being the technical levels at 1.2240 and 1.2134. There is currently insufficient basis for reviving growth.

Hot forecast for GBP/USD on 02/05/2023

Yesterday, the pound showed impressive growth. Similarly, the euro also showed significant gains. Considering that there was no macro data from the UK, unlike the eurozone, it is more accurate to say that the pound followed the euro. However, this growth contradicted all the macro data. After all, eurozone inflation slowed down significantly more than expected, while employment in the United States increased substantially more than anticipated. So, the dollar should have extended its growth. But the market went in a different direction, and the formal reason for this was the minutes of the European Central Bank's governing council meeting, which mentioned the possibility of more interest rate hikes.

However, the meeting itself took place before there were even rough forecasts for the current inflation. Just a couple of days ago, several ECB officials explicitly stated that the cycle of interest rate hikes may have come to an end. So, the rise of the euro and, along with it, the pound, goes against common sense. Unless we consider the excessive overbought condition of the dollar, which became the main reason why European currencies increased.

However, there is a high probability that today everything will return to the values at the start of yesterday's trading. Employment data clearly suggests that the content of the US Department of Labor report will be slightly better than expected. In particular, unemployment, which was expected to increase from 3.4% to 3.5%, may well remain unchanged. But if unemployment does increase, the dollar may continue to lose its positions, primarily due to the persistent overbought condition.

During the intense upward movement, the GBP/USD pair jumped above the 1.2500 level. This served as the primary signal of the pound's recovery process relative to the recent corrective move.

Due to the sharp price change, on the four-hour chart, the RSI reached the overbought zone, which indicates that long positions are overheated in the intraday period.

On the four-hour period, the Alligator's MAs are headed upwards. This indicates a shift in trading interests.

Outlook

In this situation, the sharp price change from the day before is a signal of the pound's overbought conditions in the intraday and short-term periods. The target level is set at 1.2550, around which the upward cycle slowed down, which reduced the volume of long positions and resulted in a stagnation. We can assume that the process of the pound's recovery will be temporarily interrupted by a pullback. However, if the price remains stable above 1.2550, speculators may ignore the technical signal of overbought conditions. In this case, the pair can rise towards the peak of the medium-term trend.

The complex indicator analysis in the short-term and intraday periods points to the pound' recovery process.