Week Ahead: Powell Testimony to test USD uptrend

Weekly Recap

It’s been a very eventful week for markets with a slew of central bank meetings taking centre stage. We saw rate increases from the Fed, the SNB and the BOE while the BOJ held rates unchanged. 

USD rallied firmly into the FOMC on Wednesday on expectations that the Fed would hike by a larger amount than the initially projected 50bps. The Fed followed through with a larger 75bps hike and warned of further tightening to come as it battles inflation, upgrading its rate path projections for the year ahead. However, the Fed scaled back its growth forecasts, adding to recessionary concerns. Following the meeting, USD has since fallen back as developments elsewhere diverted trader focus. 

The SNB thrust CHF into the spotlight this week as it announced an unexpected 50bps hike on Thursday. Despite hawkish commentary recently from the SNB, no change was expected and so the move fuelled an immediate rally in CHF across the board. Along with the hike, the SNB warned that further tightening would likely be necessary. 

The BOE meeting followed on Thursday. Despite speculation that the BOE would follow in the Fed’s footsteps and hike more aggressively, the bank stuck to the signalled 25bps hike. Along with the increase, the BOE signalled a willingness to do more going forward, if necessary. GBP was well-bid on the back of the meeting with traders now projecting UK rates to end the year above 3%.  

The BOJ once again bucked the central bank tightening trend this week. The BOJ reaffirmed its commitment to maintaining an easing presence though noted that it was monitoring recent movements in JPY with regard to its impact on the economy. 

Stock indices suffered across the week as further central bank tightening has put traders on alert. With inflation at elevated levels globally, and central banks tightening across the G10, growth fears are weighing on stock markets. With further tightening expected across the summer (Fed, BOE, ECB), markets look vulnerable to further downside near-term. 

In the commodities space, we saw plenty of volatility this week. Crude prices reversed lower initially amidst the USD rally ahead of the Fed. However, with USD falling back after the FOMC crude prices recovered. Metals saw a similar path this week with both gold and silver rallying off mid-week lows, taking advantage of a softer USD post-FOMC. 

Coming Up This Week

  • Fed’s Powell speaks 

Fed chairman Powell’s testimony at the senate next week will be closely watched on the back of the hawkish shift we saw at the June FOMC. With the Fed hiking by 75bps and signalling further, aggressive action to come, Powell comments have the potential to fuel plenty of USD volatility. Traders will likely be most sensitive to Powell’s comments around growth forecasts given the downward revisions issued at the FOMC and rising recession fears. 

  • RBA Meeting minutes

The RBA meeting minutes this week will be closely watched on the back of the recent RBA hike, which came in above expectations. With a clear hawkish shift taking place at the RBA, traders will be looking to judge how likely a further hike is at the next meeting or whether the bank is looking to hold and assess for a period. With inflation surging, expectations are for the RBA to press ahead with tightening. 

  • UK CPI 

UK inflation will be a key focus for markets this week on the back of the BOE meeting last week. The BOE refrained from a larger 50bps hike last week, opting for a 25bps increase instead. With inflation having hit record levels in May, traders will now be looking to see if annual inflation has ticked higher. A further strong reading will keep hawkish BOE expectations anchored ahead of the August meeting. Traders are expecting a larger hike in August, with this view likely to gain further traction if we see a further bullish surprise in inflation. 

Forex Heat Map 

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Technical Analysis

Our favorite technical chart of the week – GBPUSD 

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he sell-off in GBPUSD over recent weeks saw the market breaking to fresh 2022 lows, breaking below the prior 1.2159 level. However, the move found strong demand and price reversed sharply higher. The market is now on course to close the week out with a bullish pin at a double bottom. This is a strong bullish reversal signal. On a break above the 1.2673 level, the target for bulls will be a move up to the 1.3191 level. 

Economic Calendar

Plenty to keep an eye on this week data-wise, with RBA meeting minutes, UK and Canadian CPI the headline events. See the calendar below for the full schedule. 

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Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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