The latest CFTC report showed that investors continue to reduce their overall net position in US dollars for the fourth consecutive week. The reduction amounted to $1.9 billion during the reporting week, with the short position totaling $6.4 billion, the lowest in 11 weeks.
The demand for risk is decreasing this week, and one of the reasons is the market's disappointment with the lack of news from China that could support demand. After the People's Bank of China lowered interest rates last week, it was expected that on Friday there would be announcements of stimulus measures to support the country's economy after a prolonged period of coronavirus restrictions. However, the State Council concluded its latest meeting on Friday without any news, simply stating that the government is studying new measures that will be taken "in a timely manner."
The absence of news on stimulating the Chinese economy has led to a decline in stock markets in the Asia-Pacific region and pressure on commodity currencies, as well as a decrease in global yields.
The US dollar started the week with gains as the decrease in risk appetite increased demand for the dollar as a safe haven asset, and the depreciation of the yuan was also a factor. In the long term, we expect the US dollar to strengthen amid the withdrawal of excess liquidity from the markets and a broad decline in risk appetite, despite the possible end of the Federal Reserve's rate hike cycle.
The hawkish outcome of the European Central Bank meeting last week supported demand for the euro. In addition to the expected 0.25% rate hike, these outcomes included a revision of inflation forecasts. The forecast for HICP core inflation for 2023 has been raised from 4.6% in the March forecast to 5.1%, and for 2024, it has been raised from 2.5% to 3.0%.
As a result, the hawkish comments from ECB President Christine Lagarde and the upward revision of forecasts led to a reassessment of the peak rate. Now the markets are confident in another rate hike in July and a peak rate of 4% by December. Considering the expectations for the Fed's rate cycle to end, it is not surprising that the euro appears stronger against this backdrop.
The net short position on the euro decreased by $692 million during the reporting week to $20.48 billion. The reduction has been observed for the fourth consecutive week, but the bullish imbalance is significant enough that a reversal is not yet being considered. The pair has a bearish bias.
We anticipate that EUR/USD will not be able to develop an upward trajectory. The clearly hawkish outcome of the ECB meeting did not help the euro reach a new local high of 1.1086, and from current levels, it is more likely for the pair to move downward. We expect the goal to be a retest of the local low at 1.0635. There is currently no basis for a deeper decline, so it is unlikely that the lower limit at 1.0517 will be tested in the coming week.
On Thursday, the Bank of England will announce the results of its latest monetary policy meeting.
After the Fed and the ECB raised rates and strengthened their hawkish stance, the markets expect the BoE to be more aggressive. It is forecasted that the rate will be raised by 0.25% to 4.75%, and the comments will reveal a clear hawkish shift.
Following the May BoE meeting, it was unexpectedly revealed that both inflation and wage growth rates were higher than forecasted. Since both the Bank of Canada and the Reserve Bank of Australia raised rates against market expectations, sentiment towards the pound has become noticeably more bullish, as the UK economy is holding up better, which has increased pressure on the BoE. The decision to raise rates is considered a done deal.
The latest overall labor market report was stronger than expected and underscores that the UK labor market remains under significant pressure. Wage growth, excluding bonuses, increased to 7.2% (compared to 6.7% the previous month) with an acceleration of wage growth in the private sector. Similarly, unemployment dropped to 3.8% after increasing in recent months.
Inflation data for May will be released on Wednesday, the day before the BoE meeting, and will receive increased attention as April's data exceeded expectations. In April, core inflation recorded a monthly increase of 1.22%, the highest growth in decades.
Consequently, there is currently high demand for the pound as the markets are anticipating a hawkish surprise from the BoE. The market forecast for the rate now implies a peak of 5.75%, compared to 4.80% just a month ago.
At the same time, the net long position on GBP decreased by £438 million during the reporting week to £531 million, with minimal bullish imbalance. Speculative positioning does not support the current short-term demand for the pound. The calculated price is near the long-term average and is unlikely to break above it.
Last week, we speculated that the pound would end its rise below the previous local high of 1.2678. However, driven by expectations of the BoE's decision, the pound moved significantly higher, testing the technical level of 1.2754. If the BoE supports this sentiment, the pound may start moving towards the psychological level of 1.30. However, if we look at the futures market, the lackluster demand for it may indicate that major players are not expecting explosive growth.
We anticipate that the bearish sentiment will prevail in the near future, as the replenishment of the US Treasury account after the debt limit was raised will lead to an outflow of excess liquidity from the markets and naturally contribute to the strengthening of the US dollar.
*تعینات کیا مراد ہے مارکیٹ کے تجزیات یہاں ارسال کیے جاتے ہیں جس کا مقصد آپ کی بیداری بڑھانا ہے، لیکن تجارت کرنے کے لئے ہدایات دینا نہیں.
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