Forex News

Economists at Crédit Agricole explain why they see downside risks for EUR/USD in the near-term.

Fed rate hike expectations are in for a rebound

“We continue to see some downside risks for EUR/USD in the near-term. In particular, we think that Fed rate hike expectations are in for a rebound after they have been pared back far too aggressively. We think that abating banking sector risks and evidence on Thursday and Friday that US inflation remains very ‘sticky’ could be the trigger of a renewed move higher in US rates and yields.” 

“Potential downside surprises from the Eurozone HICP data on Friday could force investors to reassess their stance on the ECB’s policy from here. To the extent that this leads to lower EUR/USD nominal and real rate spreads, it should add to the downside risks for the EUR.”

See – EU HICP Preview: Forecasts from seven major banks, headline inflation falls sharply, but core remains high

Can the Swiss Franc still be a safe haven when there's considerable stress in the financial system there? Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, discusses CHF outlook.

SNB intervention policy disrupts Franc's "safe haven" behavior

“I argue that the Franc's safe-haven-property does not depend on the Swiss banking system, but on the SNB's interest rate policy.”

“SNB's interest rate policy policy still makes the Franc a safe haven in the FX space. However, this status is reduced by the SNB's intervention policy.”

• AUD/USD regains positive traction on Thursday and climbs to a one-week high.
• The risk-on mood undermines the USD and benefits the risk-sensitive Aussie.
• The divergent Fed-RBA policy expectations could act as a headwind for the pair.

The AUD/USD pair attracts fresh buying near the 0.6660 area on Thursday and builds on its steady intraday ascent through the early part of the European session. The momentum lifts spot prices to a one-week high, around the 0.6820 region in the last hour, though any meaningful upside still seems elusive.

The upbeat market mood - as depicted by the ongoing rally in the global equity markets - prompts some selling around the safe-haven US Dollar (USD) and turns out to be a key factor lending support to the AUD/USD pair. Against the backdrop of easing fears of a widespread banking crisis, hopes for a strong economic recovery in China boost investors' appetite for riskier assets and benefit the China-proxy Australian Dollar. In fact, China's Premier Li Qiang, speaking at the Boao Forum, promised more stimulus to boost domestic spending and reforms that can help stimulate growth.

That said, worsening US-China relations, along with the prospect of an imminent pause in the Reserve Bank of Australia’s (RBA) rate hikes, might hold back bulls from placing aggressive bets around the AUD/USD pair. The markets have been scaling back their bets for any further policy tightening by the RBA amid signs that inflation had peaked and that economic growth was cooling. The expectations were reinforced by the latest Australian consumer inflation figures released on Wednesday, which showed that the headline CPI decelerated to an eight-month low in February.

Furthermore, the RBA recently warned that the path to a soft landing for the Australian economy remained a narrow one.  Apart from this, speculations that the Federal Reserve (Fed) will move back to its inflation-fighting interest rate hikes could revive the USD demand and further contribute to capping the upside for the AUD/USD pair. Even from a technical perspective, last week's repeated failures near the very important 200-day Simple Moving Average (SMA) warrants some caution for aggressive bullish traders and before positioning for any further near-term appreciating move.

Market participants now look to the US economic docket, featuring the release of the final Q4 GDP print and the usual Weekly Initial Jobless Claims later during the early North American session. This, along with the broader risk sentiment, will influence the USD price dynamics and provide some impetus to the AUD/USD pair. The focus, however, will remain glued to the Fed's preferred inflation gauge - the Core PCE Price Index - due on Friday.

Technical levels to watch

In an Economic Bulletin article published on Thursday; the European Central Bank (ECB) offered updates on the economic, financial and monetary developments in the Euro area.

Key highlights

“Inflation is projected to remain too high for too long.”

“The new ECB staff macroeconomic projections were finalized in early March before the recent emergence of financial market tensions.”

“ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.”

“Wage pressures have strengthened on the back of robust labor markets and employees aiming to recoup some of the purchasing power lost owing to high inflation. 

“Risks to the outlook for economic growth are tilted to the downside. Persistently elevated financial market tensions could tighten broader credit conditions more strongly than expected and dampen confidence.”

“Baseline projections for growth in 2023 have been revised up to an average of 1.0% as a result of both the decline in energy prices and the economy’s greater resilience to the challenging international environment.”

“According to ECB staff March 2023 projections, the euro area fiscal outlook is set to improve over the projection horizon. “

Market reaction

EUR/USD is holding the higher ground near 1.0870 following the release of the ECB’s Economic Bulletin. The pair is adding 0.23% on the day to trade at 1.0866, as of writing.

Further consolidation seems likely in USD/CNH around 6.8100 and 6.9200 for the time being, comment UOB Group’s Economist Lee Sue Ann and Market Strategist Quek Ser Leang.

Key Quotes

24-hour view: “We expected USD to trade in a range of 6.8700/6.8950 yesterday. USD subsequently traded between 6.8750 and 6.8975 before closing slightly higher at 6.8950 (+0.22%). The underlying tone has improved somewhat and USD is likely to edge higher today. In view of the mild upward pressure, any advance is unlikely to break 6.9110. On the downside, a break of 6.8850 would indicate that the current upward pressure has faded.”

Next 1-3 weeks: “Our latest narrative was from Monday (27 Mar, spot at 6.8700) wherein we highlighted that the recent USD weakness has stabilized and that USD is likely to trade between 6.8100 and 6.9200 for now. While we continue to hold the same view, short-term momentum has improved a tad, but at this stage, the odds for a clear break above 6.9200 are not high.”

• EUR/USD adds to the recent uptick beyond 1.0800.
• The dollar appears offered ahead of key US data releases.
• EMU Consumer Confidence, Germany Flash CPI next on tap.

The single currency extends the weekly upside and motivates EUR/USD to keep the trade above the 1.0800 mark on Thursday.

EUR/USD looks at data, dollar

EUR/USD advances uninterruptedly since Monday and continues to consolidate the breakout of the 1.0800 barrier in a context dominated by dollar weakness and further improvement in the risk complex.

In addition, further ECB speak reinforced the case for higher interest rates after Board member Elderson said inflation remains too high and deemed as “robust” the bank’s decision to hike rates at the March event. Elderson also suggested that the ECB will reduce its bond holdings in a balanced manner.

Still around the ECB, the Economic Bulletin sees inflation averaging 5.3% this year, 2.9% in 2024 and 2.1% in 2025. In addition, GDP projections have been revised up in response to lower energy prices and the resilience of the domestic economy.

Data wise in the region, the final Consumer Confidence in the euro area is due later seconded by the Economic Sentiment. In addition, advanced inflation figures in Germany will be in the limelight.

In the US, usual weekly Claims are due along with the final Q4 GDP Growth results.

What to look for around EUR

The weekly recovery in EUR/USD remains unabated and continues to target the 1.0900 neighbourhood so far on Thursday.

In the meantime, price action around the European currency should continue to closely follow dollar dynamics, as well as the potential next moves from the ECB in a context still dominated by elevated inflation, although amidst dwindling recession risks for the time being.

Key events in the euro area this week: Germany  Flash Inflation Rate, EMU Consumer Confidence, Economic Sentiment (Thursday) – Germany Retail Sales/Labor Market Report, EMU Flash Inflation Rate/Unemployment Rate, France Flash Inflation Rate, Italy Flash Inflation Rate (Friday).

Eminent issues on the back boiler: Continuation, or not, of the ECB hiking cycle. Impact of the Russia-Ukraine war on the growth prospects and inflation outlook in the region. Risks of inflation becoming entrenched.

EUR/USD levels to watch

So far, the pair is gaining 0.14% at 1.0859 and a break above 1.0929 (monthly high March 23) would target 1.1032 (2023 high February 2) en route to 1.1100 (round level). On the flip side, the next support comes at 1.0712 (low March 24) followed by 1.0644 (100-day SMA) and finally 1.0516 (monthly low March 15).

Economists at Morgan Stanley Research discuss GBP outlook. Monetary policy divergence could weigh on the British Pound.

BoE is done hiking

“We remain tactically neutral on GBP but see risks skewed to the downside.”

“We expect the BoE to be done with its hiking cycle now, but incoming data over the next few weeks will remain extremely important for the May rate decision.”

“This stands in contrast with the Fed and the ECB where we see more 25 bps hikes in the coming months. This policy divergence should continue to weigh on GBP and keep EUR/GBP trending higher.” 

Further upside in USD/JPY could surpass the 134.00 barrier in the newxt weeks, note UOB Group’s Economist Lee Sue Ann and Market Strategist Quek Ser Leang.

Key Quotes

24-hour view: “We highlighted yesterday that USD ‘downward momentum has waned with the rebound and USD is unlikely to weaken further’ and we expected USD to trade in a range between 130.70 and 131.75. Instead of trading in a range, USD soared to a high of 132.88 before closing on a strong note at 132.84 (+1.51%). The sharp and swift rise has room to extend but deeply overbought conditions suggest a sustained rise above 133.50 is unlikely. The next resistance level of note is at 134.20. On the downside, 132.00 is a solid support (there is a minor support at 132.30).”

Next 1-3 weeks: “We have held a negative USD view since early last week. In our update from yesterday (29 Mar, spot at 131.10), we highlighted that ‘downward momentum is waning rapidly and the risk of USD bottoming is increasing’. However, we did not quite expect the manner in which USD jumped to a high of 132.88 before closing higher by a whopping 1.51% (NY close of 132.84). Note the increase of 1.51% is the largest 1-day advance in almost 2 months. Despite the sharp rise, it is premature to expect a major reversal. That said, the current rebound could extend to 134.20. At this stage, a sustained rise above this level is unlikely. Overall, the current upside pressure will remain intact as long as USD stays above 131.20, the current ‘strong support’ level.”

Open interest in natural gas futures markets increased for the third straight session on Wednesday, no by more than 19K contracts according to preliminary readings from CME Group. On the other hand, volume shrank by around 27.5K contracts after two consecutive daily builds.

Natural Gas keeps targeting the sub-$2.00 region

Prices of the natural gas attempted a mild bounce on Wednesday. The tepid uptick was accompanied by increasing open interest and declining volume, which should point to the emergence of some consolidation in the very near term. In the meantime, the 2023 low in the sub-$2.00 region per MMBtu.

• Silver gains strong positive traction on Thursday and touched its highest level since early February.
• The technical setup favours bullish traders and supports prospects for a further appreciating move.
• A convincing break below the $22.00 mark is needed to negate the near-term constructive outlook.

Silver catches fresh bids on Thursday, following the previous day's two-way/directionless price moves, and rallies to a nearly two-month high during the early European session. The white metal is currently placed around the $23.60-$23.65 region, up over 1% for the day, and seems poised to prolong its recent appreciating move from levels just below the $20.00 psychological mark, or the YTD low touched earlier this March.

Against the backdrop of the recent breakout through the 61.8% Fibonacci retracement level of the pullback from over a nine-month peak, the ongoing positive move adds credence to the bullish outlook for the XAG/USD. Hence, some follow-through strength, back towards the $24.00 mark, looks like a distinct possibility. The momentum could get extended further towards the $24.65 region (multi-month peak touched in February) en route to the $25.00 psychological mark.

That said, Relative Strength Index (RSI) on the 1-hour chart is already flashing overbought conditions and remains close to 70 on 4-hour/daily charts. This makes it prudent to wait for some near-term consolidation or a modest pullback before placing fresh bullish bets. Any meaningful corrective slide, however, might now be seen as a buying opportunity near the $23.00 round-figure mark and remain limited near the 61.8% Fibo. level resistance breakpoint, around the $22.80 area.

The latter should now act as a strong base and a pivotal point, which if broken decisively might prompt some technical selling. A subsequent slide below the $22.50 region could then drag the XAG/USD towards the $22.20 intermediate support en route to the $22.00 round figure. This is closely followed by the $21.75-$21.70 zone. A convincing break below said support levels is needed to negate the positive outlook and shift the near-term bias in favour of bearish traders.

Silver daily chart

Key levels to watch

With the Yen bearing the brunt of the risk rally, the Dollar saw some delayed benefits. Economists at ING believe that the USD/JPY pair could bounce to the 135 region.

Oil-sensitive currencies may continue to enjoy decent momentum

“Improving sentiment asymmetrically hits the Yen given it is accompanied by an unwinding of dovish Fed bets: the USD/JPY might rebound to the 135.00 area, even though we favour another decline in the pair beyond the short term.”

“Oil-sensitive currencies may continue to enjoy decent momentum as we see more upside risks to oil prices. The Canadian Dollar is also benefiting from the general improvement in American (North and Latam) sentiment but lacks a domestic tightening story, so its rally may start to run out of steam sooner than other peers (like MXN and NOK).” 

“We think the small USD recovery seen yesterday could be one of many along a gradual decline path, but would favour some consolidation around current levels today.”

In the opinion of UOB Group’s Economist Lee Sue Ann and Market Strategist Quek Ser Leang, NZD/USD is still seen navigating within the 0.6160-0.6280 range in the near term.

Key Quotes

24-hour view: “Yesterday, we held the view that NZD ‘could break above 0.6280 but it is unlikely to maintain a foothold above this level’. However, NZD did not break 0.6280 as it dropped from 0.6271 to a low of 0.6215. Downward momentum has improved a tad and today, NZD is likely to edge lower but a break of 0.6190 is unlikely. On the upside, a breach of 0.6250 (minor resistance is at 0.6235) would indicate that the current mild downward pressure has eased.”

Next 1-3 weeks: “We highlighted yesterday (29 Mar, spot at 0.6250) that ‘if NZD breaks and stays above 0.6280, it would increase the risk of a break of 0.6310’. NZD rose to 0.6271 before dropping quickly from the high. The build-up of momentum fizzled out quickly. In other words, instead of breaking upwards, NZD is more likely to trade in a range for the time being, expected to be between 0.6160 and 0.6280.”

Here is what you need to know on Thursday, March 30:

Choppy action continues in financial markets in the second half of the week but investors prepare for volatility to pick up later in the day. Business and consumer sentiment data from the Eurozone, March inflation data from Germany and fourth-quarter Gross Domestic Product (GDP) reading from the US will be featured in the economic docket. Participants will also pay close attention to comments from Federal Reserve officials, including Richmond Fed President Thomas Barking and Minneapolis Fed President Neel Kashkari.

Risk flows dominated the markets in the second half of the day on Wednesday and the US Dollar's rebound following a two-day slide remained limited. Early Thursday, the US Dollar Index fluctuates in a tight channel at around 102.50 and the benchmark 10-year US Treasury bond yield stays in weekly range above 3.5%. Meanwhile, US stock index futures trade modestly higher in the early European session. In the final revision, Q4 GDP in the US is expected to match the previous estimate of 2.7%. The US Department of Labor will release its weekly Initial Jobless Claims data as well.

Earlier in the day, the data from Spain showed that the annual Harmonized Index of Consumer Prices (HICP) declined sharply to 3.1% in March from 6% in February. This reading came in much below the market expectation of 4%. In Germany, annual HICP is forecast to drop to 7.5% from 9.3%. Despite the soft inflation data from Spain, EUR/USD continues to trade in its daily channel at around 1.0850 in the European morning.

Following Wednesday's pullback, GBP/USD has regained its traction and climbed to the 1.2350 area in the European session. The UK's FTSE 100 Index opened marginally higher.

USD/JPY took advantage of the risk-positive market environment on Wednesday and registered impressive gains. The pair seems to have gone into a consolidation phase early Thursday and was last seen trading in negative territory below 132.50.

Gold price edged lower on Wednesday but didn't have a difficult time holding above $1,960. With the US yields staying indecisive on Thursday, XAU/USD continues to move up and down in its daily range slightly below $1,970.

Supported by the improving market mood, Bitcoin gained nearly 4% on Wednesday and reclaimed $28,000. BTC/USD holds its ground on Thursday and continues to edge higher toward $29,000. Ethereum registered small gains on Wednesday and was last seen moving sideways near $1,800.

The South African central bank (SARB) is likely to hike its key rate by a further 25 bps today to 7.5%. A lot already seems to have been priced in, so that the reaction of the Rand exchange rates should be moderate, economists at Commerzbank report.

SARB likely to hike further today

“With a view to rising inflation risks it cannot be excluded that a larger rate step of 50 bps will at least be discussed. However, due to the weak economy we assume that the majority on the board will vote in favour of a moderate 25 bps hike.”

“Possible ZAR gains in case of a hawkish seeming SARB are likely to be limited.”

“We do not foresee a sustainable recovery in ZAR in the current market environment and in view of the domestic challenges. ZAR investors are likely to remain cautious going forward due to possible fiscal risks too.”

• NZD/USD rebounds from the 0.6200 mark and reverses a part of the overnight losses.
• A positive risk tone undermines the safe-haven USD and benefits the risk-sensitive Kiwi.
• The upside seems limited as traders keenly await the US Core PCE Price Index on Friday.

The NZD/USD pair attracts fresh buying near the 0.6200 mark on Thursday and builds on its steady intraday ascent through the early European session. The pair is currently placed just below mid-0.6200s, up over 0.25% for the day, and for now, seems to have stalled the overnight rejection slide from a technically significant 50-day Simple Moving Average (SMA).

As investors look past softer data from New Zealand, a generally positive tone around the equity markets undermines the safe-haven US Dollar (USD) and turns out to be a key factor benefitting the risk-sensitive Kiwi. Against the backdrop of easing fears of a widespread banking crisis, hopes for a strong economic recovery in China boost investors' confidence and remain supportive of the prevalent risk-on environment. The optimism is fueled by comments from China's Premier Li Qiang, promising more stimulus to boost domestic spending and delivering reforms that can help stimulate growth.

The upside for the NZD/USD pair, however, seems limited, at least for the time being, amid reviving bets for further policy tightening by the Federal Reserve (Fed). The takeover of Silicon Valley Bank by First Citizens Bank & Trust Company calmed market nerves about the contagion risk. Furthermore, the fact that no further cracks have emerged in the banking sector over the past two weeks raises hopes that a full-blown banking crisis has been averted. This could allow the US central bank to move back to its inflation-fighting interest rate hikes, which could lend support to the Greenback.

Hence, it will be prudent to wait for strong follow-through and sustained strength above the 50-day SMA before positioning for any further appreciating move for the NZD/USD pair. Investors also seem reluctant and might prefer to wait for the release of the US Core PCE Price Index - the Fed's preferred inflation gauge on Friday - before placing aggressive directional bets. In the meantime, Thursday's US economic docket, featuring the final Q4 GDP print and Initial Weekly Jobless Claims, might influence the USD and provide some impetus to the major later during the early North American session.

From a technical perspective the pair is precariously positioned at the lower boundary line of a rising wedge pattern which has formed in the midst of NZD/USD's medium term downtrend. The pair's first attempt to breakout from the wedge on March 27, failed and the second attmept on Wednesday has equally reversed and seen prices recover. Given the longer term bearish picture, however, the pair looks vulnerable to a breakout lower. Such a breakdown would require confirmation from pushing below the March 27 lows at 0.6180 but if successful would probably fall to an initial target of 0.6160 and the 200-DMA, followed by 0.6120 – the 61.8% extension of the height of the wedge – and in a more bearish scenario, to 0.6060, the 100% extension.

Technical levels to watch