The Federal Reserve adopted a more dovish approach than anticipated at its most recent meeting, with Fed Chair Jerome Powell dismissing the possibility of further interest rate hikes, which brought a considerable relief to the markets.
The Fed meeting proved to be a major letdown for the dollar, as the greenback saw widespread declines against other major currencies, marking its worst week in two months. This was due to Powell’s unexpectedly mild stance and the subsequently cooler-than-expected April jobs report.
Job creation in April was disappointing, with nonfarm payrolls totaling only 175,000, a significant drop from March's 315,000, while the unemployment rate unexpectedly rose to 3.9%, highlighting a loss of momentum in the labor market.
The dollar will now face a relatively empty week in terms of key data, with the main focus being the University of Michigan's consumer sentiment index on Friday.
In other news, the Bank of England will make an interest rate decision this Thursday. Markets expect the UK central bank to maintain rates with a 7-2 vote favoring a 5.25% hold. Softer inflation forecasts might be interpreted by the market as a precursor to a rate cut before summer's end, which would likely negatively impact the pound.
For the eurozone, the minutes from the European Central Bank’s (ECB) April meeting are due to be released on Friday, potentially shedding more light on the likelihood of a rate cut in June.
The Reserve Bank of Australia maintained its cash rate at 4.35% for the fourth consecutive meeting, citing that inflation remains elevated and is decreasing slower than anticipated. The board decided to continue with a data-dependent strategy, indicating its continued vigilance regarding the persistent high risks of inflation. Following the RBA's decision, the Australian dollar weakened.
Meanwhile, interest rate decisions are also anticipated this week in Sweden (Wednesday), Brazil (Wednesday), Mexico (Thursday), and Poland (Thursday).
Year-to-Date Performance Of Major Currencies: USD Leads, JPY Lags
US Dollar update: The dollar is seeing the foundations that supported its bullish trend, namely expectations of a hawkish Federal Reserve and the continued strength of the economy buoyed by labor market tightness, begin to waver. Consequently, expectations for rate cuts have reemerged, with market speculators now predicting two Federal Reserve rate reductions by the end of the year. Accordingly, 2-year Treasury yields, which are highly sensitive to interest rate expectations, have dropped from 5.05% to 4.80% in just a few sessions. The bearish pressure is likely to persist in the coming days, at least until next week’s consumer price index (CPI) inflation report, which will determine whether this movement is merely a pullback or a more serious trend reversal.
Euro update: The euro has seen three consecutive weeks of modest gains, bringing the EUR/USD pair into the 1.0750-1.0800 range, where the key 50 and 200-day moving averages lie. Traders are seeking more clarity this week from the minutes of the latest ECB meeting. As a reminder, at that meeting, ECB President Christine Lagarde mentioned that some board members had already favored cutting rates in April. If the minutes further support the possibility of a rate cut in June, the euro is likely to experience some bearish pressure, or at least see its gains capped.
Pound update: The British pound remains stable in the 1.25-1.26 range as traders keenly anticipate the BoE policy meeting this Thursday. The expectations of the UK central bank implementing its first rate cut in August have lessened, with financial markets now pricing in the first cut for September. BoE Governor Andrew Bailey recently noted that British inflation appears on track to meet the 2% target. Meanwhile, retail sales in April were notably weak, falling by 4.4% year-over-year compared to a growth of 1.6% previously, as inclement weather affected consumer spending, particularly impacting outdoor services and sales of clothing and footwear.
Yen update: The dollar-yen exchange rate experienced a sudden halt in its rising trend due to interventions by the Bank of Japan, which sold foreign reserves last week to support the weakening yen. BOJ data indicated that monetary authorities spent approximately $60 billion to bolster the yen. A dovish stance from the recent Federal Reserve meeting, coupled with cooler-than-expected U.S. labor market statistics, further supported the yen by narrowing the yield spread differentials between U.S. Treasuries and Japanese bonds. As a result, USD/JPY has closed below 155 for four consecutive sessions, suggesting that the bullish momentum may have dissipated.
Swiss franc update: Inflation in Switzerland continues to sit below the 2% target, and the Swiss National Bank (SNB) is unlikely to allow any appreciation of the Swiss franc. To achieve its inflation objectives, the SNB is expected to employ a combination of rate cuts and interventions in the foreign exchange market to sell CHF. The SNB's foreign exchange reserves rose to CHF 720.373 billion in April 2024, up from CHF 715.625 billion the previous month, marking the highest level in nearly a year. This increase represents the fifth consecutive rise since the reserves dipped to a near seven-year low of CHF 642.363 billion in November 2023. This trend signals a strategic shift by the SNB towards devaluing the franc.
Chart of The Week: SNB’s FX Reserves Rise, Franc Declines
Long AUD/CHF
AUD/CHF analysis: Divergent monetary policies between the RBA and the SNB are likely to drive the AUD/CHF pair higher. As previously mentioned, the SNB is actively implementing measures to weaken the franc. Conversely, the RBA's stance remains data dependent. The 2-year yield spread between Australian and Swiss bonds stands at approximately 300 basis points, or 3 percentage points, bolstering the Australian dollar and creating attractive opportunities for carry trades.
From a technical analysis perspective, AUD/CHF appears poised for a rebound to its 2023 highs at 0.6565. The next levels of resistance are found at 0.6093, which corresponds to the 50% Fibonacci retracement from the 2024 lows, and at 0.6371, which aligns with the 78.6% Fibonacci retracement level.
Long XAU/USD
Gold analysis: Gold has been experiencing a sideways market over the past two weeks, which currently seems to be a pause in the remarkable bullish trend that began in late February. The fundamentals remain firmly bullish, supported by an increase in gold purchases by global central banks and expectations of interest rate cuts throughout the year in Europe and the United States. The weakening of the dollar and the lowering of Treasury yields could provide fresh impetus for the resumption of the bullish trend. Additionally, the Relative Strength Index (RSI) appears to have found support at the 50 mark, suggesting that the pullback from the April highs of $2,430 is showing signs of exhaustion.
Late-comer bulls may find current levels appealing, setting a psychological target of $2,500 per ounce, which is about 8% above current levels, and placing a stop loss at $2,230/oz, below the 200-day moving average.
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