What to watch this week in the FX market
The first week of June will be marked by several major macroeconomic events, including two rate cuts in major advanced economies and key updates on the U.S. job market.
On Thursday, the European Central Bank (ECB) is set to cut its key interest rates by 25 basis points, as widely anticipated by its policymakers and fully priced in by the market. This will be the first reduction in interest rates since 2016. Additionally, the ECB will update its staff macroeconomic projections, with market attention focused on Christine Lagarde’s remarks for any hints of further moves beyond June. Currently, traders are expecting 60 basis points of ECB rate cuts by the end of the year.
In the U.S., the spotlight will be on May’s jobs report, scheduled for release on Friday. Non-farm payrolls (NFPs) are expected to increase from 170,000 to 195,000, while both the unemployment rate and average hourly earnings annual growth are predicted to remain steady at 3.9%. The release of the ISM Services PMI on Wednesday will also be closely monitored, especially after the services sector entered contraction territory in April, and following bleak manufacturing surveys that may indicate a cyclical slowdown in the U.S. economy.
Meanwhile, the Bank of Canada is anticipated to deliver a 25-basis-point rate cut to 4.75% on Wednesday, marking the first cut since March 2020. This decision comes as core inflation has been on a steady decline, wage growth has moderated, and economic activity remains weak.
In Switzerland, traders have digested the May annual inflation rate, which came in at 1.4% as expected, and are now awaiting updates on the Swiss National Bank’s foreign exchange reserves for May, due on Friday. These updates will help gauge the recent pace of intervention aimed at weakening the Swiss franc.
In emerging markets, the National Bank of Poland is expected to hold rates steady at 5.75% on Wednesday. Additionally, traders will be closely monitoring developments in Mexico after the peso experienced sharp volatility following Claudia Sheinbaum’s victory in the country’s Presidential Elections. The Mexican currency weakened by as much as 4% against the U.S. dollar on Monday, suffering its worst one-day drop in four years, as investors fear that a “supermajority” by left-wing parties could lead to market-unfriendly constitutional reforms in Mexico.
Chart of Week: Mexican Peso Plummeted After Sheinbaum’s Election Victory
Dollar outlook: The U.S. dollar index (DXY) has experienced three consecutive days of declines heading into Tuesday, falling to the 104 level, its lowest in nearly two months. Softer economic data, particularly in the manufacturing sector, have led to sharp declines in bond yields. As energy prices also weakened, inflation expectations fell, which weakened the dollar.
Both the Services PMI and the jobs report will be key indicators to gauge the health of the U.S. economy. If US economic updates disappoint again this week, it could prompt traders to potentially discount more easing by the Federal Reserve, raising the implied rate cut from the current 42 basis points. This would exert downward pressure on the greenback.
Conversely, stronger-than-expected employment growth, coupled with an uptick in wage growth, could ease concerns of a slowdown and support a rebound of the dollar. This is especially relevant as other major central banks, particularly the ECB, are beginning their rate-cut cycles.
Euro outlook: The ECB is set to drop interest rates this week, but the key factors influencing the euro response might be forward guidance and Lagarde's hints at future reduction. The ECB has been careful in stressing that any move beyond June will be data-dependent, without committing to a further decrease in July. If Lagarde explicitly rules out a July cut and reminds markets that May's inflation data came in higher than expected, she would be perceived as hawkish, possibly strengthening the euro.
On the other hand, if the ECB signals the need to sustain demand for consumption and investment after several quarters of stagnation or very slow growth, and reiterates that inflation is expected to converge to target next year, it will be perceived as dovish, potentially causing market participants to discount more upcoming rate cuts, putting downward pressure on the euro. However, the overall effect on the EUR/USD exchange rate will also be influenced by crucial US data releases.
Canadian dollar outlook: The Bank of Canada's rate decision on Wednesday will have a significant influence on the Loonie. Traders expect the BoC to drop rates by 25 basis points, although a delay until July is not without dangers.
If the BoC cuts, the USD/CAD rate may rise as the rate differential between the two areas widens. On the other side, a delay might rekindle CAD bulls, driving the USD/CAD lower.
In other currency crosses, the CAD will be influenced by the evolution of oil prices, as crude fell for five consecutive days coming into Tuesday, with the West Texas Intermediate falling below $72 a barrel, the lowest since early February 2024.
Year-To-Date Performance of Major Currencies: GBP Leads, JPY Lags
Trade ideas for the week
Long USD/CAD
- Entry: 1.3667
- Take Profit: 1.39
- Stop loss: 1.3574
- Risk-reward ratio: 2.4
USD/CAD Analysis: The Loonie appears to have yet to discount the fact the likely BoC rate cut this week. This event has the potential to reverse the USD/CAD negative trend that has been in place since mid-April. The combination of BoC rate cut and stronger-than-expected US Services PMI and NFPs may result in a significant rise in the pair, as the 2-year yield difference between the US and Canada widens further.
The next level of resistance is 1.3720 (upper line of the declining channel), followed by 1.3845 (April 2024 highs) and 1.39 (November 2023 high). A stop might be put at 1.3572 (the 200-day moving average support).
Short EUR/NZD
- Entry: 1.7615
- Take profit: 1.7335
- Stop loss: 1.7730
- Risk-reward ratio: 2.1
EUR/NZD analysis: EUR/NZD has been in a downtrend since late April, with six weeks of falls in the last seven. The sluggish momentum, as shown by a downturn in the RSI, may be intensified by the ECB's rate cut on Thursday. Additionally, the pair is about to form a death cross, as the 50-day moving average is about to cross below the 200-day average.
The 2-year bond yield differential between Germany and New Zealand is now negative by roughly 1.9 percentage points, indicating that bears may take advantage of the lower EUR funding rate to invest in higher NZD rates. A profit target of 1.7375 (slightly below December 2023 lows) might be established, with a stop at last week's high of 1.7730 to protect against ECB hawkish remarks.
Short GBP/JPY
- Entry: 198.65
- Take profit: 193.40
- Stop loss: 200.80
- Risk-reward ratio: 2.4
GBP/JPY analysis: In a week highlighted by global economic concerns and two projected rate cuts by the ECB and the BoC, the Japanese yen is expected to maintain some resilience amid decreasing rate differentials with other major currencies. In this backdrop, traders may be looking for the start of a trend reversal in GBP/JPY, supported by bets on the BoE being the next central bank to lower interest rates, and as the UK elections approach in less than a month, with the Labour Party ahead in surveys.
On a technical perspective, the GBP/JPY fell 0.6% in European early Tuesday trade, setting up the worst day in a month since the Bank of Japan intervened in the foreign exchange market.
A Fibonacci retracement analysis of the May 2024 high-to-low range shows that the GBP/JPY is presently testing the 23.6% level. The next significant support level is 196-196.06 (50% retracement), and a break below that level might trigger more negative pressure into 194.77 (50-day moving average) first, then 193.40 (78.6% Fibonacci). A stop might be placed at 200.80, which is above May's high.
We hope this brief helps you understand today’s market movements. If you have any questions or need further clarification, feel free to reach out. Subscribe to FlowBroker’s daily insights and updates. Happy trading!
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