Forex markets enter a week loaded with key economic events, including crucial data and remarks from major central bankers, which could generate significant volatility.
What To Watch This Week
On Tuesday, the focus will be on the April producer inflation update for the United States. The headline producer price index (PPI) is expected to edge slightly up from 2.1% to 2.2% year-on-year, reflecting pressures from global commodities. Later, Federal Reserve Chair Jerome Powell will speak at an event organized by the Netherlands' Foreign Bankers' Association, which could provide further market-moving insights.
Wednesday will be pivotal with the release of the consumer price index (CPI) report. Following three consecutive hotter-than-expected CPI readings, economists now anticipate a marginal decline in the overall annual inflation rate from 3.5% to 3.4% for April. Core inflation, excluding energy and food, is expected to decrease from 3.8% to 3.6%, marking the lowest rate in three years. Additionally, the April retail sales report will shed light on the health of consumer demand in the US.
In the UK, attention will be on the labor market data for March, which is expected to show signs of cooling. The unemployment rate is projected to rise from 4.2% to 4.3%, annual wage growth is forecast to slow from 5.6% to 5.3%, and employment is expected to decrease by 215,000.
For the Eurozone, the German ZEW economic sentiment index, due on Tuesday, is expected to show improvement in May, up from 42.9 to 46.3 points. On Wednesday, the second estimate of Q1 GDP for the Euro area will provide deeper insights into growth trends across major economies within the region.
Switzerland will release producer inflation data on Tuesday and industrial production figures on Friday.
Australia will release its jobs report on Thursday, with the unemployment rate anticipated to inch up from 3.8% to 3.9%.
Japan will publish its GDP and industrial production data on Thursday, which will be closely watched for indications of economic health and potential impacts on the yen.
Year-to-Date Performance Of Major Currencies: USD Leads, JPY Lags 
US Dollar outlook: This week’s inflation reports and Fed Chair Powell’s remarks are set to significantly impact the US dollar. If inflation readings exceed expectations, the greenback is likely to rally against major currencies as traders may scale back their expectations for Fed rate cuts. As a result, the U.S. Dollar Index (DXY) could rally to the 106 zone, recovering its losses from the previous Fed meeting. Conversely, if inflation readings are in line with or lower than expected, downward pressure on the DXY is likely to persist, potentially pushing it to test the 105 level or lower.
Powell is expected to reiterate his cautious stance from previous statements, emphasizing the Fed's hesitancy to lower interest rates in the near term. Nonetheless, during the last Fed meeting, he noted the potential for inflation to trend lower by year-end, which could pave the way for future rate cuts. Traders are currently pricing in 50 basis points of Fed rate cuts by year end.
Euro outlook: Since mid-April, the euro has experienced a modest uptrend, with the EUR/USD pair rebounding from 1.06 to 1.08. This movement has been driven by better-than-expected EU data and a more dovish stance from the Fed.
This week, the euro-dollar exchange rate is likely to be influenced primarily by US inflation data. If US inflation exceeds expectations, the EUR/USD could drop below 1.07. Conversely, softer inflation readings may support a bullish move towards 1.09. Additionally, the European Commission’s spring forecasts, which are set to be unveiled this week, could also impact the exchange rate. Traders are currently anticipating 75 basis points of ECB rate cuts by the end of the year.
Pound outlook: The British pound has remained stable in the 1.25-1.26 range, achieving three consecutive sessions in the green as of Monday, buoyed by positive market reactions to the latest Bank of England meeting. The UK central bank left policy rates unchanged, as widely expected, but signaled that rate cuts might occur sooner than anticipated due to revised, lower inflation forecasts. Additionally, the growth outlook has been revised slightly higher, with the recession risk diminishing, which supported the pound. This week, in addition to US inflation data, the GBP/USD rate will be influenced by the UK jobs report for April. Stronger-than-expected wage growth or better employment figures could help the pound break the 1.26 resistance, provided the US inflation rate meets or falls below expectations.
Yen outlook: The dollar-yen exchange rate has rebounded to the 156 level after dipping to 151.80 earlier this month, following interventions by the Bank of Japan (BoJ). The BoJ sold foreign reserves, spending approximately $60 billion to support the weakening yen.
However, for a more significant trend reversal in the USD/JPY pair, US inflation data would need to show a substantial downside miss, coupled with new remarks from BoJ authorities indicating a shift towards more conventional measures, such as rate hikes, to strengthen the yen.
Trading Ideas For The Week
Long USD/CHF
- Entry: 0.9079
- Take profit: 0.9431
- Stop loss: 0.8961
- Risk-reward: 3
A long position on USD/CHF is supported by both fundamental and technical factors.
On the fundamental side, the interest-rate differential between the United States and Switzerland remains wide as the 2-year bond spread hovers around 385 basis points. Inflation in Switzerland continues to sit below the 2% target, making it unlikely that the Swiss National Bank (SNB) will allow significant appreciation of the Swiss franc. To achieve its inflation objectives, the SNB is implementing a strategic shift using a combination of rate cuts and interventions in the foreign exchange market to sell CHF. The SNB’s foreign exchange reserves increased 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.
From a technical perspective, USD/CHF has been in an uptrend since the beginning of the year, forming an ascending channel characterized by higher highs and higher lows. The pair recently tested the support of this channel amid broader dollar weakness, rather than franc strength. A bullish target is seen in the range of 0.94-0.9430, aligning with the 2023 highs. A stop loss below 0.9020-0.90 (the 50-day moving average) could protect against potential downside risk from lower-than-expected US inflation updates or dovish remarks from Fed Chair Powell.
Long AUD/CHF
- Entry: 0.5987
- Take profit: 0.6210
- Stop loss: 0.5923
- Risk-reward: 2.9
Divergent monetary policies between the Reserve Bank of Australia (RBA) and the Swiss National Bank (SNB) are likely to drive the AUD/CHF pair higher. The SNB is actively weakening the franc by bolstering its foreign exchange reserves. Meanwhile, the RBA has kept policy rates unchanged but has maintained a data-dependent approach, leaving the door open for both rate cuts and hikes.
Another positive catalyst for the Australian dollar could come from the Chinese recovery, with recent data indicating a rebound in the inflation rate and improving business conditions in both the services and manufacturing sectors. The 2-year yield spread between Australian and Swiss bonds stands at approximately 300 basis points, or 3 percentage points, supporting the Australian dollar and creating attractive opportunities for carry trades in the AUD/CHF pair.
From a technical analysis picture, AUD/CHF is currently testing the resistance level from July 2023. A break above this level could ignite rallies towards the next resistance levels at 0.6093, corresponding to the 50% Fibonacci retracement from the 2024 lows, and at 0.6208, the 61.8% Fibonacci retracement level. The latter could offer an attractive take-profit zone. A stop loss could be set at 0.5930, near the 50-day moving average.
Long EUR/SEK
- Entry: 11.70
- Take profit: 12.00
- Stop loss: 11.60
- Risk-reward ratio: 2.6
Last week, the Riksbank cut interest rates by 0.25 percentage points to 3.75%, indicating that further declines in the cost of money are likely in the future. In contrast, while the ECB has signaled a potential rate cut in June, it has also emphasized that it will not pre-commit to additional moves.
From a technical perspective, EUR/SEK has formed an ascending channel since mid-April. Additionally, the pair has exhibited a bullish signal with the formation of a ‘golden cross,’ where the 50-day moving average crossed above the 200-day moving average. This may suggest a bullish extension towards 12.00 (2023 highs) could be a viable target for the summer, with a recommended stop loss set around 11.60.
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