DXY: all eyes on core inflation

FOREX Fundamental analysis for EUR/USD on June 8, 2023The decisions of the Reserve Bank of Australia and the Bank of Canada made a mess of the financial markets. Lately the index of fear has been contracting like a spring and the actions of the Central Bank have caused an upsurge in volatility of currency pairs, affecting the dynamics of the EUR/USD.Initially markets were surprised by the RBA's decision to raise the rate to 11-year highs, but the Bank of Canada's move to 22-year extremes shocked investors. Prior to that the central bank had held a pause for 4 months and didn't even hint at a continuation of the monetary restriction cycle. In June, Tiff Maclem's team decided to continue tightening monetary policy, citing the risks of accelerating inflation. This came as a surprise, as many investors were confident that the BoC had ended the cycle of rate hikes.Analysts speculate that if two central banks resumed monetary tightening in June, why shouldn't the Fed join them? The United States has higher inflation than Australia and Canada, and the labor market allows for a tight monetary policy stance. The likelihood of a Fed rate hike at the June meeting rose from 25% to 35%, boosting Treasury yields.Pic. Dynamics of bond yields.Moreover, in the US bond rates may continue to rise for 4 months because of the treasury bond issue. However, this is a double-edged sword for the dollar. On the one hand, the strengthening of the yield and the demand for dollar as a defensive asset will strengthen the greenback, on the other hand, the emission will cut bank liquidity and might provoke a new round of financial system crisis.In such a situation the chance of a EUR/USD decline is higher than an increase. The consolidation range could be in the range of 1.060-1.076.

AUD/USD trade idea on June 7, 2023AUD/USD is consolidating near 0.6650 on Wednesday. After the Reserve Bank of Australia's decision on Tuesday to raise the rate by 25 basis points, the pair sharply strengthened and approached the strong resistance level of 0.6700.The RBA's decision came as a surprise to many. The regulator raised the cost of borrowing to 4.10%, the highest since April 2012. In the accompanying statement, the central bank noted a high inflation rate of around 7% and reiterated its intention to return the consumer price index to 2-3%. The RBA understands the risks in the economy and monitors deterioration in the labor market, but will continue to tighten monetary policy because, according to Philip Law, high inflation hurts the economy more than rising interest rates. The regulator is also likely to conduct an act of monetary restriction in July.At the same time, the US dollar is losing ground on expectations of a pause in the Fed's rate hike cycle. The regulator is 82% likely to leave the cost of borrowing unchanged at the June meeting. In such a scenario, the yields on treasuries will fall, which will lead to a decline of the USD.Fundamental analysis, key forex indicators and chart patterns suggest a further strengthening of the AUD/USD above 0.6700. We suggest placing a pending orderBuy-limit 0.6650take-profit 0.6800stop-loss 0.6600

Everyone was very afraid that the US would default, but it seems to have been cleared: Congress approved the increase of the national debt limit. But that doesn't mean that all is well ahead. As soon as the US starts printing new Treasuries, their stock market might crash. After all, the big problems of the US economy are not going anywhere.The budget deficit will remain largeThere are no options: The Treasury needs to borrow urgently to fill the hole. For several months, the government has been literally scraping at the coffers to avoid a default. Now, over the next three months, the Finance Ministry will have to borrow $730 bln, according to Morgan Stanley. The deficit is not going to disappear: the Democrats did not cut so much spending, and now the elections are approaching: no time to save.As a result, not only will the national debt grow, but (even worse) the cost of its service. In a few more years, the US budget will spend more on bond coupons than on military spending.All the factors are in place to keep those interest rates even higher:High inflation is keeping the key rate down.The default issue has not disappeared, but is "hanging in the air," and the profitability will have to tempt investors to take the risk.Investors will flee into treasuriesWhy risky assets when there is a safe haven of treasuries? As long as rates are high, US government bonds have attractive yields. So a new issue could be bought back quickly - and liquidity would plummet from the market.Investors are really worried: bets on the decline of the major ETFs in the US have reached a record high, notes Goldman Sachs.

FOREX Fundamental analysis for EUR/USD on June 6, 2023No sooner had the fears concerning the national debt ceiling subsided, than a new shock awaits the financial system of the United States. In the near future the Treasury will have to redeem more than $1 trillion worth of debt bonds. This will severely reduce liquidity at banks and increase short-term borrowing rates, which will create problems for businesses and, therefore, increase pressure on the economy.The Treasury's balance sheet is shrinking, and should be $550 billion by the end of June.While in past years the issuance of Treasuries has caused stock indices to fall and the dollar to strengthen, in 2023 the S&P 500 is supported by corporate reporting and the dollar remains under pressure from expectations of a "dovish" reversal by the Fed.In addition, the bond redemptions will trigger a new wave of deposit outflows, which will bring the theme of the US banking crisis back to the markets.An unpleasant surprise for dollar buyers was the release of ISM non-manufacturing sector business activity index. In May the index fell from 51.9 to 50.3 points against the forecast of 52.2.At the same time investors overestimated the US labor market statistics, published last Friday, and put the growth of unemployment rate instead of the created jobs at the forefront, as exactly this indicator will be the main factor to influence the FOMC interest rate decision. At this point, the likelihood of a monetary tightening in July has gone down.The Fed is likely to take a prolonged pause and may even begin easing monetary policy by the end of the year. We continue to stick to the medium-term consolidation scenario. Forex trading strategies suggest buying EUR/USD as it descends to 1.067. We plan to paint long positions above 1.072.

AUD/USD analysis on June 5, 2023On Monday AUD/USD does not show any clear trend and remains around the key level of 0.6600.Australia's service sector business activity index fell from 53.7 to 52.1p, which is the smallest value among the indexes of the world's leading economies. Gross profits of national companies in the first quarter fell markedly from 12.7% to 0.5%.The Reserve Bank of Australia will hold a monetary policy meeting tomorrow. Most experts do not expect the regulator to make any changes. The rate is likely to remain at 3.85%. The previous pause in monetary policy tightening caused inflation to rise from 7.4% to 7.8%.The US dollar index remains at 104.00. The US service sector business activity index will be released today. It is projected to rise from 53.6 to 55.1 p.On the Daily chart, the Rectangle pattern, through the lower boundary of which the price came out last week, is noticeable. Alligator indicator and awesome oscillator retain their sell signals.After the pair fixes below 0.6560, we will open a short position with Take Profit at 0.6460. Stop loss is set at 0.6600.In case the asset breaks above 0.6600, we start buying with a target of 0.6780. Stop-loss is set at 0.6600.

Since the beginning of the week GBP/USD has not decided about the direction of the movement and traded near the key level of 1.2400. However the pair's dynamics after the US labor market report released last Friday shows a more bearish trend.Non-farm Payrolls showed 339 thousand new jobs against the forecast of 190 thousand. However, over the month the unemployment rate rose from 3.4% to 3.7% and the average wage growth slowed down from 4.4% to 4.3%.Reuters conducted a poll of British residents, according to which the majority of citizens expect house prices to fall by 3.0% in 2023. Previously, the figure was 2.4%.Today, the UK and the US will release business activity indexes whose values will influence the monetary policy of the central banks.Technical Analysis for GBP/USDBollinger Bands indicator on the chart of the day is in the horizontal plane. MACD indicator is almost at zero level and does not give out any signals. Stochastic Oscillator turned down and came out of the overbought area.After the pair has consolidated below 1.2390, consider an entry into short positions with Take Profit at 1.2307. Stop loss is set at 1.2450.If the GBP/USD strengthens above 1.2450 we start forming long positions with the target at 1.2550. We place a protective stop at 1.2390.

FOREX Fundamental analysis for EURUSD on June 5, 2023The US labor market report once again confirmed the steady recovery of the American economy. Contrary to all expectations the employment growth amounted to 339K and the average wage growth slowed down to 4.3%. Even a cursory comparison with the Eurozone explains the sharp decline of EURUSD on Friday.In such a situation the Fed does not necessarily need to raise the rate in June, but the FOMC members are still divided on the issue. Of course, Friday's NFP will be a boon for the hawks who think a continuation of monetary tightening is necessary. Indeed, the U.S. economy added 1.5 million jobs in 2023 with an average monthly job gain of 314,000. This is well above the pre-pandemic 187,000 jobs. So the tightening of financial conditions by the regulator is not affecting the economic recovery as much as analysts had anticipated.Non-farm Payrolls was good news for both the dollar and the stock indices.At the same time, the doves will be nodding to an increase in unemployment from 3.4% to 3.7% and a slowdown in average wage growth.Derivatives are betting on a pause. The likelihood of a monetary restriction in June has fallen, but the odds of a July rate hike have risen from 54% to 68%.The Fed raised the cost of borrowing 10 times for a total of 500 points and brought the rate to 5.25%. It no longer makes sense for the regulator to move brashly forward now. Most likely, further movement will be varied, so investors do not rule out easing of the monetary policy in December-January.Certainly, the Fed will base its decisions on the inflation figure. It is unlikely that consumer prices will collapse as sharply as they have risen, but it is already clear that the Central Bank is up to the task.The labor market report showed that the EUR/USD downward movement remains in force. However, in the medium term we still expect the pair to consolidate. Our forex trading strategies consider both short-term selling towards 1.0655-1.0670 and 1.0670 and medium-term buying.

FOREX Fundamental Analysis for EUR/USD on June 2, 2023Some investors think that interest in the dollar as a defensive asset is getting lower, when in fact the national debt story is long past and has no impact on the greenback. The preconditions for the EUR/USD rally were created before the deal between the Republicans and the Democrats, which made it possible to open long positions at an attractive price.Jerome Powell's new deputy Philip Jefferson spoke out about a pause in the rate hike cycle, which sent shockwaves through the financial markets. Investors even ignored the labor market report from ADP with 278 thousand new jobs.After the Fed Vice President's speech, forex trading changed positioning. It looks like only a very, very strong Non-farm Payrolls will force the Fed into an act of monetary restraint in June. The idea of a "dovish" reversal by the regulator is returning to the market.While the Fed takes a pause, the ECB decides to continue raising rates despite the CPI slowing in May from 7.0% to 6.1%. Christine Lagarde thinks it is too early to talk about a complete victory over inflation. The European regulator's policy supports buyers of the single currency.It is hard to say yet whether EUR/USD has gone into consolidation or whether the trend will change direction. We are waiting for the report on U.S. labor market, though chances for the dollar to strengthen are minimal. If the data is as forecasted, a little worse or a little better, we'll build up long positions.