Forex market outlook: sleepless night! Powell testimony superimposed on two central bank interest rate decisions
On Tuesday, boosted by the U.S. CPI to a new high, the U.S. dollar rose sharply against all major currencies. Data show that the US CPI rose 0.9% in June, higher than the 0.6% in May, and also higher than the expected value of 0.5%. Calculated at an annual rate, the annual rate of CPI rose by 5.4% in June, the largest increase in 12 years, and the core price rose by 4.5%, the fastest growth rate since 1991. Although everyone expected inflation to rise, no one expected the situation to become so serious. Prices are not only rising sharply, but the range of increases has become wider, which means that prices may remain high for a longer period of time. Consider that a large part of the problem is the supply chain, which will be more difficult to solve.
Although the CPI report last night cast doubt on the Fed’s view that “high inflation is temporary”, the opposite performance of the stock and bond markets shows that investors have not yet made a decision. Fed funds rate futures show that the Fed’s probability of raising interest rates in December 2022 is 90%, but the 10-year US Treasury bond yield closed down instead of rising on the same day. The stock market fell, but the decline was modest. Investors are clearly waiting for the guidance of Fed Chairman Powell, who will give a semi-annual testimony on monetary policy and the economy early on Thursday morning. If he suppresses the CPI data, the dollar will give up gains; but if he hints that a reduction in quantitative easing is coming, the dollar may rise quickly.
The Bank of New Zealand and the Bank of Canada will announce interest rate resolutions
Not only the Federal Reserve, the Bank of New Zealand and the Bank of Canada will announce interest rate decisions before Powell's testimony. Although they may be hawkish, due to the rise in the U.S. dollar, both currencies were sold off. The Bank of New Zealand and the Bank of Canada are currently the two toughest central banks. The Bank of New Zealand is expected to keep interest rates unchanged this month, but the market generally expects it to be the first major central bank to raise interest rates. Many local banks predict that they will raise interest rates in November, and the Bank of New Zealand may issue an interest rate hike signal as early as this month. The weak performance of the New Zealand dollar shows that investors are not ready to accept very hawkish forward-looking guidance, partly due to the Australian new crown pneumonia epidemic blockade and the slowdown in China's economic growth. However, the misalignment between the price trend of the New Zealand dollar and the guidance of the Bank of New Zealand may cause the New Zealand dollar to fluctuate significantly. If the NZD/USD0.6920 support is broken, the next support level will be 0.6800. In terms of resistance, the first resistance level is 0.7025 and the second resistance level is 0.7150.
The Bank of Canada announced on Wednesday that the probability of reducing asset purchases is about 80%. In April of this year, the Federal Reserve kicked off the global reduction in debt purchases. The market generally expects that the Federal Reserve will continue to promote the normalization of monetary policy amid high inflation and accelerating economic growth. Nearly 68% of Canadians received at least one dose of the COVID-19 vaccine, which allowed the country to relax restrictions, which led to strong job growth and manufacturing activity. In the latest quarterly business outlook survey, the confidence index rose to a record high because executives expected a surge in demand.
Like the New Zealand dollar, USD/CAD has not risen significantly, although the central bank may be more hawkish. Although the market has partially digested this point, the US dollar/Canadian dollar may still fluctuate sharply on Wednesday, and the US dollar/Canadian dollar may break through 1.26 upwards or test 1.24 before the end of this week.
The euro and the pound fell against the dollar on Tuesday, but today the market pays more attention to the pound. Because the UK will release inflation data, like the US, price pressures in the UK in June are expected to increase. However, given the recent lack of interest rate decisions, EUR/USD and GBP/USD are likely to look for clues in the market's demand for the U.S. dollar.
