Last week the ECB raised rates by 50 bps and the markets are still evaluating the change, but the raise is not likely to impact the EUR/USD's trajectory and prevent it from further depreciating which is the expected scenario.
The main events of the week ahead are: For the USD, the consumer confidence data, the FOMC Meeting and the Core PCE Price index q/q; for the AUD, the CPI q/q; and for the JPY, the Japan (Tokyo) Inflation which is not expected to have a major impact but could give an insight into how nationwide prices are evolving. The BOJ is not showing signs of joining the hawkish camp, at least for now.
The political crisis in Italy, the battle for the next Prime Minister in the UK that's expected to be over in early September and the headlines about the war in Ukraine will continue to add uncertainty in the market over the coming weeks. The unprecedented heat waves hitting Europe are expected to impact the energy market in particular.
The W.H.O declared monkeypox a global health emergency and it remains to be seen if the market will react in any way to this development. And finally, the month end rebalancing is also something we should keep an eye on.
As we're heading into the last month of summer, market conditions could be tricky due to low liquidity. Traders will be taking a closer look at this week's FOMC minutes. After Waller recently backed a 75 bps rate hike the USD entered into a correction, but the market is now pricing in a 100 bps hike. A lot can happen until Wednesday, of course.
Nomura expects a 100 bps hike, even though the consensus among analysts is now for 75 bps, as it adjusted its view after the last CPI print data. Nomura's main argument is that given the inflation increase it feels like the Fed could be behind the curve and this will help them catch up.
This week's meeting will set the tone for the USD for the next month as there won't be another FOMC meeting in August; just the Jackson Hole Symposium.
Nomura analysts believe that after a 100 bps hike in July, the Fed will likely slow down to a pace of 50 bps in September’s meeting, then three consecutive 25 bps hikes in November, December and February.
For the AUD, all eyes will be on the CPI data which will set the tone for the next RBA meeting on August 2nd. It is hard to believe the data will be low enough to keep the RBA for hiking rates by 50 bps as expected, but if inflation exceeds expectations considerably, a 75 bps hike could come into play.
USD/CAD expectations
In the short term, the USD/CAD looks good for selling opportunities targeting 1.2785. On the H1 chart the pair closed the week near the 1.2945 level of resistance which, if rejected, will move the next target to the 1.2830 support. On the upside the next resistance is at 1.3040.
The CAD had a positive week, but it's possible that USD selling will see some restraint before this week's FOMC meeting. According to analysts from Scotiabank the CAD's correlation with crude oil and commodities strengthened in recent weeks. This is a sign that the commodity market prices are stabilizing following the recent slide, but they won't resist the global growth slowdown over the longer term. The CAD might have the opportunity to gain some ground on the USD over the short term.
It's worth noting though that the outcome of the Fed's meeting could influence the pair direction.
The Dollar Index expectations
While the next FOMC meeting will set the tone for the USD, there are concerns about the impact the continued USD strengthening has on vulnerable countries with a considerable portion of their sovereign debt in USD. Wells Fargo warns about potential repayment issues, sharp economic slowdown in the developing world and a rise in the probability of default.
On the H1 chart the DXY is flat and it’s possible to enter a period of consolidation until Wednesday. From a technical perspective there are a few levels to watch for: The DXY is near the 106.05 support. If broken, the next level of support is 105.10. On the upside the next level of resistance is at 107.35 and 108.70.
I believe the USD correction is not over yet and could continue over next month. In the long run the prospects for the USD are bullish.
This article was written by Gina Constantin.
