Daily Forex Overview

Previous session overview

On Tuesday, the dollar declined against the euro and yen as expectations started to fade for an imminent hike in U.S. interest rates.

Prices for short-term interest rate contracts jumped Tuesday, significantly reducing expectations that the Fed will initiate a series of rate increases this summer or autumn to combat inflation.

A softer German ZEW survey in European trading moved EUR down. From highs near 1.5550 EUR slipped to lows near 1.5460. But, EUR reclaimed lost ground following softer than expected US housing starts and industrial production. The ECB's Mersch also gave EUR some lift when said that "heightened alertness is the same as vigilance", cementing the case for a July ECB hike.

Sterling fell against the dollar after British inflation rose to its highest level since 1997 but expectations a rate hike were unlikely. Annualized, CPI is running at 3.3% above the BoE's target of 2.0%, but a series of recent sluggish economic reports make the likelihood of a rate rise doubtful.

USDJPY traded heavy early hitting a low of 107.61 before retracing to a high of 108.39. The pair finished the session at 108.00, mostly ignoring the heightened risk aversion signal from equity markets overnight.

The Canadian dollar rose against the greenback after worse than expected US data and a report that foreigner purchased C$9.75b worth of securities in April.

The Australian dollar was largely unchanged late in Asia Wednesday, having traded range bound in a directionless session.

Market expectation

Small stops triggered as euro-dollar breaks to fresh highs for the day above USD1.5530, with more hawkish rhetoric from ECB's Stark hitting the wires. Traders suggest the USD1.5550/60 area will be more difficult to break. EURUSD looks like it has completed a flat correction, but stronger evidence of this will appear once the last intra-day top at 1.5587 has been overcome. However, while below this level the rate looks vulnerable, and support between 1.5286-63 remains at risk.

Some players are starting to believe that the ECB might not continue raising interest rates. But they aren't likely to buy the dollar instead of the euro because the economy in the U.S. is worse than that in the euro zone.

The GBP is likely to fall no matter what the Bank of England does with interest rates. Although inflation pressures may be calling for a rise, the UK economy is probably too weak to cope, so a hike in rates would probably be seen as a reason to sell not buy the GBP.

While market waits for the FOMC to temper the upside expectations for US rates, the USD is likely to remain under pressure. And traders suggest going short USD/CAD from 1.0182, with an initial target of 0.9800.

Investors are looking forward to Thursday's release of CPI and the BoC's speech for further direction of the CAD.

Most important events of the day