Forex Today: Dollar tumbles, shows few signs of life

After a volatile week that included many top-tier events such as the US CPI, the Fed and the ECB meetings, next week will see interest rate decisions from the Bank of England and the Swiss National Bank. The UK will release inflation data, and the preliminary Global PMI will provide insight into the state of the global economy. Comments from officials at the Fed and ECB will be closely watched.

Here is what you need to know for next week: 

The beginning of the week may be relatively quiet since the US stock and bond markets are closed on Monday in observance of Juneteenth.

The People's Bank of China has already cut interest rates and may continue to do so. The Wall Street Journal has reported that China is planning major steps to revive its economy, including new infrastructure spending.

Despite the gloomy outlook and recent rate hikes, global equity markets finished the week with gains. Expectations that the tightening cycle is nearing its end, evidence of inflation slowing down, and some upbeat labor data have helped to boost market sentiment.

The US Dollar Index had its worst week in months, as risk appetite weighed on the Greenback despite the hawkish tone from Federal Reserve Chair Jerome Powell. The DXY dropped to 102.00, the weakest level in four weeks. US data showed that inflation continues to slow down. With a live FOMC meeting in July, economic data from the US have become more relevant, as well as comments from Fed officials. Fed Chair Powell will present the semiannual monetary policy report to Congress on Wednesday and Thursday. He is expected to reiterate what he said after the FOMC meeting.

EUR/USD had its best week in months, rising above 1.0900. The bullish tone has put the 1.1000 area back on the radar. The European Central Bank (ECB) raised rates by 25 basis points, as expected, and signaled another hike in July. The surprise came from upward revisions to core inflation forecasts. The key report next week will be the flash PMIs on Friday. 

USD/JPY posted its highest weekly close since October, above the 141.50 area. The Japanese Yen hit multi-year lows against many of its rivals, affected by the dovish stance from the Bank of Japan (BoJ), risk appetite, and higher government bond yields. As expected, the BoJ kept its monetary policy stance unchanged. The central bank will have the opportunity to signal changes in its policy at the July meeting with new macroeconomic projections. A key report to watch for will be the Japanese National Consumer Price Index, which is set to be released next Friday.

GBP/USD accelerated to the upside, climbing for the third consecutive week and reaching the highest levels since April 2022. On Friday, it rose above 1.2800. Despite the hawkish ECB, the EUR/GBP dropped again, falling towards 0.8500. The Pound outperformed during the week, boosted by upbeat economic data from the UK, particularly strong wage growth numbers. Next Thursday, the Bank of England will announce its monetary policy decision, with a 25 basis points rate hike expected. Prior to the decision, inflation data from the UK is due on Wednesday.

Analysts at Wells Fargo:

Next week's inflation data will be key in determining the path ahead for the Bank of England. While we forecast additional BoE tightening, another hot inflation print could result in a terminal rate that is much higher than we currently forecast. Right now, we believe BoE policymakers will reach a peak policy rate of 5.00%; however, should core inflation tick higher in May, we would likely revise that forecast higher to reflect a need for tighter monetary policy. In the event inflation comes in softer than expected, softer price pressures could take some pressure off of the U.K. economy, although a shift to interest rate cuts is likely a ways off.

USD/CHF retreated from the 20-week Simple Moving Average (SMA) at 0.9110, ending the week below 0.9000. Meanwhile, EUR/CHF gained 80 pips during the week, rebounding from monthly lows and posting the highest close in two months. The Swiss National Bank (SNB) will hold its monetary policy meeting next Thursday. A rate hike is priced in, and a 50 basis point increase is not ruled out, following hawkish comments from Chairman Thomas Jordan, and considering the SNB meets one time per quarter. 

NZD/USD continued its recovery and climbed above 0.6200, gaining 1.60% during the week. New Zealand's Q1 GDP numbers came in below expectations. The Reserve Bank of New Zealand (RBNZ) has ended its tightening cycle, while its neighbor, the Reserve Bank of Australia (RBA), unexpectedly hiked rates last week and could do so again. The divergence has boosted the AUD/NZD, which surpassed 1.1000, reaching the highest level since February.

AUD/USD broke above the medium-term resistance at 0.6800 and approached 0.6900, posting the highest close since January. The pair was boosted by a weak US Dollar and strong Australian labor data, which triggered expectations of more rate hikes from the RBA in July and August. Next Tuesday, the RBA will release the minutes from its latest meeting.

USD/CAD broke below the 1.3300 area and tumbled, falling below 1.3200, the lowest level since August. The Bank of Canada's meeting minutes and retail sales data are both due next week.

USD/TRY stabilized around 23.60, rising almost 20% in the month following President Erdogan's victory. Next Thursday, the Central Bank of the Republic of Turkey (CBRT) is expected to raise the repo rate sharply, following the sharp depreciation of the Turkish Lira. If the CBRT delivers, it will signal a pivot from its previous policy and could help the TRY.

The South African Rand was the best-performing currency of the week, as the USD/ZAR retreated to 18.00. The Mexican Peso rose for the fifth consecutive week against the Dollar, with USD/MXN moving closer to 17.00, the lowest level since 2016. Next Wednesday, the Brazilian Central Bank and Bank Indonesia will have their monetary policy meeting.

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