The best performer last Friday was the British pound which headed for a test of 1.39 against the U.S. dollar. Much of the GBP/USD’s recent upward move can be attributed to a weakening U.S. dollar on the back of declining Federal Reserve rate hike expectations and collapsing U.S. Treasury yields.
As for the greenback, this week will be an eventful one with the June U.S. inflation report (Tuesday) and Fed Chair Jerome Powell’s semi-annual Congressional testimony (Thursday) being potential catalysts for bigger market movements. There is a risk that market participants may shrug off an even hot inflation report and a corresponding rise in yields since the Fed continues to insists that inflation is largely transitory. This could limit dollar gains even if Tuesday’s inflation report surprises to the upside.
The latest FOMC minutes, on the other side, showed the committee had a lot of questions about how soon labor shortages and supply bottlenecks contributing to inflation would resolve. Chair Jerome Powell may shed more light on the outlook on Thursday when he appears before the Senate Banking Committee to deliver the Semi-Annual Monetary Policy Report to Congress. The hearing is scheduled to start at 9:30 a.m. in Washington.
The cable’s rebound was limited to a high of 1.3910 and we will wait for a break above 1.3920 in order to expect a test of 1.3940-50 and maybe even a run for the crucial resistance at 1.40. For bearish momentum to gain traction, we would need to see a renewed break below 1.3760 on the downside or a test of 1.40 on the upside.
EUR/USD: The euro rebounded towards 1.19 after the 1.1780-level proved to hold. We now pay attention to an upside break of 1.1910 which could spur bullish momentum towards 1.1970. On the downside, the 1.18-level could serve as a current support but if it breaks, we see a next target at around 1.1760.
Looking ahead to the next week, the European Central Bank decision on July 22, which was previously expected to be relatively uneventful amid the summer markets, will now have “some interesting variations and changes”. “It’s going to be an important meeting” and investors should prepare for new guidance in 10 days, ECB President Christine Lagarde told Bloomberg Television in Venice on Sunday. So, there might be some volatility in store for euro traders next week.
The index refrained from a fall below 15300 and thus extended the lower bound of its previous sideways trading range to 15300. A break below the ascending trendline at 15350 could however result in a break of the sideways range with a next lower target seen at 15100. Bulls will keep an eye on an upside break of 15800.
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