The U.S. dollar ended the last week higher against the euro and British pound and while the dollar’s recent strength appeared to be month-end rebalancing flows, traders wonder whether the dollar could extend its gains this week. Greenback bulls could hope for further bullish potential as long as there is a rise in U.S. Treasury yields but we bear in mind that rising near-term inflation expectations could outpace gains in U.S. Treasury yields while a dovish Federal Reserve could limit gains in the dollar.
On Friday we will have April’s non-farm payrolls report scheduled for release and almost one million jobs are anticipated to be added. The unemployment rate is also expected to decline to 5.7 percent from 6 percent in the previous month. The focus will also be on average hourly earnings for further insight into inflationary pressures.
It could be a volatile week for the British pound. The Bank of England is due for its monetary policy announcement on Thursday and a QE taper could be in the cards. On the same day Scotland holds parliamentary elections which could bring back expectations of another independence referendum. Sterling could come under pressure ahead of the election as a potential referendum remains a risk for the currency.
As for Thursday’s other risk event, the Bank of England is expected to upgrade its economic projections with a stronger Q2 GDP forecast and there is a chance that the BoE will announce a slight tapering of asset purchases.
Technically, chances are slightly in favor of the bears right now with the pair eyeing the 1.38-support. If the cable falls below 1.3770, we could see a test of the lower support around 1.37 and possibly even a fall towards 1.36. However, given the possibility of a BoE taper on Thursday, losses might be limited to the support zones.
The euro gave up some of its recent gains and dipped towards its crucial support at 1.20. We expect a lower support area to be at around 1.1950 from where more buyers could swoop in. A current resistance is seen at 1.2130. If the euro falls below 1.1940, bearish momentum may accelerate towards 1.1850 and 1.18.
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