Market sentiment is rapidly changing in the direction of reducing tensions, as the Fed persistently demonstrates dovish intentions. On Thursday, two FOMC members, the head of the Federal Reserve Bank of New York, Williams, and the Vice-chairman of the Fed, Clarida, made similar statements in which they emphasized the need for quick action before the main macroeconomic indicators actually turn to the negative direction.
These statements looked so coordinated that the markets began to see the conviction that the Fed could cut the rate in June not by 0.25% but immediately by 0.5%, which immediately led to a sharp weakening of the dollar, updating the gold quotations to a 6-year maximum and falling bond yields. At CME, rate of futures almost show the same expectations for both variants of the results of the FOMC meeting.
The market reaction was so pronounced that the New York Federal Reserve Bank even published a special explanation on Friday morning that Williams did not try to send a specific signal to the markets.
Nevertheless, the touchstone was thrown and now, the possibility of reducing the rate in July by 0.5% does not look fantastic. These changes in sentiment serve as a powerful bearish factor for the dollar, which was caught between two alternatives - either a reduction in the rate of 0.25% and a subsequent strengthening of the USD or a decrease of 0.50% and a decline in the dollar accordingly.
According to Bloomberg, the ECB began research to find out whether the long-term inflation target set at 2% is in line with current market realities. The ECB has already hinted at a meeting in June that the target indicator should become more flexible. Any deviations from the target level can be more significant without changing the policy of the Central Bank.
In the absence of significant macroeconomic news by the end of the week, the market's attention focused on approving Christine Lagarde as head of the ECB, as well as topics on budget discussions in Italy and the upcoming ECB meeting on July 25. The consolidated view of the market is that the ECB will keep its deposit rates unchanged but will expand its preliminary recommendations. At the same time, they intend to set the stage for a rate cut in September.
Earlier, we assumed that the EUR/USD pair would trade in a range in anticipation of the ECB meeting but sharp changes in expectations at the Fed rate forced the bulls to intensify. The euro is out of range and now, testing the resistance of 1.1285 looks more likely with an attempt to consolidate higher.
UK retail sales rose by 1.0% in June with year-on-year growth of 3.8%. Both figures have significantly exceeded expectations. Growth in retail sales has somewhat reduced concerns about inflation but it was not the reason for the sharp rise in the pound on Thursday.
The reason is political. The House of Commons on Thursday adopted an amendment that made it difficult to commit Brexit in the absence of an agreement between London and Brussels. As of now, the Prime Minister will not be able to suspend the work of the parliament in order to prevent the deputies from blocking the exit from the EU without a deal, and the favorite race of Boris Johnson loses the possibility of completing Brexit without parliamentary approval. A total of 17 conservatives voted for the bill, indicating the ongoing split within the Conservative Party in particular and also reduces the likelihood of Brexit without a deal.
It was the reason for the sharp rise in pounds on Thursday. Reducing the likelihood of a hard Brexit supports the pound and scenarios for its further reduction become irrelevant. On Friday, the GBP/USD pair has all chances to go even higher with the resistance zone at 1.2570 / 80, then to 1.2620 / 25.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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