Another busy week ahead, is it time to buy USD?

Currencies gear up for another big week of central bank meetings.

Having negotiated the hawkish set of Fed and ECB meetings last week, FX markets will this week brace for around 10 central bank policy decisions across the developed and emerging market space. Further rate hikes in the likes of the UK, Norway and Switzerland can hold the strong dollar in check, while a rate cut in Hungary should not hurt the forint too much.

USD: Rest of World hawkish push back keeps dollar in check.

When considering the current state of US rates and the highly inverted US yield curve, one could assume that all the necessary factors are in place for the dollar to maintain its strength. This is further supported by the USD/JPY exchange rate nearing 142. However, recent remarks from the European Central Bank, which took a more hawkish stance, and the anticipated series of 25 basis point rate hikes in the UK, Norway, and Switzerland this week, serve as a reminder that the Federal Reserve's decisions are not made in isolation.

Regarding the USD/JPY, the US Treasury released its semi-annual FX report late last week. This report was established to monitor whether any trading partner was manipulating their currency to gain a trade advantage. The report originated from a weak dollar environment and aimed to discourage competitors, primarily in Asia, from allowing their currencies to appreciate due to strong current account surpluses. It is worth noting that the strong dollar last year prevented trading partners from selling their local currencies, with many even buying them to mitigate the impact of imported energy prices.

However, the recent news that Japan has been removed from the US Treasury's Monitoring List does not significantly impact the likelihood of Japanese authorities intervening to sell USD/JPY. The decision to intervene will be made in Tokyo and could potentially result in a repeat of dollar-selling intervention if the USD/JPY exchange rate approaches 145.

While much attention will be directed towards overseas rate meetings this week, the US calendar also includes important congressional testimony from Fed Chair Jerome Powell on Wednesday and Thursday. It seems unlikely that Powell will deviate from the Fed's hawkish narrative at this stage, reinforcing the market's expectation (currently priced at a 71% probability) of a 25-basis point Fed hike on July 26.

Considering the situation, it is probable that the DXY, the US dollar index, will continue to trade around 102.00, but with a downward bias.

EUR: China misfire sees EUR/USD rally slow.

EUR/USD struggled to extend its gains on the previous Friday, which could be attributed to both the Juneteenth public holiday in the US and China's lack of announcement regarding new stimulus measures over the weekend. Investors expressed some disappointment as the State Council meeting in China on Friday did not yield any fresh stimulus, resulting in a rise in USD/CNH back to 7.15/16 today. Technical analysts will closely watch whether the USD/CNH rally reaches a halt around 7.15/16, as failure to do so could strengthen the dollar's demand and put pressure on EUR/USD.

In the upcoming week, attention in the Eurozone will be directed towards the flash Eurozone PMIs released on Friday, in search of any signs of economic improvement. Furthermore, there will be several speeches by ECB representative. Market participants eagerly anticipate her insights into the likelihood of rate hikes in both July and September.

To sustain the bullish momentum from last week, EUR/USD should find support at short-term levels around 1.0910/30. My preference continues to lean towards a near-term upward movement towards 1.1000/30 and possibly higher, as investors position themselves for a decline in the US dollar in the second half of the year. Additionally, the expected 25 basis point rate hikes in the UK, Norway, and Switzerland should contribute to maintaining a modestly positive stance for the European currency complex.

GBP: Steady into Wednesday's May CPI release

The British pound is maintaining its recent gains, and according to UK economist James Smith's analysis in the Bank of England preview, he believes that the BoE does not currently possess enough tools to counter the anticipated nearly five 25 basis point hikes expected before the end of the year. This suggests that sterling is likely to remain supported in the near term.

From a technical standpoint, GBP/USD appears to have the potential to advance towards the 1.30 level. However, the macroeconomic catalyst for further gains seems uncertain at the moment. Presently, there is significant emphasis in the UK media on the "mortgage timebomb" narrative, but sterling is unlikely to experience a correction until we witness softer price data, which might take a few months to materialize.

Meanwhile, EUR/GBP continues to be offered in the market. The hawkish stance of the European Central Bank provides some resistance to the pricing of the Bank of England, and I maintain my forecast for a higher EUR/GBP exchange rate later this year, particularly once the intense inflation concerns in the UK subside. There is a possibility that EUR/GBP could find support around the 0.8500/8550 level.

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