The dollar continued to lose ground yesterday—especially against the British pound—and there were sufficient reasons for it.
Despite a brief impulse in the dollar after the release of data on a decline in U.S. initial jobless claims, the overall trend remains negative for the American currency. This small positivity was insufficient to compensate for the prevailing market expectations of further monetary easing by the Federal Reserve. The market continues to assess the likelihood of additional Fed rate cuts as high, which puts substantial pressure on the dollar.
The publication of the UK budget was favorable for buyers of the British pound. Given the measures taken to close budget gaps, traders are likely to continue playing out a scenario of high interest rates from the Bank of England, despite deteriorating economic prospects. The labor market remains tight, and wages are rising, fueling inflation. The government's actions aimed at increasing tax revenues and reducing expenditures, while appearing as responsible fiscal policy, may only exacerbate inflationary pressures in the short term.
Today is rich in economic reports of interest to traders. The first block will be data from Germany. The GfK consumer climate index is expected to be published, providing insights into consumer sentiment in the Eurozone's largest economy. This indicator is important because consumer spending is a key driver of economic growth. Following that, attention should be paid to data on private-sector credit and changes in the M3 money supply. These data will help assess the state of the credit market and liquidity in the Eurozone. An increase in lending indicates improved economic activity, while changes in the money supply can signal inflationary trends.
The culmination of today will be the publication of the European Central Bank's report following its monetary policy meeting. Recall that at the last meeting, the central bank kept interest rates unchanged, which was, however, expected.
Regarding the pound, today's macroeconomic data appear relatively calm. The only significant event is a speech by BoE Monetary Policy Committee member Megan Green. Given the lack of other important economic data, her comments might influence the dynamics of the British pound. In the context of the recent budget publication, which prompted purchases of the pound due to concerns about inflationary pressure, Green's speech takes on particular significance. Traders will closely monitor her rhetoric to gauge how the BoE plans to respond to potential inflationary pressures. If Green expresses concern about rising prices and hints at a more aggressive approach, the pound could gain additional support.
If the data aligns with economists' expectations, it may be best to act based on the Mean Reversion strategy. If the data is significantly higher or lower than economists' expectations, the Momentum strategy would be more appropriate.
Momentum Strategy (Breakout):
For the EUR/USD Pair
- Long positions on a breakout at 1.1615 could lead to growth towards 1.1635 and 1.1655.
- Shorts on a breakout at 1.1590 could lead to a decline towards 1.1571 and 1.1549.
For the GBP/USD Pair
- Longs on a breakout at 1.3277 could lead to a rise towards 1.3310 and 1.3339.
- Shorts on a breakout at 1.3247 could lead to a drop towards 1.3219 and 1.3185.
For the USD/JPY Pair
- Longs on a breakout at 156.23 could lead to a rise towards 156.67 and 157.06.
- Shorts on a breakout at 156.00 could lead to dollar sell-offs towards 155.80 and 155.54.
Mean Reversion Strategy (Retracement):
For the EUR/USD Pair
- Shorts will be sought after a failed breakout above 1.1616 on a return below this level.
- Longs will be sought after a failed breakout above 1.1594 on a return to this level.
For the GBP/USD Pair
- Shorts will be sought after a failed breakout above 1.3275 on a return below this level.
- Longs will be sought after a failed breakout above 1.3241 on a return to this level.
For the AUD/USD Pair
- Shorts will be sought after a failed breakout above 0.6549 on a return below this level.
- Longs will be sought after a failed breakout above 0.6522 on a return to this level.
For the USD/CAD Pair
- Shorts will be sought after a failed breakout above 1.4047 on a return below this level.
- Longs will be sought after a failed breakout above 1.4015 on a return to this level.
