In a note to clients, Credit Agricole outlines its expectations for the upcoming European Central Bank (ECB) meeting in June. The bank notes that the market has been repricing the risk of higher policy rates in the Eurozone ahead of the meeting, though the activity has been relatively muted compared to other central banks. As a result, the short-term EUR-USD rate spreads have decreased, adding further pressure on the EUR/USD pair.

Credit Agricole suggests that a 25 basis point rate hike next week, along with indications from the ECB that it expects persisting inflation in the Eurozone and does not believe financial conditions have tightened enough to threaten growth, could spur further front-loading of rate hikes and support the Euro. However, the bank expects the Euro to consolidate mainly against currencies with dovish central banks or banks that have signaled the peak of their tightening cycle, such as the Japanese Yen and the New Zealand Dollar.

The bank highlights that the recent weakening of the Eurozone growth outlook, along with renewed concerns about China's economic future, could make Euro bulls selective about which Euro-crosses to buy.

• AUD/USD hit 0.6694 overnight, fall aided by downbeat China May PPI/CPI

• Pair pierced the daily cloud top, slide stalled just short of the 200-DMA

• Buyers emerged, 0.6725 traded, NY opened near 0.6710, traded down -0.05%

• Bounce aided by AUD/JPY nearing 93.90, iron-ore DCIOc2 rally extending

• Equity ESv1 losses, higher US rates SRAU3 temper AUD/USD bulls for now

• Techs lean bullish; daily RSI rising, pair above daily cloud, 200-DMA

• Daily doji candle & thinning daily cloud may be concerns for longs though

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• Significant break for higher ground but move to 1.2566 already stalling

• Speed and magnitude of Thurs rally does argue for at least consolidation

• Daily momentum readings remain positive but RSI blunted

• A thick and rising daily Ichimoku cloud provides key support at 1.2492

• Cloud starts to fall from Jun. 14: there is an early July 1.2450-60 twist

• Bulls need a positive Friday close to give back to back weekly gains

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History shows that the euro usually climbs against the yen in June and this trend will likely continue in 2023, especially as the European Central Bank and Bank of Japan continue to chart different courses.

The ECB will hike its key interest rates by 25 basis points on June 15 and again in July, before pausing for the rest of the year, as inflation remains sticky, according to a clear majority of economists polled by Reuters.
Meanwhile the BOJ is expected to maintain ultra-loose monetary policy next week and its forecast for a moderate economic recovery.

A study of EUR/JPY's seasonal performance for each June since 2000 shows it has posted a positive return in 15 of the last 23 years, highlighting an underlying structural bullish bias.
Fourteen-week momentum remains positive, further reinforcing the current bid technical outlook.

Seasonality should not be considered in isolation, but when combined with other factors it can be a useful tool.

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• EUR/USD has gravitated towards the centre of this year's range

• The 2023 range is the smallest on record (1.0482-1.1096 EBS)

• One-month vol has sunk from over 14 in Oct 2022 to 6 this year

• Although interest rate differentials have narrowed they still favour USD

• One-year forward is 190 pips from 270 pips in Oct 2022

• Traders who went short $ in Oct 2022 are now short over $22 billion

• EUR/USD closed Dec 30 2022 at 1.0715, last traded 1.0765

• At current levels those long since end-2022 have lost due int/rates

• At the end of 2022 traders were short of $19.4 billion

• EUR/USD's 81 pips gain on Thursday, biggest daily rise since March, bullish

• However the daily cloud should limit the upside, keep the bias on downside

• Thick daily cloud currently spans the wide 1.0806-1.0980 region

• 14-day momentum remains negative, reinforcing the underlying bearish market

• We are looking to get short at 1.0785 for a bearish resumption

• EUR/USD Trader TGM2334. Previous update nL1N37Z0GB

• Cable holds above 1.2543 (June 2 high) after Thursday's US data-spurred jump

• US weekly jobless claims 261k, highest since Oct 2021, vs 235k forecast

• GBP/USD was sub-1.25 before the data release (1.2500 was Wednesday's high)

• 1.2564 was fractionally fresh four-week high in Asia (1.2545 = ensuing low)

• Fed rate decision next week (June 14); no change is consensus forecast

• BoE is expected to deliver 13th consecutive rate hike, to 4.75%, on June 22

Adds Chart

• 1-week USD/JPY options captured Fed from Thursday and now the BoJ

• 1-week implied volatility up 2.0 to 10.0 after capturing U.S. CPI and Fed

• Its jumped another 2.0 to peak 12.6 after capturing BoJ from today

• Implied volatility measures actual volatility expectations

• Significant gains warn against complacency over next weeks CB meetings

• FX options wrap - Can key data and central banks rekindle FX?

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• EUR/USD opened +0.79% at 1.0782 after USD broadly fell

• Rise in US jobless claims sent US yields lower and the USD followed

• EUR/USD was left alone in Asia and only managed a 1.0775/86 range

• Resistance is @ 1.0810 where the 100-day MA & 38.2 of 1.1096/1.0635 converge

• A break above 1.0815 would suggest a bottom is in place at 1.0635

• Support is at the 21-day MA at 1.0764 and 10-day MA at 1.0726

• Bias is for higher after close above the 21-day MA

• It may not extend too far ahead of next week's FOMC

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The surprise 25 basis point rate hike by the Bank of Canada (BoC) has put downward pressure on the USD/CAD pair, which is now aiming to test the lows of November 2022 at 1.32/1.33, according to ING. If the pair breaks below this level, 1.30 will be the next key resistance level to watch.

ING states that there are no compelling reasons to contest market expectations for another 25 basis point hike by the BoC in July. Although this expectation is already fully priced in and may have limited direct implications for the Canadian Dollar (CAD) in terms of further hawkish repricing, ING remains somewhat skeptical regarding another rate hike in September.

Nonetheless, the resumption of the BoC's tightening cycle is keeping the risk-adjusted carry for the Loonie (CAD) attractive. ING's forecast before the BoC rate hike had placed 1.30 as an end-of-Q3 target for USD/CAD, but the bank now believes there is a heightened possibility that the pair could reach 1.30 earlier this summer.

Towards the end of the year, potential adjustments in U.S. growth expectations and possible rate cuts by the Federal Reserve in late 2023 could negatively impact the CAD. As a result, the currency might underperform compared to other pro-cyclical currencies. However, due to the recent tightening by the BoC, ING anticipates that USD/CAD might trade closer to 1.25 than 1.30 by the year-end.

• AUD/USD is shifting back towards 0.6700 as USD better bid in Asia

• USD/JPY moving higher on talk of strong importer demand

• USD/CNH moving higher after China May CPI softer than expectednL1N38103VnB8N37700R

• Soft China inflation highlights weak domestic demand in China

• AUD/USD support is at the 200-day MA at 0.6691

• Key support is at 0.6610 where the 10 & 21-day MAs converge

• AUD/USD sellers tipped at 0.6720 with resistance at the 100-day MA at 0.6741

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• EUR/USD opens +0.79% after USD fell across the board on lower US yields nL1N3802DYnL1N38029B

• EUR/USD closed above the 21-day MA (1.0764) to signal end of down-trend

• Resistance is @ 1.0810 where the 100-day MA & 38.2 of 1.1096/1.0635 converge

• EUR/USD support is at the 21-day MA at 1.0764 and the 10-day MA at 1.0726

• EUR//USD will likely range traded with a slightly bullish bias ahead of FOMC

• A clear break above 1.0810 would confirm a bottom is in place

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• AUD/USD opens +0.95% after USD uniformly fell across the board

• USD selling started before surge in US jobless claims and accelerated after nL1N3802DY

• USD following the lead from bond market as US yields eased on Thursday nL1N38029B

• AUD/USD close above 200-day MA at 0.6691 gives the pair a bullish bias

• Resistance is at the 100-day MA @ 0.6741 with sellers tipped ahead of 0.6720

• A break above the 100-day MA targets the May 10 trend high at 0.6818

• Support is at 0.6610/15 where the 10 & 21-day MAs converge

• Moves in the CNY likely to dictate AUD/USD direction in Asia

• China PPI and CPI out today and soft numbers will highlight weak demand

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The Mitsubishi UFJ Financial Group (MUFG) has expressed a cautious outlook on the Canadian Dollar (CAD) ahead of the release of Canada’s jobs report for May. While the economic data has been stronger than what the Bank of Canada (BoC) anticipated, MUFG is not convinced that this trend will continue.

The jobs report data will be crucial in understanding whether or not the Bank of Canada will go for another rate hike in its next meeting on July 12th. However, MUFG warns that there could be risks associated with aggressive tightening, especially considering that Canadian households carry a higher debt burden compared to other countries. This could potentially have an immediate impact on economic data.

Following the recent rate hike by the BoC, the movement in the 2-year swap spread suggests that USD/CAD could trade below 1.3000. Assuming that risk appetite remains resilient, MUFG believes that further strength in the Canadian Dollar, pushing it toward the 1.3000 level, is possible in the short term.

Nevertheless, the financial institution also points out that if the BoC oversteps with monetary tightening and economic data weakens, coupled with a decline in risk appetite, these factors could limit the strength of the Canadian Dollar. MUFG thus urges a cautious approach, as these developments could unfold rapidly

• USD/JPY was unable to hold gains above 140 this week and falls back

• Nears the 21-DMA, last week's lows and 23.6% of Mar-May rise @138.63/44/27

• May's o/b 2023's peak by this year's rising channel top looks toppy

• It could well be the final C-wave of an ABC rebound from January's key low

• That 127.215 low on EBS is by 50% of the 2020-22 uptrend at 127.27

• A sub-138.27 close eyes 30- & 200-DMAs & kijun at 137.67/32/22 next

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The dollar fell alongside Treasury yields on Thursday after initial jobless claims vaulted up to the highest level since October 2021, spooking traders sitting on long positions ahead of next week's Fed meeting.

Though some policymakers have signaled a possible interruption to their string of 10 successive hikes, surprise rate increases from the RBA and BoC this week raised bets on the Fed following suit.

Fed policy pricing didn't shift much after the report, so a June skip is still seen likely followed by a final 25bp hike in July, and then cuts more probable from December onward.

The jump in initial claims -- the biggest month-on-month rise in nearly two years despite continuing claims falling -- struck a nerve following the May ISM services employment index fall below the breakeven 50, and ISM manufacturing index in contraction for a seventh month.

It also follows a stunning May payrolls rise that was marred by a 0.3% jump in the jobless rate and 310k drop in the household survey's employment measure.

There's a concern that post-banking crisis and debt ceiling pricing out of roughly 100bp of H2 Fed rate cuts went too far, with signs of slowing global growth manifest.

Also, after nearly a year of Treasury yield curve inversion via 500bp of hikes, the Fed's much closer to the end of its dollar-boosting tightening cycle than the ECB and BoE, whose rates are well below local inflation.

EUR/USD gained 0.75% after the downtrend from April-May peaks stalled the last two weeks.
Prices are now near the daily cloud base and 100-day moving average resistance at 1.0806/10.

Sterling climbed 0.9%, aided by the BoE being priced to hike rates roughly another full percent to nearly in line with the Fed, amid febrile wage-led inflation.

USD/JPY dove 0.85% toward its 21-DMA, June's low and 23.6% of the March-May rise at 138.62/44/27.
If Fed rates are cresting, May's 2023's highs may mark the overbought and spec-driven ABC correction's end.

Tuesday's US CPI is the focus before Fed, ECB and BoJ meetings.

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• Initial jobless claims rise to highest since Oct 2021 slams dollar

• Tsy yields back off, with 21-DMA, June low & 23.6% eyed at 138.62/44/27

• Fed already telegraphing rate hike "skip" but peak may follow fairly soon

• Market favors 1 more 25bp hike in July and rate cut risk from Dec onward

• USD/JPY could be one soft jobs report away from reversing 2023's rebound

• Fed's 2023 dot-plot mean and pre-GFC rate peak have already been reached

• 2-10-yr Tsy yld spreads been inverted, and deeply, for nearly a year

• Break of kijun at 137.21 would confirm USD/JPY's 2023 ABC rebound reversal

• Tues's CPI is key into Fed, with new dot plots, SEPS also eyed as guides

• BoJ next Fri seen keeping YCC, so Fed and Tsy yields remain main drivers

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Morgan Stanley highlights that investing in 2023 has been notably challenging due to unforeseen events such as the sudden rebound in US data in Q1, the sluggish recovery in China, and financial sector volatility. This has led to elevated investor confusion, particularly in the foreign exchange (FX) market.

Surprisingly, the Swiss Franc (CHF) and the British Pound (GBP) have emerged as the best-performing currencies year-to-date. CHF outperformed despite unexpected banking sector volatility, while GBP succeeded in spite of widespread skepticism about the UK's capacity to manage higher rates and import prices. On the other hand, the Norwegian Krone (NOK) has massively underperformed in the G10 despite a year-to-date rally in equities and widening rate differentials between Germany and Norway.

Morgan Stanley predicts that the remainder of 2023 will continue to be challenging for investors. Central banks’ attempts to curb demand as a measure to fight inflation is expected to keep economic growth disappointingly low for the foreseeable future.

Furthermore, the investment bank emphasizes that while their base case is for most economies to narrowly avoid a recession, risks are skewed to the downside. This is especially so due to asymmetric central bank responses, where positive economic developments could prompt hawkish reactions to curb inflation, while negative developments may not elicit symmetrical dovish responses due to inflation concerns.

In light of this, Morgan Stanley suggests investors focus on “carry and defense” strategies. Carry trading is likely to be attractive in a low-growth environment, as it could play a significant role in determining total returns. The term 'defense' refers to cautious investment strategies, given that risks are predominantly skewed towards negative economic outcomes and a potential “hard landing”.

In conclusion, the US Dollar (USD) trend is expected to be largely influenced by investors’ demand for carry and defense. This approach is believed to be sensible in navigating the ongoing challenging investment landscape.

• Sterling firm into NY close +0.92% at 1.2553, Thurs range 1.2557-1.2438

• Pair hits 1-month high after claims data hints, prior hikes slowing US econ

• Sterling soars after US claims data affirms Fed June rate skip nL1N3801HS

• UK-US rate spreads narrow, UK rates to overtake U.S. rates in Q4 2023 IRPR

• GBP$ res at 1.2557 Thurs high, 1.2639 May 11 high, 1.2679 May 10's 2023 high

• Above 1.2679 bulls target 200- DMA at 1.2873,early Apr 2022 highs by 1.3160

• Supt 1.2480 30-DMA, 1.2438 Thurs low, 1.2443 the 100-DMA

Societe Generale (SocGen) recently highlighted Japan's extraordinary nominal GDP growth in Q1, which stood at an annualized rate of 8.3%, in stark contrast to the average annualized growth of 0.3% over the last 25 years. The bank suggests that, given this context and the yen's current position, the Bank of Japan (BoJ) might consider adjusting its yield curve control policy in the near future. SocGen also pointed out that there's more room for USD/JPY to fall than to rise.

Moreover, the major story in the financial markets has been the global bond sell-off, triggered by the Bank of Canada's rate hike. The rate hikes by the Reserve Bank of Australia and the Bank of Canada have turned the market's attention towards the likelihood of a subsequent move in rates. As a result, there's an increasing probability of another rate hike by the Federal Reserve this summer.

In contrast, even though the market is still factoring in two 25 basis points hikes by the European Central Bank (ECB), it now predicts the rate differential between the Fed and ECB to widen by autumn. SocGen notes that this presents a challenge for the euro, mainly due to growing concerns regarding Europe's economic outlook. The ECB is expected to either continue tightening its policy long after the Fed concludes its tightening cycle or delay easing after the Fed begins cutting rates

EUR/USD struck a 4-session high Thursday and neared the 21-day moving average on the back of broad based dollar weakness and the persistent trend of rising U.S. jobless claims could gives longs a confidence boost.

U.S. weekly jobless claims increased more than expected with a big jump to 261k from the prior upwardly revised 233k.
Weekly claims USJOB=ECI have been trending upward, albeit at a snail's pace, since March 2022.

The latest claims data and recent unemployment rate jump up to 3.7% reinforce views the jobs market may be growing fragile, which could lead the Fed to either skip a rate hike or even indicate the tightening cycle will be paused.

U.S.
short-term rates markets reacted by increasing the probability of a Fed rate cut at the end of 2023 FFZ3.

The dollar's yield advantage over the euro eroded further after claims data as U.S.-German 2-year yield spreads US2DE2=RR, which EUR/USD is correlated with, traded their tightest in 2-weeks.

EUR/USD longs now need a downside miss to U.S. CPI due June 13 if they expect the rally to extend and resistance in the 1.0800/30 zone to break.

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Danske Bank predicts that the upcoming European Central Bank (ECB) meeting may not significantly impact the markets, as the anticipated 25 basis points rate hike and the end of Asset Purchase Program (APP) reinvestments from July 1st have already been well-communicated. Furthermore, hawkish statements by ECB President Christine Lagarde based on new staff projections are likely to be largely ignored by markets, according to Danske.

Danske Bank highlights that the market’s pricing is more in line with the ECB's stance on policy hikes than in the past year, and it expects the ECB to increase rates to 4% by September. However, there might be a slight risk of only reaching 3.75% in July.

According to Danske, the 25 basis points rate hike might not have a substantial impact on EUR/USD. Still, there could be short-term upside risks depending on the rhetoric in the subsequent press conference and market's pricing of sequential growth outlook.

Danske Bank identifies three main drivers of EUR/USD over the past month: the relative outperformance of the US economy, weaker-than-expected data from China spilling over to the euro area, and the US debt ceiling situation. The US economy's resilience has contributed to widening interest rate differentials between the US and the euro area, which has recently been a headwind for EUR/USD.

Looking ahead, Danske Bank maintains its bearish stance on EUR/USD, suggesting that the tightening of USD liquidity and the fundamental factors favoring the US economy will continue to pressure EUR/USD. The bank expects EUR/USD to drop below 1.06 in the second half of the year based on relative terms of trade, real rates, and relative unit labor costs.

ANZ Bank expresses caution regarding the recent strength in AUD/USD, attributing its reservations to the ongoing weakness in China's growth data. However, ANZ acknowledges that much of the negativity may already be factored into the price, leading the bank to anticipate some modest strength for the Australian dollar (AUD) in the month ahead.

Regarding the New Zealand dollar (NZD) against the US dollar (USD), ANZ predicts some consolidation in NZD/USD following a disappointing month. The bank believes that the effects of the May Reserve Bank of New Zealand's (RBNZ) decisions will continue to weigh on the currency pair for a while, consequently diminishing its expectations of NZD's performance against other currencies.

ANZ's outlook appears to take into account the economic conditions in China, which have a significant impact on the Australian and New Zealand economies, and recent central bank decisions, particularly from the RBNZ. Both AUD and NZD, being commodity currencies, are also influenced by global market sentiment and trade conditions.

• Bank of Canada surprised markets on Wednesday with a 25bps rate hike

• Notes increased concerns that CPI could get stuck "materially" above 2%

• BoC now more likely to raise rates further to 5% in July 0#BOCWATCH

• USD/CAD awaits BoC Deputy Governor speech due 20:25BST

• Support: 1.3321 (post-BoC low), 1.3315 (May low), 1.33 (April low)

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