Today, the dollar index plummeted to an eight-week low of 101.90, driven by factors such as the stagnation of the American industry (PMI dropping below 50 points) and persistent expectations of the Federal Reserve softening its stance towards the national currency. These factors are favorable for the euro and the pound, so the time is ripe to buy the British currency.
The previously mentioned forecast, which predicted that the dollar index would break below the 101.00 mark, remains relevant. Moreover, the American currency may hit other lows not seen in several years in the coming weeks.
According to HSBC, for sustainable growth in the dollar, hawkish surprises or signs of weakening in the financial sector will be required. However, rate positioning and risk appetite suggest a weakening dollar in the near term.
Economists write that while the US dollar may continue to enjoy support when concerns about the weakness of the financial sector become apparent, they believe that the overall picture will contribute to a weakening of the exchange rate in the near term.
As for the latest input, the numbers indicate moderate economic activity and a decrease in inflationary pressure, but the non-farm payrolls report is ahead. The surprisingly strong employment report is enough to prompt the markets to think about a more hawkish stance by the Federal Reserve, although the forecast for the labor market is weak.
The euro is spreading its wings.
In early April, the EUR/USD pair bounced above 1.0900, reaching its highest level in two months after rising 1.6% against the dollar last month. The March increase was driven by expectations that the European Central Bank would continue to raise interest rates in the coming months to combat inflation.
ECB Council Member Robert Holzmann said that another 50 bps hike is still on the table if recent banking disruptions do not worsen. At the same time, ECB President Christine Lagarde said last month that the Central Bank is determined to bring inflation back to target levels despite the risks of a recession.
The latest CPI report shows that inflation in the Eurozone slowed down in March to an annual minimum of 6.9% due to the first drop in energy prices in two years. However, the core index growth accelerated to a new historical high of 5.7%.
On Tuesday, the ECB survey revealed that consumers reduced their inflation expectations in February and were more optimistic about economic growth and unemployment.
The euro's current rise looks like a definite trend, and most analysts see good prospects for the euro to continue to grow. The nearest target for EUR/USD pair may be at 1.1000 if traders manage to break through 1.0930. Given the lack of important data, market participants will closely monitor the risk appetite.
Appetite for buying the pound remains.
The British pound jumped today above 1.2500, reaching its highest level since December 14 and after the largest monthly gain in four months of 2.6% in March. Investors evaluated the Bank of England's policy stance and the economic prospects of the United Kingdom. Bank of England Governor Andrew Bailey said last week that the regulator may need to raise rates again after unexpectedly high inflation reached 10.4% in February. Food inflation hit a record high in March.
Markets assess a 66% probability of a further 25 bps hike in May and a 34% probability of no change. Nevertheless, investors still believe that the Bank of England is approaching the end of its hiking cycle. In the United States, investors are betting that the Federal Reserve will become less hawkish amid slowing inflation and an economic downturn.
CIBC believes that the British pound is worth buying on dips as more favorable economic prospects for the United Kingdom combine with a broad retreat of the dollar. Overall, the rising trend of the GBP/USD pair is expected to continue in 2023.
Sterling was the most effective major currency of the first quarter, rising an average of 3%. It benefited from a series of economic data that turned out to be stronger than analysts expected. The Bank of England's positioning also contributed to the exchange rate's rise.
However, the GBP/USD pair has encountered a significant resistance area that the pair need to be to break and consolidate above. Only after that, the cable will be able to confidently move further. We are referring to the December/January high of 1.2450. Judging by the current position of the pound, it has managed to do so. Now it is important to monitor the session closing.
Most analysts tend to believe that any sustainable upward movement in the GBP/USD pair after breaking through 1.2400 will largely depend on the dynamics of the dollar.
This week, traders are focused on Friday's employment report, aiming to get some signs of a slowing US economy.
For the pound, the first serious internal test is related to the publication of labor market and inflation data. The releases will take place on April 18 and 19, and the currency market is expected to react to these figures, considering that they will determine the likelihood of another rate hike by the Bank of England in May.