The net short speculative position on the US dollar increased by 3.4 billion during the reporting week, reaching 10.5 billion, which is the largest bearish bet on the US dollar in the past 2 months. Market participants are increasingly inclined to believe that the Federal Reserve's rate hike cycle is nearing its end, meaning the main factor that pushed the dollar higher is losing its influence.
European currencies, primarily the euro and the pound, as well as the Swiss franc, look the best in the report. Gold saw a slight correction, with the net long position shrinking by $823 million to $38.619 billion, while the yen and commodity currencies saw minimal changes.
The dollar managed to recoup some of its losses on Friday, as stronger-than-expected data pushed US yields higher. Retail sales showed a 1.0% month-on-month decline in spending in March, which is significantly below the consensus forecast of -0.5%, but excluding automobiles and gasoline, sales only fell by 0.3%. Capacity utilization rose to 79.8% (forecast 79%), industrial production increased by 0.4% compared to the forecast of 0.2%, and the University of Michigan's consumer confidence index rose from 62 points to 63.5 points (no changes were expected). The Atlanta Fed raised its Q1 GDP forecast to 2.5% YoY.
Fed data shows reduced stress in the banking system last week: banks' demand for liquidity in the context of the Fed's funds declined for the fourth week in a row, and both deposits and commercial bank loans grew for the week ending April 5th. On Sunday,
Treasury Secretary Janet Yellen stated, "I'm not seeing anything at this time that is dramatic enough or significant enough in my view to significantly change the outlook," but she suggested that banks would likely become more cautious, and this could be a "substitute for further interest rate hikes that the Fed needs to make". Yellen's statement is likely to be seen as a bearish factor for the dollar by the markets.
EURUSD
The forecast for the European Central Bank's May meeting has toughened up; if last week the average increase was 22 basis points, by Monday morning, it had already risen to 32 basis points. Late last week, several ECB representatives mentioned the possibility of considering a 50 basis point hike in May, which adds confidence to euro bulls.
The key event this week is the consumer inflation report for March, which will be released on Thursday, April 19th. Forecasts regarding a slowdown in inflation in the eurozone remain very cautious, forcing the ECB to maintain hawkish rhetoric, and compared to the Fed, the ECB appears significantly more aggressive. From a yield spread perspective, expectations are skewed in favor of the euro; therefore, if the report does not show a slowdown in inflation, the euro may respond with another wave of growth.
After several weeks of relative stability, the net long position on the euro increased by $2.647 billion, a significant increase, although the overall balance (+$22.3 billion) is still below mid-February levels. Nevertheless, growing expectations that the ECB will act more aggressively than the Fed are pushing the euro higher, with the calculated price remaining stable with a slight bullish bias.
The euro tried to climb higher, reaching the target of 1.1032, which was marked as a probable one in the previous review, but then the pair failed to settle above this level. We expect that after a shallow correction, growth will resume, with the nearest resistances at 1.1180 and 1.1270.
GBPUSD
This week, the UK will release several important macro data. On Tuesday, the labor market report for March will be published, with a significant increase in jobs and a slowdown in wage growth expected. On Wednesday, the inflation report for March is due, with price growth still noticeably higher than in key European countries and the US. However, forecasts are positive, expecting a decrease in core inflation from 6.2% to 6%, and overall inflation from 10.4% to 9.8%.
The Bank of England's next meeting is on May 11th, and before announcing another rate hike, the BoE intends to take some urgent measures to prevent a banking crisis. The total debt of British borrowers has already exceeded the £2 trillion mark, and further tightening would increase risks to the banking system. To prevent a situation similar to the bankruptcy of several regional banks in the US and Swiss giant Credit Suisse, the BoE is considering urgent reform of the deposit guarantee scheme. It seems that the reassuring statements regarding the avoidance of a large-scale banking system crisis do not entirely correspond to reality.
The short position on the pound has almost been liquidated, as per the CFTC report, with a decline of £970 million over the week. At present, the bearish bias is only £186 million, meaning positioning has shifted from bearish to neutral. The calculated price is above the long-term average and points to an uptrend.
GBPUSD tried to climb above the resistance level of 1.2440, with the local high updated, but still failed to consolidate above this level. I expect the correction to be shallow, with the pound staying above 1.2340. If it declines towards this support, there is a basis for buying with the recent local high of 1.2545 as the target, while the technical level of 1.2750 remains relevant as a medium-term target.