FX.co ★ Markets cautious ahead of the US inflation report. Overview of USD, EUR, GBP

Markets were cautious on Wednesday morning as they await the results of talks between Biden and House Speaker McCarthy on the US debt ceiling. Both sides are not willing to consider short-term solutions that would allow raising the borrowing ceiling and are not ready for compromises. A quick solution should not be expected, and perhaps there will be a threat of a technical default while a solution is being worked out.

The US labor market report for April contained rather contradictory data. Overall, the data was stronger than forecasts - 253,000 new jobs were created (forecasted 179,000), however, the data for the past 2 months was revised downward by 185,000, which offset all the positive news. The average hourly income was 0.5% against the forecast of 0.3%, which completely nullifies expectations of a rapid decline in inflation.

The US NFIB Small Business Optimism Index fell to its lowest level since 2013, at 89 points.

The key event of Wednesday is the US Consumer Price Index. Forecasts do not imply changes - monthly inflation growth rates are expected at 0.4%, annual rates at 6%, and any deviation from the forecasts may cause a strong market reaction.

EUR/USD

The European Central Bank raised its rate by 25 basis points, which was lower than the expected 50 basis points, and decided to stop the reinvestment of the APP program from July 1, which matched the forecasts.

Inflation estimates have not changed overall, and the reasons why the ECB refrained from raising the rate by 50 basis points can be sought in recent events in the banking sector. Perhaps banks perceive the threat of a large-scale banking crisis more seriously than it seemed; the latest survey showed that lending rates have fallen sharply, and lending conditions have tightened.

Comments on the ECB's unexpected decision were numerous and often contradictory. In general, their tone boils down to the statement that "the battle with inflation is far from being won," and the slowdown in rate hikes will allow keeping rates high on a longer trajectory. Indeed, a decline in overall inflation due to falling energy prices is evident, but core inflation has a completely different trajectory.

ECB President Lagarde mentioned several times at the press conference that the tightening of credit conditions has begun to spread to the real economy. Overall, Lagarde tried to appear hawkish, but markets reacted neutrally to the ECB meeting's outcome.

The net long position in the euro increased by 0.6 billion during the reporting week, reaching 23.8 billion, with speculative positioning remaining confidently bullish. The calculated price, however, has decreased slightly, suggesting the development of a corrective bearish movement.

A week earlier, we assumed that EUR/USD would begin to decline towards support at 1.0910. There is no reason to abandon this scenario yet; support has not been reached, but the chances of a further decline remain high. In case of a confident breakthrough at 1.0910, we assume further movement towards support at 1.0875.

GBP/USD

The Bank of England will hold another monetary policy meeting on Thursday. Market expectations suggest an interest rate hike of 25 basis points to 4.5% and a cumulative increase of 50-75 basis points by the third quarter. Forecasts for inflation, the labor market, and GDP will also be published.

The UK is experiencing more robust inflationary pressure than the US or the Eurozone, with overall inflation above 10% YoY and core inflation consistently above 6% without signs of slowing down.

According to the CFTC report, the net long position in the pound decreased during the reporting week from 0.5 billion to 0.1 billion, with positioning being neutral. The calculated price, however, continues to stay above the long-term average, so chances for continued growth remain. Overall, the pound looks stronger than the euro at present.

The pound updated its local high, getting to 1.2668 the medium-term target of 1.2750 has not been reached, but it is still valid. Support at 1.2575, if GBP/USD stays above this level, restoring growth and updating the high is possible. In case the corrective decline develops, a decline to the support area 1.2430/50 is possible, where there will be an attempt to create a basis for renewal of growth. There are no grounds for stronger decrease yet.