Mid-week currency markets review
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There was a quite big surprise yesterday in the financial markets. US Inflation was significantly high in April and May (4.2% and 5% respectively) and the markets expected a small decline at 4.9% in June. The announcement of 5.4% shook the markets as there are many opinions that the inflationary issue is not something transitory and should be faced as a very serious case. The immediate reaction of the markets was a strong buying trend for USD due to the anticipation that Fed may tighten the US Monetary Policy to deal with the problem. The USD Index performed more than 0.60% yesterday and led almost all the USD FX pairs to a clear trend. Today & tomorrow Jerome Powell is going to testify before Congress and after the latest developments, his speech has extra weight.
EURUSD (current price 1.1782) turned sharply bearish yesterday, after the US Inflation news. The pair lost more than 70 pips in a few hours by continuing the trend that was bearish since the beginning of the week. Europe had not offered a lot of things on this. The German inflation was announced at 2.1%, as the markets expected, and Eurogroup/Ecofin did not bring out any surprises. EURUSD is approaching the main support of 1.17 which is an 8-month low price and below that level, there’s the support of 1.16 (almost 1-year low price).
GBPUSD (current price 1.3850) also dropped yesterday after USD strength but there are serious attempts for recovery today. The UK also announced the June Inflation at 2.5% vs 2.2% expected and some expectations are also generated for a tighter Monetary Policy from the Bank of England, which gives some extra credits to the sterling today. This mini uptrend though, does not seem to have the necessary strength to change the direction of GBPUSD in the short term and the support of 1.3730 may return as a target to the sellers.
USDJPY (current price 110.47) managed to be retained above 110 and to climb higher even if today there’s a mild decline. The bond yields are falling after yesterday’s jump (from 1.36% to 1.42%) and this is the main reason for the USDJPY correction. A return to the uptrend requires a solid breakout above 110.70 and more, a solid breakout above 111.10. The Producer Price Index and the Machinery Orders announced in Japan are considered positive from the markets and this weighs a bit to the side of JPY.