FX.co ★ Euro and pound will search for a base, while the US dollar has few reasons to further strengthen. Overview of USD, EUR, GBP

The markets continued to win back the moderately hawkish results of the Fed meeting on Friday and Monday morning, but the dynamics became less strong. The US dollar strengthened primarily due to commodity currencies, as well as the sale of risky assets.

At the end of the previous week, Fed members Bullard and Kashkari made their comments, which were quite soft. According to them, it will take time to reach full employment and some discussion would be better to start after September. In general, this corresponds to the fact that any discussion about a possible tightening of the Fed's policy is clearly early.

The CFTC's weekly report on Friday was not published, despite the fact that it was scheduled that day. There are no explanations on this topic on the CFTC website, so we just go into standby mode.

EUR/USD

So while there is no CFTC report yet, the dynamics of the yield spread are particularly important. It is worth noting that it is important for investors which currency is more profitable, for which a simple calculation is made – the dynamics of the difference in returns on the same type of securities, adjusted for inflation, is studied.

Following the FOMC meeting last June 16, the yield on 10-year US Treasuries surged from 1.485% to 1.575%, meaning investors generally viewed the outcome of the meeting as bullish. At the same time, the yield of the 10-year Bundesbank also increased, but to a lesser extent. In total, such dynamics were in favor of the US dollar, which was reflected in the fall of the EUR/USD rate.

However, the situation fell back in the following days – the 10-year German Bundesbank stayed above the level of Wednesday, while the 10-year USD fell to 1.4% on Monday morning, that is, the yield of US securities is even lower than before the FOMC meeting. Such dynamics may mean that the market was not particularly impressed by Powell's hawkish rhetoric and the increase in rate forecasts.

The estimated price (excluding weekly CFTC data) is held above the long-term average. Hence, we make an intermediate conclusion – the current decline in the EUR/USD pair is a correction, and the trend remains bullish.

This week, there will be quite a lot of important information from the Euro area. In particular, we have the preliminary reports of the Markit PMI for June and the German IFO, which will show the growth rate of the industry, and three speeches from the ECB President – Lagarde will make a statement twice on Monday and then one on Wednesday. If the public is not presented with new negative data, the EUR/USD pair will form a base and resume growth.

Technically, the correction wave can reach the support zone of 1.1680/1.1710, but it is likely that the stop will occur slightly higher. The medium-term target is still the local high of 1.25555.

GBP/USD

Although retail sales fell by 1.4% in May compared to April of this year, they were 9.1% higher than in February 2020, which is before the pandemic happened.

Inflationary pressures remain high. The target price (excluding weekly CFTC data) is above the long-term average, which means that the pound, like the euro, has a good chance to further rise after the correction is done.

There is also negativity, albeit not decisive amid the results of the FOMC meeting. We are talking about the postponement of the opening of the UK economy for 4 weeks due to the spread of a new "Indian" strain of coronavirus, as well as the impasse in negotiations with the EU on the fate of the Brexit agreement regarding Northern Ireland.

As for the Bank of England meeting on Thursday, no revelations are expected. The BoE traditionally stays away from the Fed for several months in its steps, so if any changes in monetary policy occur, it will not happen before the fall.

From a technical viewpoint, the GBP/USD pair is trying to find a base. It is possible to buy with the nearest target at 1.4220/40, and a stop at 1.3770, whose possible triggering will indicate that the correctional wave is not yet complete.