Yesterday, the US dollar collapsed against risk assets, and there were objective reasons for this.
Yesterday, the Federal Reserve kept the rate unchanged, but the decision was quite controversial. Three regional Fed presidents—Hammack, Kashkari, and Logan—called for an immediate 25-basis-point hike, marking the most significant division within the Fed since Kevin Warsh took the chairmanship. The statement following the meeting portrayed a mixed picture: the economy is growing at a steady pace despite uncertainties surrounding the Middle Eastern conflict; unemployment has hardly changed; and inflation remains above the 2 percent target, partly due to supply and energy shocks. In the press conference, Warsh indicated that the pause should not be interpreted as long-term inaction.
Warsh also elaborated on the logic behind the voting split, describing the discussion as active and substantive, and emphasized that the inflation target is not a flexible benchmark: five years of high inflation have created a false impression that the Fed’s actual target was above 2 percent. For the euro and pound, this outcome provided substantial support. The disappointment from the lack of tightening weakened demand for the dollar, allowing both European currencies to strengthen. Both EUR/USD and GBP/USD surged amid the dollar’s decline, and the extent of their growth was determined by how dovish the market considered yesterday’s decision.
Today, the euro has the chance to continue rising, but this will require a solid block of European data. The focus will be on Germany’s GDP data and consumer price index, as well as similar indicators for Eurozone GDP and unemployment rates. GDP reflects economic growth and serves as a foundation for assessing economic health; the consumer price index captures inflationary pressures and influences expectations for the ECB rate, while the unemployment rate characterizes the state of the labor market. Together, these releases provide a broad picture, and the market will evaluate them collectively.
Only significantly strong figures will allow the single currency to sustain its upward movement. Strong economic growth combined with stable inflation will bolster arguments for a stricter European Central Bank policy and support the EUR/USD pair. However, if the data disappoints, the euro will lack the support needed to build on its recent upward movement, risking a correction.
As for the pound, all eyes will be on the Bank of England’s decision regarding the main interest rate and the accompanying monetary policy report. The rate decision directly affects the yields on pound assets, while the report reveals the central bank’s outlook on inflation and the economy, shaping expectations for future steps. Economists predict that the rate will remain unchanged, and such an outcome could partially weaken the British currency’s position, as the absence of a tightening reduces its attractiveness against the dollar. However, much will depend not only on the verdict itself but also on the tone of the report. Hawkish inflation signals could support the pound even if the rate is kept unchanged, while cautious wording could increase pressure on the GBP/USD pair.
Until the decision is announced, the British currency is likely to remain restrained, and a significant surge in volatility is expected with the publication of the meeting results.
If the data aligns with economists’ expectations, it is better to act based on the Mean Reversion strategy. If the data come in much higher or lower than expectations, the Momentum strategy will be the most appropriate.
Momentum Strategy (Breakout):
For EUR/USD
- Buy on a breakout of 1.1458 may lead to a rise in the euro to around 1.1474 and 1.1501;
- Sell on a breakout of 1.1442 may lead to a drop in the euro to around 1.1426 and 1.1409;
For GBP/USD
- Buy on a breakout of 1.3357 may lead to a rise in the pound to around 1.3383 and 1.3417;
- Sell on a breakout of 1.3328 may lead to a decline in the pound to around 1.3299 and 1.3275;
For USD/JPY
- Buy on a breakout of 163.76 may lead to a rise in the dollar to around 163.99 and 164.26;
- Sell on a breakout of 163.48 may lead to a sell-off of the dollar to around 163.18 and 162.92;
Mean Reversion Strategy (Reversion):
For EUR/USD
- Look to sell after a failed breakout above 1.1462 on a return below this level;
- Look to buy after a failed breakout below 1.1438 on a return to this level;
For GBP/USD
- Look to sell after a failed breakout above 1.3362 on a return below this level;
- Look to buy after a failed breakout below 1.3336 on a return to this level;
For AUD/USD
- Look to sell after a failed breakout above 0.6969 on a return below this level;
- Look to buy after a failed breakout below 0.6947 on a return to this level;
For USD/CAD
- Look to sell after a failed breakout above 1.4058 on a return below this level;
- Look to buy after a failed breakout below 1.4039 on a return to this level;
