Article by: ETO Markets
Forex markets this week have been dominated by US inflation data and comments from Federal Reserve officials. The August CPI data released by the Bureau of Labor Statistics showed that the headline inflation rate fell from 2.9% to 2.6%, in line with market expectations. However, core CPI was flat at 3.2 per cent year on year, slightly higher than expected, indicating that inflationary pressures remain. This triggered a reassessment of the Fed's rate cut path in the market, especially with the slightly higher core CPI data, the market's expectations of a large rate cut by the Fed have diminished.
The Fed is now expected to cut rates by at least 98 basis points this year, down from 108 basis points a day earlier, according to data from the Chicago Board of Trade. Still, dovish comments from several Fed officials continued to support market expectations for a rate cut. John Williams, president of the New York Fed, and Austan Goolsbee, president of the Chicago Fed, both said the rate cut was a necessary step to keep the economy balanced, further reinforcing market expectations that the Fed will cut rates at its September meeting.
GBP/USD continued to come under pressure this week, falling below the 1.3050 mark, mainly due to two factors. First, the CPI data in the US were mixed, with the core CPI annual rate remaining at 3.2%, in line with market expectations, despite the decline in headline inflation. Meanwhile, monthly CPI and core CPI rose 0.2% and 0.3%, respectively, beating market expectations. This has led to diminished market expectations for a big Fed rate cut of 50 basis points in September, with the probability of a 25 basis point cut now at 85 per cent, supporting the dollar.
At the same time, the UK released weak GDP data, which put further pressure on the pound. Still, leading indicators point to potential for a recovery in the UK economy, suggesting the Bank of England may not cut interest rates by more than 50 basis points this year, which could provide some support for the pound.
GBP/USD is technically showing short-term downward pressure as the price has fallen below the 20-day moving average (DMA). A break below the … support could lead to a further dip to the 50-day moving average of … or even …. However, the Relative Strength index (RSI) is close to the neutral 50 line, and if it can stay above it, buyers could push prices back to …, with further targets at … and …. Therefore, in the short term, GBP/USD may oscillate between support and resistance, the key is the direction of the RSI and the solidity of the support level.
Ahead of the release of the US CPI data, USD/CHF continued to trade lower and is currently trading around 0.8430. The dollar came under pressure as Treasury yields fell. In addition, the market expects the Fed to cut interest rates by at least 25 basis points at its September meeting, although expectations for a larger 50 basis point cut fell to 31 percent from 38 percent. Meanwhile, Swiss inflation fell to a five-month low, raising expectations that the Swiss National Bank (SNB) may soon cut interest rates again. The combination of these factors has limited the upside of the Swiss franc. The market focus going forward will be on the Fed's policy path and comments from the SNB.
Technically, USD/CHF remained low below …, showing a clear downward trend. The Relative Strength Index (RSI) is showing oversold signals, which indicates the possibility of a technical rebound in the short term. However, both the 50-day and 200-day simple moving averages (SMA) are under pressure, indicating that bears remain dominant. If the price continues to move lower, initial support could be around the psychological level of …, further testing the long-term support of …. Conversely, if a rebound occurs, resistance will be in the range of … to ….
