EUR/USD - 1.0542 Despite euro's rally to a 8-day high in Asia Thursday, subsequent selloff to as low as 1.0493 in New York on renewed broad-based rally in usd suggests recovery from last Thursday's 5-year bottom at 1.0472 has possibly ended and below 1.0472 would extend recent downtrend to 1.0405/10. On the upside, only a daily close above 1.0578/83 would prolongs choppy swings and risks stronger retracement to 1.0603, break, 1.0630/40. Data to be released on Friday Australia AIG services index, Japan Tokyo CPI. Swiss unemployment rate, U.K. Halifax house prices, Markit construction PMI, Germany industrial output, France non-farm payrolls, Italy retail sales. U.S. Non-farm payrolls, private payrolls, unemployment rate, average earnings, Canada employment change, unemployment rate and Ivey PMI.

EUR/USD - 1.0542 Despite euro's rally to a 8-day high in Asia Thursday, subsequent selloff to as low as 1.0493 in New York on renewed broad-based rally in usd suggests recovery from last Thursday's 5-year bottom at 1.0472 has possibly ended and below 1.0472 would extend recent downtrend to 1.0405/10. On the upside, only a daily close above 1.0578/83 would prolongs choppy swings and risks stronger retracement to 1.0603, break, 1.0630/40. Data to be released on Friday Australia AIG services index, Japan Tokyo CPI. Swiss unemployment rate, U.K. Halifax house prices, Markit construction PMI, Germany industrial output, France non-farm payrolls, Italy retail sales. U.S. Non-farm payrolls, private payrolls, unemployment rate, average earnings, Canada employment change, unemployment rate and Ivey PMI.

Outlook: The major-currency central banks are done for the moment and we’re back to policy rhetoric and watching inflation. Oh, yes, and Fed-bashing. The CME Fed funds tool yesterday, before the Fed decision, had shown a 95% chance of a 75 bp hike. That has now fallen to zero, of course, but accompanied by accusations of the 50 bp we did get was “dovish.” The dovish label applies mainly to the QT methodology—let the paper fall off the balance sheet as it matures—and not the hike per se, but it’s the worst thing that can happen to the Fed—a bloodthirsty market. The 75 bp fantasy came from a single Fed (Bullard) making a one-time comment that he qualified by saying it’s not his preferred base case, but the market ran wild with it like a horse with a bit in his teeth. In contrast, the 50 bp version, also started by Bullard, was quickly picked up a bunch of other Feds , including chief Powell, and widely publicized. Why the market chose a single comment from a single Fed to hang its hat on is a mystery. The market erred. The Fed signals its intentions with great clarity these days. But it’s true that the Fed erred in not acknowledging the spread of the fringe into the mainstream expectation. Obviously the Fed is not dovish if it’s hiking by 50 bp and another 50 bp likely in June, but equities and commodities went up and the dollar went down, so obviously the market is right. Market prices are always right in the sense that they are evidence of action, not words. It doesn’t mean the analysis behind the action is right, but it may mean “confidence and trust in institutions” is not as strong as it could and should be in a crisis. Especially when the other big independent institution, the Supreme Court, is losing the public trust by gobs with every passing minute. Accusations of a true-color dovishness are not only in fringey publications, but made the front page of the Financial Times. It’s absurd to say the Fed is dovish after the first 50 bp hike in 20 years, but it looks wimpy in the context of 75 having been expected. There was nothing wrong in the Fed’s transparency—it has been signaling 50 bp and it delivered 50 bp. The market pumped itself up on a false idea and is now throwing a temper tantrum because it was wrong. The ironic part is that if Powell had NOT said the Fed is declining to consider 75 bp and let the market go on thinking 75 is somehow on the table, the reaction might have been saner and tamer. It’s ridiculous to say the high-falutin’ finance and economics types at the Fed should be heeding the silly fantasies of some of the crowd, but wait, it’s their job to know what the market expects and the CME Fed funds tool is hardly social media gumpf. Criticism is also upon the plan of letting maturing assets run off the balance sheet instead of actually selling any. For longer-tenor assets, this will take forever—well, a long time.  The Fed has $1.92 trillion in assets of 5-10 years. A third “shortcoming” is Powell admitting the Fed doesn’t know what the neutral rate should be. Aiming for transparency, something the market has agitated for years (in part because of Greenspan’s deliberate obfuscation), Powell said the Fed can’t identify the neutral rate “with any precision.” The FT reminds us that  “Fed officials broadly view neutral to be about 2 and 3 per cent, when inflation is at 2 per cent, but some economists argue it is now much higher — potentially as much as 5 per cent — given the magnitude of price pressures.” “Despite that challenge, Powell wavered little from his earlier optimism that the Fed can achieve a ‘soft or softish landing’, not least because of the strength of household and corporate balance sheets as well as the historically tight labour market.” It looks like the market was out to get Powell no matter what he said, but to be fair, the Fed appears somewhat clueless about the depth and width of criticism of its policies. This is not to say the Fed is wrong, just out of touch with a seemingly fairly fat tail. This is often the case, as we have observed over the years, with the phrase “behind the curve” having entered the general lexicon. The question now is whether the dovish label gets removed over time and if so, how much time. The rapid response in asset pricing was likely driven by a minority that was quickly joined by a majority that was just jumping on the bandwagon and not necessarily buying into the dovish story. Let’s not forget...

The Bank of England (BOE) is set for a 25 bps rate hike on Super Thursday. The no. of dissenters and the BOE’s forward guidance will hold the key. Nothing can stop GBP/USD’s downfall amid aggressive Fed bets and bearish technicals. GBP/USD remains exposed to downside risks, as we progress towards the Bank of England (BOE) ‘Super Thursday’. Another 25 basis points (bps) rate hike remains on the table from the BOE, although it would not be enough to rescue GBP bulls. The UK central bank is set to announce its policy decision at 11:00 GMT, which will be accompanied by the meeting’s minutes and inflation report. BOE walking a tight rope May’s ‘Super Thursday’ will likely see the BOE delivering another 25 bps interest rate hike, lifting its benchmark rate to 1%, the highest since 2009. This would be the fourth straight rate hike, making it the first time the BOE has tightened that way since 1997. BOE Governor Andrew Bailey is scheduled to hold a press conference following the publication of the Monetary Policy Report (MPR) at 11:30 GMT. Markets have priced in a 25 bps lift-off, predicting the bank rate to rise to 1.5% by early 2023. Heading into another rate hike this week, the outlook for the UK economy continues to be dour while the central bank remains committed to tackling the inflation monster. Although fourth quarter UK GDP was revised upwards to 1.3% QoQ, a protracted Russian invasion of Ukraine and China’s coronavirus lockdown-driven global supply chain crisis is spelling recession fears for the British economy. Bailey and Co. are in a tough spot yet again, as the inflation rate holds at a 30-year high of 7% in March, driven by a sharp increase in petrol and diesel costs. In a balancing act at its March policy meeting, the BOE’s cautiousness on the future tightening path disappointed the hawks and since then GBP/USD has lost roughly 1000 pips to hit 21-month lows just above 1.2400. Governor Bailey said last month, "We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession.” GBP/USD probable scenarios The central bank’s forward guidance will hold the key at this meeting, while markets will also focus on the number of dissenters. Deputy Governor Jon Cunliffe was the only dissenter last time but if two or more members join him against a rate rise, then it would mean an outright dovish hike. GBP/USD could see a fresh downside leg, with a breach of the 1.2400 level well on the cards. On the other hand, if policymakers voice concerns over inflation broadening out even while acknowledging the material risks to growth to the downside, it could be seen as a shift to a hawkish pivot. Further, any hints of a potential quantitative tightening (QT) by active sales of gilt yields in the upcoming months could be seen as hawkish. In such a case, cable’s recovery could gather steam, with the pair looking for a bullish reversal towards the weekly highs of 1.2600 en-route to 1.3000. But traders should bear in mind that the BOE is not the only factor impacting the pair today, as the expected hawkish Fed decision will also play a crucial role in GBP/USD’s price action ahead of the BOE event. 

GBP/USD witnessed some short-covering move on Wednesday amid broad-based USD weakness. Fed Chair Powell downplayed the possibility of super-size hikes and weighed heavily on the buck. Expectations for a further tightening by the Fed revived the USD demand and capped the major. Market participants now look forward to the BoE monetary policy decision for a fresh impetus. The GBP/USD pair rallied nearly 200 pips intraday and shot to over a one-week high on Wednesday amid the post-FOMC US dollar downfall. As was widely expected, the US central bank announced the largest interest rate hike since 2000 and the start of quantitative tightening (QT). The Fed raised its benchmark interest rate by 50 bps and said that its near $9 trillion balance sheet would be allowed to decline by $47.5 billion per month in June, July and August. The reduction would increase to as much as $95 billion per month in September. The USD, however, witnessed a typical ‘buy the rumour, sell the news’ kind of trade after Fed Chair Jerome Powell downplayed expectations for an aggressive tightening path. In the post-meeting press conference, Powell said that the Fed was not actively considering a 75 bps rate hike and that policymakers were ready to approve similar-sized rate hikes at upcoming meetings. The comments sent the US Treasury bond yields lower, which, along with the risk-on impulse, weighed on the safe-haven greenback and prompted some short-covering around the GBP/USD pair. That said, the markets are still pricing in further 200 bps rate hikes for the rest of 2022. This, in turn, helped limit deeper losses for the buck and capped the major, rather attracted fresh selling during the Asian session on Thursday. Spot prices slipped back below mid-1.2500s as the focus now shifts to the Bank of England (BoE) meeting. The UK central bank looks poised to raise interest rates for the fourth time since December to the highest level in 13-years to contain inflation, which has leapt to a 30-year high. Meanwhile, the overnight index swaps markets predict that the BoE will hike six more times in 2022, raising prospects for disappointment. It is worth recalling that the MPC voted 8-1 to hike rates by 25 bps in March. Any sign of widening dissents in favour of keeping the interest rate unchanged would be seen as a dovish tilt and suggest that the rate hike cycle could be nearing a pause. This would be enough to prompt aggressive selling around the British pound and set the stage for the resumption of the GBP/USD pair's recent bearish trend. Heading into the key event risk, traders might take cues from the release of the final UK Services PMI. Meanwhile, the US economic docket features the usual Weekly Initial Jobless Claims, though is likely to be overshadowed by the post-BoE volatility. Apart from this, some repositioning trade ahead of the closely-watched US monthly jobs report - NFP on Friday - should allow traders to grab some meaningful opportunities around the GBP/USD pair. Technical outlook From a technical perspective, the pair's inability to capitalize on the overnight strong move up and the emergence of fresh selling suggests that the recent downtrend might still be far from over. That said, any subsequent decline is more likely to find decent support near the 1.2500 psychological mark, below which spot prices could slide back to the overnight swing low, around the 1.2470-1.2465 region. Bearish traders could eventually aim to challenge the YTD low, around the 1.2410 area. The latter should act as a pivotal point, which if broken decisively will be seen as a fresh trigger for bearish traders. The pair would then accelerate the fall towards intermediate support near the 1.2345 region en-route the 1.2300 mark before eventually dropping to June 2020 low, around mid-1.2200s. On the flip side, the 1.2600 round-figure mark might now cap the immediate upside ahead of the post-FOMC swing high, around the 1.2635-1.2640 region. The next relevant hurdle is pegged near the 1.2670 area, or the 38.2% Fibonacci retracement level of the recent slump witnessed over the past two weeks or so. A convincing breakthrough the latter would suggest that the pair has formed a near-term bottom and set the stage for additional gains.

Fed Chair Powell has ruled out a 75 bps rate hike, cooling hawkish expectations.  By saying neutral rates are between 2% to 3%, markets see light at the end of the tunnel. A late focus on supply-related inflation puts additional limits to Fed action.  The dollar remains the currency of choice as other central banks are not as aggressive. The Federal Reserve has lifted its leg from the hawkishness pedal – but remains en route to "expeditious" tightening, which is set to keep the dollar bid. After a series of hawkish comments on the impact of inflation – and kicking off the presser by talking directly to the American people – Fed Chair Jerome Powell sent the dollar higher. But, traders want to know what's next. First, Powell then all but ruled out a highly aggressive 75 bps rate hike, providing clear guidance about 50 bps hikes in both June and July. That puts one limit on rates and on dollar strength. Secondly, the Fed Chair said that a neutral rate would be somewhere between 2% to 3%. According to the plan for the next two months, interest rates will reach a range of 1.75% to 2% already in July, so the following moves are constrained as well. Talking heads on financial media discussed levels as high as 3.50%, so that comment is another dollar downer.  Third, despite all the rhetoric about inflation as a big issue, Powell stressed that some factors are beyond the Fed's control. Central banks impact demand, not supply, he retorted and then went on to elaborate on external factors. China's covid-related lockdowns and Russia's war in Ukraine weigh on supply and push prices higher. That Fed cannot fight that. These three limits explain the blow to the dollar, but what's next? I think the greenback remains king, as the Fed is tightening faster than other central banks. Moreover, those external issues boost the dollar as a safe haven.  All in all, we had a dollar-negative "buy the rumor, sell the fact," then a dollar rise in response to a determined view against inflation, and finally a downfall when Powell set limits to the Fed's hawkishness. And now, I expect the broader dollar uptrend is set to resume.