Will Market Participants Receive The Volatility They Have Been Craving?

Over the past couple of weeks, there has been a reduced level of volatility in FX markets. This week, there is a wide variety of high risk economic news due for release nearly each day, and this should provide market participants with the volatility they have been craving.

On Tuesday morning, the latest UK CPI (Inflation) readings are announced. For over a year, the Bank of England (BoE) have maintained a threshold 2% CPI target to consider an interest rate increase. Despite UK unemployment falling to multi-year lows, UK CPI fell to an annualised five-year low (1.5%) last month. In the past fortnight, both current BoE Deputy Governor, Sir John Cunliffe and soon to become BoE Governor, Minouche Shafik have proclaimed that the timing of a BoE rate hike would be dependent on the UK’s economy capacity to grow, before encountering inflation pressures.

Therefore, the direction of the GBP/USD’s next valuation will likely be dependent upon the market reaction to Tuesday’s CPI recording. A reading above 1.6% could potentially stimulate a GBP/USD rally, whereas a similar reading to last month, or lower CPI will add bearish pressure to the GBP/USD. In a bullish scenario, the GBP/USD can find resistance situated around 1.7103 and 1.7165. Although, if the reaction to the CPI release is bearish, GBP/USD support is around 1.7045.

In regards to the EUR/GBP, the EUR would likely welcome the opportunity to retrieve losses against the GBP, after the EUR/GBP fell to a near 23-month low just one week ago. EUR/GBP resistance is located at 0.7990 and 0.80232. At the same time, an optimistic UK domestic reaction to the CPI release could open up the opportunity for the EUR/GBP to extend below the 0.7943 and 0.7917 support levels.

On Tuesday afternoon, all attention will be on the United States. Not only is the latest US Advance Retail Sales released but Federal Reserve Chair, Janet Yellen will begin to provide her two-day testimony to the Senate Committee. Due to the severity of the latter, there may be a muted response to the Advance Retail Sales release. Yellen will likely be asked various question regarding when the Federal Reserve will begin to raise interest rates.

If Yellen provides a dovish response or looks to downplay giving any hints regarding a possible time duration for a rate rise, a period of risk appetite in the currency markets will likely be impending. If this occurs, EURUSD resistance is located at 1.3640, 1.3660 and 1.36883. The NZD/USD valuation remains just 40 pips below a 2011 high (0.8840), while USDJPY downside moves below 101 remain limited.

Referring back to the NZD/USD being just 40 pips shy of a 2011 high, attention must be paid to Tuesday evening’s latest New Zealand CPI release. New Zealand’s increased inflation levels are the major contributing factor behind three consecutive Reserve Bank of New Zealand (RBNZ’s) rate hikes, and investors have continued to purchase the Kiwi due to an unconfirmed assumption that the RBNZ will hike interest rates again this month.

In May, the RBNZ specified that a higher appreciated Kiwi might lead to detrimental fundamental performances and inflation readings from their economy. The central bank also specified that a reduction in CPI levels would delay future rate hikes. If Tuesday’s CPI disappoints, doubts will be raised in investors’ minds that they will need to refrain from raising rates next week. This would likely inspire NZD/USD selling and nearby support levels can be found around 0.8785, 0.8747 and 0.8712.

Additionally, the AUD would likely welcome the opportunity to regain losses against the NZD, after the pair fell to a four-month low last week. If the New Zealand CPI does inspire NZD weakness, AUD/NZD resistance can be found at 1.0663, 1.0697 and 1.0723.

As the week draws to a conclusion, the markets will await the latest Royal Bank of Canada (RBC) interest rate decision. Over the past month, demand for the CAD has increased following Canada’s latest inflation recording surpassing the RBC’s threshold target to consider an interest rate hike. However, last Friday’s employment report showed that in the previous month, the Canadian employment sector contracted by nearly 10,000 jobs. In effect, this makes it very unlikely that the RBC will raise interest rates this coming week and as this week develops, investors will likely be enticed to take profit on the Canadian currency.

Possible CAD/JPY support levels are located at 93.923 and 93.382, CAD/CHF support at 0.8254 and 0.8196. Whereas,GBP/CAD resistance is situated around 1.8397 and EUR/CAD resistance at 1.4690.



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