Is it worth betting on further tightening of the Federal Reserve's policy? Market players find it extremely difficult to orient themselves, hence the wide range of expectations. If earlier in May there was almost 100% certainty of a monetary pause, now more than 35% are betting on tightening. At times, this figure rises to 60%.
Judging by recent remarks from the new Vice President of the Fed, Philip Jefferson, the EUR/USD bears won't have much room to maneuver. It is unlikely that there will be more hawkish comments at this time, which will slightly ease the pressure on the euro.
According to Jefferson, skipping the interest rate hike in June will give the bank an opportunity to get more data and assess the need for continued monetary tightening. Nevertheless, keeping the interest rate at 5.25% should not be perceived by the markets as the end of the cycle.
Adding fuel to the fire, Philadelphia Fed President Patrick Harker said he is inclined to support a "skip" at the central bank's next meeting in June.
Therefore, forecasts based on the important US employment report for May have changed significantly. In order for the data to become a catalyst for strengthening the US dollar, it needs to be very strong, which raises doubts.
In this scenario, buying towards 1.0710 and 1.0740 remains relevant.
Scotiabank economists also predict a rise towards the resistance zone of 1.0730-1.0740.
As for the ECB, it appears that the cycle of interest rate hikes will conclude in July after two consecutive increases of 25 basis points. This event will not be well-received by EUR/USD traders.
In favor of the dollar, it is worth noting the increase in job openings in the US from 9.75 million to 10.1 million in April. The job openings-to-unemployment ratio stands at 1.8, which, although lower than in March 2022, is the highest reading since 1951. The labor market remains robust, allowing the Fed to continue its cycle of monetary tightening.
On Friday, an official statement from the US Department of Labor will be released.
According to experts' forecasts, 170,000 new jobs were created in the US economy last month, compared to 296,000 in April. If expectations are confirmed and the data proves to be disappointing, traders' confidence in the need for further rate hikes may be affected. This would have a negative impact on the dollar exchange rate.
The Bank of England is likely to be compelled to continue tightening its monetary policy in response to high inflation levels. UK Chancellor of the Exchequer, Jeremy Hunt, previously stated the need for rate hikes despite increasing recession risks.
He noted that economic recovery is only possible with complete inflation control, which currently stands at 8.7%. This is the highest level among all developed countries.
Take note that food inflation has reached 19.1%, the highest since 1977. According to Hunt, food inflation significantly impacts households with low incomes, as they have to spend more on food and less on other goods and services.
An interest rate hike of 25 basis points is expected at the next BoE meeting. Therefore, it is premature to sell the pound, and buying the GBP/USD pair remains relevant.
Scotiabank believes that if GBP/USD sustains a solid breakthrough above 1.2460, it will continue to rise towards 1.2550.
