FX

Welcome to another edition of Forex Friday. The EUR/USD was unable to close above the key 1.0950 short-term resistance level on Thursday, despite the US dollar weakening against most other currencies on the day on the back of mixed data. Consequently, the single currency was on the backfoot again with the greenback rebounding from earlier weakness at the time of writing on Friday. Investors were looking forward to the release of more inflation data from the US, with PPI and UoM Inflation Expectations both coming up.

Unless the RBA is surprisingly more dovish than expected at its meeting on Tuesday, Aussie CPI comes in well below expectations on Wednesday, or we see a sharp reversal in risk appetite, the path of least resistance will remain to the upside, in line with our continued bullish AUD/USD forecast.

USD/JPY is on a collision course with key support, plunging for a fourth consecutive day as carry trades involving the Japanese yen are unwound. It’s the kind of move you’d normally expect to see in a crisis, although we’re not in a crisis. Yet.

After a rare reversal in USD/JPY to start July, traders should be on the lookout for any follow through selling as expectations for Fed rate cuts this year swell. Considering higher US yields helped to propel the dollar higher, if you take that away, can the prevailing trend realty be maintained?

One big risk event is taking place next Sunday, on June 30. This will mark the first round of the French parliamentary election. But it is likely that the extent of Marine Le Pen party's progress will only be known after the run-offs on July 7.

The sizeable reversal in USD/JPY following the BOJ interest rate decision may be the start of a far larger move, unless you think the Federal Reserve may be forced to abandon the prospect of rate cuts this year. Given asymmetrical risks for the US rate outlook and increasingly tepid US economic data, selling USD/JPY rallies is preferred.

GBP/USD looks set to remain in the trading range it’s been stuck in for weeks despite the arrival of wages and unemployment data from the UK later Tuesday, with traders likely to fade any significant moves ahead of the Fed interest rate decision and US inflation report on Wednesday.

The Federal Reserve June FOMC meeting and US consumer price inflation for May look set to dictate directional risks for GBP/USD this week, overriding anything on the UK calendar including Britain’s unemployment report. Risks look skewed to the downside.

USD/JPY is on the backfoot in early June, hit by narrowing yield differentials and a whiff of concern about the trajectory for the US economy. Data releases in the coming days may provide clarity on the answer, providing two-way price risks given elevated levels of uncertainty.

Directional risks for USD/JPY look set to be driven by economic data this week, helping to shape opinions on the US interest rate outlook given an absence of Fed speakers. With nonfarm payrolls and ISM services data to navigate, the environment looked primed for increased volatility.

When the US government is forced to pay up to fund its ballooning deficit, it means it needs to attract capital from somewhere, be it other asset classes or regions. EUR and GBP are not immune to the global drain towards the US dollar.