Wall Street moves and position adjustment will dominate on Friday, risk appetite still vulnerable

Global risk conditions have continued to have a significant impact on major exchange rates and this will continue in the near term.

There will be an underlying shift in positions built during the period of extremely low global interest rates, which will maintain vulnerability in risk conditions.

However, there will also be room for a near-term correction after heavy losses, which may provide an element of relief for risky assets, particularly if markets pull back from the more aggressive policy projections. the Fed.

Inevitably, volatility will remain elevated in the near term with risk reversals likely to fade quickly.

British Pound and US Dollar Exchange Rate Outlook

Confidence in the UK economy continued to deteriorate with rumors of a recession following the latest round of data releases.

It is certainly possible that the UK economy will contract for at least two quarters this year.

Although Bank of England Deputy Governor Ramsden said interest rates had not peaked, there was fresh speculation that the BoE should limit rate hikes due to pressure on the economy.

Risk conditions will also remain very important to the GBP/USD outlook with further losses if equity markets continue to decline.

There will however be pressure for at least a limited correction after heavy losses and GBP/USD will rebound if equity markets manage to recover.

Overall, there is room for a rebound in GBP/USD, although rallies will quickly attract sellers’ interest, with markets still targeting a drop to 1.20.

Euro (EUR) exchange rate today

Although there was a change in expectations towards ECB policy and heightened expectations of a rate hike in July, the euro came under renewed pressure on Thursday.

The euro to dollar (EUR/USD) exchange rate fell back below the 1.0500 level, which helped trigger aggressive selling and the EUR/USD fell sharply to a 5-year low below 1.0400. It was also trading near 19-year lows as confidence in the outlook for the eurozone remained weak.

There will be pressure for a limited correction, but EUR/USD will depend on a broader pullback in the dollar to ensure a meaningful near-term recovery.

Speculators will always make parity a key short-term market objective.

US Dollar (USD) Exchange Rate Outlook

The dollar posted another big gain on Thursday as European currencies remained under pressure and the dollar index hit a new 20-year high as the euro slumped.

There was a slight pullback on Friday as an attempt to revive risk appetite dampened defensive demand for the US currency.

Fed Chairman Powell reiterated that the bank expects rate increases of 50 basis points in the next two meetings, which would take rates to 2.00%.

Yields and risk trends will remain very important for the dollar in the near term.

Wells Fargo Maintains Dollar Bullish Stance; “A hawkish Federal Reserve has boosted the US dollar against most G10 and emerging market currencies since the start of the year, and we believe this trend is likely to continue. Given that we believe the Fed is likely to tighten policy aggressively, we believe capital flows should return to the US.

He also considers that expectations for rate hikes elsewhere are too high; “With regard to G10 currencies, we believe that financial markets may be too tight by many foreign central banks. As markets adjust to a more gradual pace of tightening overseas, G10 currencies should weaken and the US dollar should benefit from a tailwind.

Other currencies

The Japanese yen gained further support on Thursday as equity markets came under renewed pressure.

The exchange rate between the pound and the yen (GBP/JPY) hit an 8-week low below 156.0 before recovering to around 157.50 as stocks tried to rally.

The Swiss franc could not get more than limited support and the dollar against the Swiss franc (the USD/CHF exchange rate exceeded the parity level for the first time since the end of 2019.

The Canadian dollar showed resilience as oil prices rose again and the exchange rate between the pound and the Canadian dollar (GBP/CAD) held below the 1.6000 level.

The day to come

The latest US consumer confidence data will be released on Friday, although the overall impact is likely to be limited unless there is a substantial decline.

Wall Street trends and broader developments surrounding risk appetite are expected to dominate during the day.

Although there is room for further correction after heavy losses, underlying confidence is likely to remain vulnerable, which will contribute to further volatility during the day.