1. Federal Reserve and Bank of Japan Rate Decisions

The Federal Reserve and the Bank of Japan are at the forefront of market movements this week. The Federal Reserve is anticipated to keep rates steady at 5.25%-5.50% during its meeting on June 12. The market is pricing in only one 25 basis point rate cut this year, likely at the November or December meeting, especially after the robust U.S. jobs report. The Fed's cautious, data-driven approach will be closely scrutinized, with special attention on the FOMC's economic projections and the tone of the statement and press conference. Key U.S. data includes the CORE CPI and CORE PPI, leading a relatively low-key data week.

Conversely, the Bank of Japan is in a different scenario, discussing potential rate hikes. A Reuters poll indicates that 53 of 54 economists expect no rate change in June, though 88% foresee yields reaching at least 0.2% by year-end. The statement's tone, press conference, and any bond-buying guidance will be crucial for the markets. Japan’s Final GDP and PPI are the significant data points to watch.

2. Key Economic Data Releases

China’s May inflation data, due on Wednesday, will be significant. Consumer inflation is expected to stay steady at 0.3%, while producer prices are projected to drop 1.8% year-on-year, a slower decline than April's 2.5% fall. May credit data is also anticipated, with new yuan loans expected to surge to 1.300 trillion yuan from April’s 730 billion yuan.

In Australia, May employment data on Thursday will be pivotal for Reserve Bank of Australia rate expectations, as persistent inflation and a tight labor market suggest a higher-for-longer rates outlook. New Zealand’s data on food prices will shape inflation expectations, while Canada has no major data releases this week.

3. Market Reactions and Technical Levels

The dollar index climbed 0.7% following the strong U.S. payrolls and earnings data, which boosted Treasury yields and dampened expectations for Fed rate cuts ahead of the U.S. CPI report and the Fed meeting. The dollar's strength was particularly pronounced against risk-sensitive currencies like the Australian dollar, New Zealand dollar, and Mexican peso. EUR/USD fell 0.78%, approaching last week's swing low, the 200-day moving average, and the flat daily cloud top at 1.0789. This decline was driven by a significant rebound in 2- and 10-year Treasury yields.

Risk-On and Risk-Off Volatility Analysis

Risk-On Environment: In a risk-on environment, where investor sentiment is positive, we typically see increased demand for higher-yielding assets and currencies. The strong U.S. jobs data has reduced the likelihood of near-term Fed rate cuts, leading to a rise in Treasury yields. This environment supports the U.S. dollar against risk proxies like the Australian and New Zealand dollars. For EUR/USD, significant support levels are at 1.0789, 1.0759, and 1.0721. A break below these levels could see a deeper retracement, influenced by the U.S. CPI data and the Fed's subsequent decisions.

Risk-Off Environment: In a risk-off scenario, investors seek safer assets, leading to a stronger U.S. dollar and Japanese yen. USD/JPY could target the highs near 157.715/99 if the U.S. CPI report indicates persistent inflation, prompting a hawkish Fed stance. Sterling's performance will hinge on UK labor data and the broader market sentiment. Support levels for GBP/USD are at 1.2716, 1.2709 (21-DMA), and 1.2655 (30-DMA).

Technical Fundamentals and Economic Events

EUR/USD:

• Support Levels: 1.0789 (200-DMA and flat cloud top), 1.0759 (50% Fibo of April-June rise), and 1.0721 (61.8% Fibo).
• Resistance Levels: Above 1.0820 (30-DMA), further resistance at 1.0916.

USD/JPY:

• Support Levels: 154.55 (rising 55-DMA), 154.125.
• Resistance Levels: 157.71/99 (May highs), 160.35 (April peak).

GBP/USD:

• Support Levels: 1.2716 (Friday low), 1.2709 (21-DMA), 1.2655 (30-DMA), 1.2562 (50% Fibo of April-June rally).
• Resistance Levels: 1.2741 (post-NFP high), 1.2759 (10-DMA), 1.2825 (Friday high).

In summary, the interplay between the Federal Reserve’s rate decision, U.S. CPI data, and the Bank of Japan’s policy stance will be critical in shaping market volatility. Technical levels in major currency pairs will be tested as economic data and central bank communications unfold, providing a roadmap for traders navigating these turbulent waters.

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