Overview of Forex Market Movements

This week, the dollar index remained flat on Friday, ending the week much like it started. The dollar weakened against the euro and sterling, while the earlier rebound in USD/JPY diminished due to less attractive Treasury-JGB yield spreads and mixed U.S. economic data. EUR/USD saw minimal changes on Friday but gained 0.94% over the week, briefly surpassing April's high of 1.0885 on Thursday. The pair rebounded from a low of 1.0836, aligning with the 61.8% Fibonacci retracement of the March-April decline, cleared earlier in the week after softer U.S. CPI and retail sales data.

Focus on Key Economic Indicators

Looking ahead, market attention will turn to significant economic indicators, particularly the upcoming U.S. CPI and retail sales data. The euro's uptrend is currently bolstered by a recovering eurozone economy and disappointing U.S. economic data, as highlighted by Citi's Economic Data Surprise indexes. Interest rate futures suggest that the ECB is expected to start cutting rates in June, with up to three cuts by year-end. In contrast, the Federal Reserve's rate cuts projected for September and December are no longer fully priced in. This divergence in monetary policy expectations suggests a potentially stronger performance for the euro, driven by higher-for-longer U.S. rates versus quicker rate reductions in the eurozone.

EUR/USD and Sterling Analysis

EUR/USD's bullish momentum is supported by tighter bund-Treasury spreads, which have improved by 35 basis points from April's lows. The pair is moving towards significant resistance near the 1.10 mark, a major Fibonacci target. Sterling also rose by 0.3%, marginally breaching April's twin peaks at 1.2709, though its rapid ascent suggests overbought conditions. The next major focus for the pound is the UK CPI data on May 22, with forecasts predicting a drop in core inflation to 3.6% from 4.2%, and overall inflation to 2.1% from 3.2%. The market anticipates a BoE rate cut by August, with another expected by December, potentially widening BoE-ECB rate spreads in favor of the pound.

Australian Dollar and Chinese Economic Influence

The Australian dollar gained 0.2%, buoyed by optimism over Chinese efforts to revive its property market, alongside surges in industrial and precious metal prices. However, USD/CNH rose by 0.19%, influenced by disappointing Chinese retail sales and home price data, highlighting persistent economic challenges despite strong export performance and ongoing tariff concerns.

Broader Currency Outlook

The broader currency outlook remains sensitive to upcoming economic data and central bank policies. The interplay between these factors is likely to drive further volatility and opportunities within the forex markets.