Uncertainties Prevail as Investors Await Central Bank Actions and Face Global Economic Concerns | Daily Market Analysis

Key events:

• USA - Building Permits (May)
• USA - FOMC Member Bullard Speaks
• USA - Housing Starts (MoM) (May)
• USA - FOMC Member Williams Speaks
• Eurozone - ECB McCaul Speaks
• Eurozone - ECB's De Guindos Speaks

On Monday evening, stock futures slightly declined after a public holiday, as investors anticipated significant speeches from Federal Reserve (Fed) officials and members of the Federal Open Market Committee (FOMC) throughout the week.

Reflecting on the previous week, it appears that it left us with more uncertainties than clarifications. The inflation data in the United States was deemed acceptable but not exceptional, while the Fed decided to pause its actions while projecting multiple future interest rate hikes. In contrast, the European Central Bank (ECB) increased interest rates while emphasizing the possibility of further hikes.

Now, the focus turns to the Bank of England (BoE), which faces the challenging task of managing the situation. Despite the Monetary Policy Committee's (MPC) efforts to control it, there is a risk that inflation could spiral out of control. Among the major economies grappling with the twin objectives of curbing inflation and ensuring a smooth economic transition, the UK appears to be facing the greatest difficulties in achieving these goals.

An interesting observation is that although GBP/USD has retraced from the highs of around $1.28 seen last week, it has still gained over 3% in the past month. Additionally, the pound has also strengthened by more than 1.6% against the euro during the same period. This is noteworthy considering that back in September, as UK Gilt yields rose, the pound was approaching parity with the dollar. Now, it is trading close to $1.30. Thus, the foreign exchange market does not seem to reflect a perception that the UK economy is on the brink of disaster.

On Tuesday, the EUR/USD pair faces challenges in gaining significant momentum and trades within a narrow range, hovering just above the 1.0900 level during the Asian session.

The US Dollar (USD) continues to recover from its recent decline, which saw it reach a low not seen in over a month last Friday. The USD has been gradually strengthening for the third consecutive day, which acts as a headwind for the EUR/USD pair, retreating to 102.55 at the latest.

Nevertheless, the downside for the EUR/USD pair appears to be supported, at least for the time being, due to the hawkish outlook presented by the European Central Bank (ECB). 

Additionally, the relatively weaker sentiment prevailing in equity markets plays into the hands of the US Dollar's status as a safe-haven currency, limiting the upside potential for the EUR/USD pair. Worries regarding a potential global economic slowdown, particularly in China, cast a shadow over reports of China contemplating a comprehensive stimulus package to support its economy. These concerns continue to dampen investor sentiment. Even the recent decision by the People's Bank of China to reduce the one-year and five-year Loan Prime Rates (LPRs) on Tuesday fails to alleviate anxieties or provide significant momentum to the major currency pair.

It is worth noting that the ECB recently raised interest rates for the eighth consecutive time, pushing them to the highest level in 22 years. The central bank also emphasized the need for additional rate hikes to achieve the Eurozone's medium-term inflation target of 2%.

On the other hand, gold has experienced significant volatility over the past month. Despite recent data releases and central bank decisions, the precious metal has remained stuck within a narrow range between $1,940 and $1,980, showing little indication of breaking out in either direction in the near future.

Of course, market conditions can change abruptly, and this week is packed with central bank interest rate decisions and numerous speeches by Federal Reserve officials, which may introduce new dynamics to the markets.