Markets Eye ECB Interest Rate Decision Due Thursday

Traders eye key UK economic data due this week for Sterling direction

The Pound has been the strongest major currency this week, boosted by a run of better-than-expected UK economic data. Last week’s May GDP reading came in at 0.4% m/m, showing twice as much growth as the 0.2% reading expected by economists. Last month’s retail sales report was similarly stronger than expected.

For this week, traders will key in on Wednesday’s UK CPI report, as well as the UK jobs report on Thursday and Friday’s Retail Sales reading; if these updates confirm the ongoing strength in the UK economy, GBP/USD could build on its already stellar month.

Cable (GBP/USD) has rallied in 10 of the last 12 days, taking the pair up to its highest level in nearly a full year. For this week, the key level to watch will be psychological resistance at $1.3000. If that level, which also represents the late July 2023 high, is convincingly broken, GBP/USD could make a run at its 2+ year high near $1.3150 next.

Meanwhile, given the pound’s 17-year high in net speculative long positioning and the overbought RSI, a profit-taking dip off this resistance level would be logical, especially if this week’s UK data disappoints. In that scenario, previous-resistance turned-support near $1.2900 will be the key level to watch.

No Major Data

EUR/USD holds below $1.0900 on firmer US Dollar

The EUR/USD pair trades on a weaker note around $1.0890 during the early Asian trading hours this morning. The renewed US Dollar (USD) demand weighs on the major pair.

The ECB is anticipated to hold the main refinancing rate, the interest rate on the marginal lending facility, and the deposit facility unchanged at 4.25%, 4.50%, and 3.75%, respectively, at its July meeting on Thursday. The ECB decided to cut the interest rate for the first time since 2019 in June after nine months of leaving the rate unchanged. Analysts expect that two more rate cuts are on the table this year, in September and December.

Data 10.00: German ZEW Economic Sentiment expected?41.2 47.5, E/Zone ZEW Economic sentiment expected 48.1 from 51.3.

Dollar holds firm against majors

The Dollar held firm yesterday against the majors, with traders keeping an eye on US Retail Sales for June and the speech from the Federal Reserve’s (Fed) Adriana Kugler due later.

Traders increased their bets that the US Federal Reserve (Fed) would cut the interest rate in September. On Monday, Fed Chair Jerome Powell said that the central bank will not wait until inflation hits the 2% target to cut interest rates. “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%,” said Powell.

Meanwhile, Fed Bank of San Francisco President Mary Daly stated that inflation is cooling down in a way that bolsters confidence it’s on its way to 2%. However, Daly added that more information is needed before making a rate decision. The Fed rate cut expectation is likely to drag the Greenback lower and create a tailwind for EUR/USD.

Data 13.30: Retails Sales m/m expected -0.3% from 0.1%?& Core retail Sales expected 0.1% from -0.1%. Speaker 19.45: FOMC Member Kugler.