Central banks looking less dovish this summer

Carrying on from the theme in May, early June saw expectations for most central banks become significantly less dovish amid ongoing trade uncertainty, higher than expected inflation in various major economies and continuing low probability of an imminent, severe recession. This article summarises recent influences on expectations for the Federal Reserve (‘the Fed’), the European Central Bank (‘the ECB’) and the Bank of England (‘the BoE’), what the banks might do in the next few weeks and how several key charts might be affected: XAUUSD, EURUSD and GBPUSD.

Fed likely to remain higher for (much) longer

Similarly to the situation over the last couple of years, expectations for the Fed’s next cut have moved steadily back from June initially to July and now September:

Source: CME FedWatch; retrieved 6 June 

In mid June, the probability of the Fed holding at the current 4.25-4.5% on 30 July was nearly 85%. In May’s minutes, the FOMC highlighted uncertainty around tariffs, which have so far been larger than expected, and risks of higher inflation while employment and growth might deteriorate. Higher for longer is basically positive for the dollar and negative for gold in itself,  but other factors such as politics and trade talks were in greater focus for much of May.

Serious negotiations between China and the USA seem possible

In a post on Truth Social on 5 June, Donald Trump talked about a ‘very good’ call with Xi Jinping which was ‘almost entirely focused on trade’ and involved mutual invitations to meet in person. This was the first direct discussion between the two leaders since January. If a meeting is confirmed, traders’ faith in a permanent trade deal might increase and instability could decline.

News of fresh American tariffs over most of the first half of the year has been particularly difficult to follow for two main reasons: typically poor policy discipline from Mr Trump’s government and the essentially arbitrary, ad-hoc nature of most of the percentages announced. Some countries seem to have escaped fairly easily so far, notably Britain whose government has been particularly eager to placate the Americans where possible.

Confidence in the American government, economy and stock market has certainly taken a hit. As yet, though, there’s no indication of a major crisis or genuine crash to come for stock markets. Mr Trump has mostly walked back after facing significant pressure while generally positive earnings in May helped indices. Tension and volatility have decreased significantly since April, but it’s important to monitor trade and related negotiations alongside monetary policy this month.

The ECB hints at a pause

The ECB cut its deposit facility rate to 2% on 5 June as widely expected. In comments after the decision, President Lagarde said that the bank is approaching the end of a cycle, but inflation last month was actually below target:

May’s annual headline inflation in the eurozone was the first time the rate was below the target of 2% since September last year. Since this was just a flash release, though, it remains to be seen whether the final figure will show a higher reading and whether this is just a blip as September 2024’s was.

Depending on upcoming GDP and jobs, significant intrigue about the ECB’s next moves might develop this month. The next majority expectation for a cut is in September, but weaker economic data might mean this could be brought forward to July. Of the Fed, ECB and BoE, the ECB seems currently to be the most dovish, which has the potential to weigh on the euro but again with the caveat that trade and politics are also important factors.

The BoE is also poised to stay higher for longer

The BoE cut its bank rate to 4.25% in May as expected, but there was some dissent on the Monetary Policy Committee with two members voting to hold against the zero expected. 19 June saw the bank rate held but three members of the MPC dissented and voted to cut again.

In comments to the Treasury Select Committee of Parliament on 3 June, the BoE’s governor Andrew Bailey commented on uncertainty over the path of rates amid trade disruption and stressed the importance of growth in wages for upcoming decisions. Meanwhile British inflation rose significantly more than expected in April:

Annual headline inflation was expected to rise to 3.3% in part because of the increase in the price cap for energy, but the result came in even higher, suggesting possible pressure on the BoE to stop or at least reduce or delay cutting until the rate settles closer to 2%.

Like the Fed, the BoE doesn’t need to be in a particular hurry to cut rates. Growth in GDP has been lukewarm since around this time last year, but 2023’s technical recession was minimal in both depth and duration. There’s also significantly less political pressure on the BoE to cut rates compared to the Fed. The BoE’s next meeting is on 7 August with a single cut expected.

Evaluation: uncertain trade influences monetary policy

Tariffs and counter-tariffs have affected sentiment in the short term and seem likely to continue to do so in the next few weeks. However, they’ve also affected the outlook for rates in most major economies and created significant uncertainty there too.

As the most dovish of the main central banks here, the ECB’s policies might mean downward pressure for the euro in some of its pairs, while the pound’s relative strength could continue. How the dollar performs in the next few weeks seems to depend as much on trade news and the Israeli-Iranian war as the upcoming press conference of the Fed on 30 July.

Gold could hold ahead of the Fed

Upward pressure from fundamentals and sentiment has been somewhat lower in June so far as trade tension has generally calmed down and stock markets have mostly recovered well from April’s turmoil. Lower volatility is clear from both contracting Bollinger Bands and ATR, which has declined since last month but remains high at around $56.

5 June’s attempt at $3,400 hasn’t been decisively rejected yet, so it’d be quite possible to see the price moving somewhat beyond there intraday in the middle of June, but another vigorous phase of the main uptrend immediately seems less likely. The 100% weekly Fibonacci extension around $3,480 seems like a potentially strong resistance although it’s only been tested once so far on 22 April.

Equally, the area around the equivalent 61.8% Fibo and the 161.8% monthly Fibo extension would probably cap losses unless there’s a strong driver of some sort. That might be a sudden resolution of trade tension or a major hawkish shift by the Fed, both of which seem quite unlikely. Overall, the situation seems to favour short-term traders for now.

Euro-dollar looks vulnerable but lacks a catalyst

With relatively low momentum and buying saturation clear recently, it’s questionable whether euro-dollar might achieve a new high soon. Volume and volatility have declined strongly since April and the 50% monthly Fibonacci retracement seems to be more established as an area of resistance.

If the price does retreat in the near future, it’s unlikely to be a large drop to $1.11 or lower immediately, more of a retracement. Behaviour after a possible break below the main dynamic support of the 50 SMA from Bands would be one of the most important factors determining the next move. Monetary policy, especially the Fed’s meeting on 30 July, and American politics and tariffs remain in focus.

Cable touches fresh three-year highs above $1.36

Cable’s long uptrend, lasting since the start of the year, has continued in June so far with the price reaching a new high on 5 June. Relative political stability in Britain can be contrasted with the USA’s chaotic implementation of new tariffs and friction in the governing Republican party over the tax and spending bill.

The uptrend is quite mature and the price currently overbought while, as for many other major pairs, volume and ATR have declined significantly and Bollinger Bands contracted since April. The obvious long-term target is the area of the 100% monthly Fibonacci retracement, 2021’s high, but even if the uptrend continues that far it’s likely to take a long time for the price to reach this area.

The 50 SMA from Bands is slightly below $1.34, so this seems like a possibly significant support in the short to medium term as both a static and dynamic area. The Fed will meet next on 30 July and BoE shortly afterwards on 7 August, so volatility around then is likely to increase sharply and, depending on the bankers’ comments and whether the BoE actually does cut, it might become clearer whether to expect continuation or consolidation.

The opinions in this article are personal to the writer; they do not represent those of Exness. This is not a recommendation to trade.