Currency and market analytics by Tickmill UK

[tickmill-news]

Too early to bet on rebound


On Monday, risk assets rebounded as reports over the weekend suggest that the bout of covid hysteria on Friday could be an overreaction. Air travel halts have apparently eased off over the weekend, while the WHO and South African researchers alleviated concerns with a statement that there are no evidences yet that the new covid strain is more dangerous than dominating delta strain. In this regard, the flow of negative news for the market, mainly related to new shocks in air transportation, is likely to slow down this week.

Nevertheless, it is too early to say that correction is over - the lack of reliable data on the new strain should keep risk appetite largely subdued this week. According to the WHO, it will take from several days to several weeks to understand whether a new variant of the virus is more aggressive and resistant to vaccines.

With regard to contagiousness, there is a reason for concern. South Africa saw a jump in reported cases of covid in November before the news about the new strain hit the wires, which may be indirect evidence that the virus is more easily transmitted from person to person:

New updates on covid, important for the markets, will appear today - Britain will gather ministers of the Ministry of Health of the G7 countries to discuss options for response, in the evening Biden will deliver a message. It should help to understand the readiness of the governments to take painful preventive decisions.

A barometer of expectations for a tightening of the Fed's policy - long-term rates, halved declines on Monday thanks to the relief rally. The yield on 10-year Treasury bonds rose 7 basis points to 1.54%, and the yield on 2-year bonds also gained about the same amount. European markets rose cautiously – gains do not exceed 1%, and it’s difficult to expect more. The optimism of buyers in the oil market is now mainly based on rumors that OPEC will postpone the planned hike in production by 400K barrels in January, but if we see more reports more countries opted to close borders, a larger drop cannot be avoided.

Noteworthy reports this week are Germany's CPI in November (slated for release today), ADP and NFP US November report. In addition, the first two days of the week are full of speeches from Fed representatives (Powell, Williams). Markets are unlikely to be able to react in cold blood to the comments which may touch on the topic of the new strain, as this will call into question the Fed's intentions to accelerate the phasing out of stimulus measures (QE). In general, one way or another, trading in the market this week should be reduced to reactions to news associated with covid, and should be characterized by more or less homogeneous risk-off/risk-on.

There is a risk of further decline in EURUSD, since Europe’s bullish rate expectations are under pressure due to recent trend to reinstate lockdowns, besides, it is geographically closer to South Africa and, if the new virus is indeed infectious, a new wave may hit it earlier than the United States. Considering the dollar index (DXY), the pullback after strong growth sets the stage for a further rally towards 97.70, where the next key resistance may reside:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

EURUSD looks vulnerable on dampening covid risk, aggressive Fed


Markets continue to price in a positive view on how the story with the new covid strain will unfold. In addition to the positive statements of influential health officials in leading countries such as the US, it is also useful to look at the daily cases data in the country where the strain was originally identified in order to see the dynamics of the spread of a strain that is supposedly “resistant to existing vaccines”. We are talking about South Africa, and the curve of daily cases there looks like this:

Actually, it is clear that after the surge in the incidence against the background of news about the new strain, there wasn’t any concerning development of the growth trend. The incidence rates remain high, but keep within 15 thousand cases per day.

Zerohedge provides the following interesting chart that shows how the markets are quickly discounting the threat posed by the new strain. This is the ratio of the recovery stocks index to the index of stocks that rallied during social restraints (the so-called stay at home stocks). In about two weeks, the decline in this ratio was fully recouped:

The VIX opened with a gap down more than four points in premarket, indicating strong bullish momentum confirmed in the US index futures which are currently gaining strength.

Given the growing speculation that the Fed will step up with withdrawal of stimulus in the near future due to strong pro-inflationary factors (mainly wage pressures), the balance of risks for EURUSD is increasingly shifting downward. The differential of rates on short-term bonds of the US and Germany has turned to growth again and is approaching a local recent maximum and is likely to break through it soon. The growing differential factor is the main bearish driver for EURUSD now. From a technical point of view, the vulnerable level is the lower border of the trend channel - the level 1.111, the rebound from the previous point of contact with the channel has already been completed, the risks associated with the new strain are mitigated, and the increasingly aggressive position of the Fed against the background of the moderate position of the ECB will most likely continue to provide downward pressure on the pair:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

EURUSD May Continue Decline Ahead of ECB And Fed Meetings Next Week



Unfavorable widening of the short-term rate differential has recently acted as the main driver of EURUSD weakness. The pressure on the common currency also stems from increasing carry-trade activity of European investors corresponding with fading pandemic risk. The ECB should deliver an unlikely hawkish surprise at the meeting next week to tip the balance in favor of a strong euro. So far, Euro does not look overbought despite the strong downtrend and fresh lows are possible.

The news about the omicron initially supported the euro due to the flight of carry-trade European investors from risk assets abroad. Now the bears are gradually withdrawing the bet that the omicron risks will materialize, the yield hunting is gaining momentum again, along with this, the downward risks for EURUSD starts to mount again.

There is one more factor of the Euro shorts and it is the recent revision of growth forecasts for the Eurozone due to restrictions in Germany and other European countries. Markets may be pricing European assets with a higher likelihood of restrictions than in the US due to higher covid risks, which ensures upward pressure in yield differential. Recently, the correlation of the latter with the EURUSD has risen, which suggests that sovereign bond capital flows may be playing the main role in driving Euro downtrend against the US currency.

Due to many dovish risks priced in the Euro the sensitivity of EURUSD to the statements of the ECB may turn out to be asymmetric - statements that the bank will not rush to raise rates will be largely ignored, but an unexpected signal that the ECB is going to catch up with the Fed in plans to curtail stimulus measures, on the contrary, may create the ground for a EURUSD reversal. Next week, meetings of both central banks will take place and a surprise is expected from the Fed in the direction of a greater tightening of policy, at the same time, there are no such expectations for the ECB meeting. Consequently, the markets will most likely now begin to factor in an even greater widening of the bond yield differential following the meetings, therefore, despite attempts to gain a foothold above 1.13, EURUSD is vulnerable to further decline in the first half of next week.

From a technical point of view, the latest COT data shows that the aggregate net short position of the Euro against the G10 currencies is still far from extreme values and there is room to sell. In turn, the technical analysis for the pair indicates the persistence of strong short-term resistance at 1.137 (two previous peaks on November 18 and 30), potential selling target is the lower border of the current downtrend (1.113 mark):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Fed’s bullish surprise this week may pave the way for new highs in USD



This week is full of event risks thanks to a number of central banks in developed and EM economies holding their policy meetings, suggesting a high chance of significant market shifts in FX. Key among them is undoubtedly the FOMC policy decision. Broad-based greenback rally on Monday suggests expectations are building up that the Fed will most likely capitulate due to persistently high inflation and accelerate bond purchase tapering. There is a growing risk of policy lag this week between the Fed and central banks with low propensity to hike rates (CHF, EUR) which may have profound FX implications. It will also be interesting to look at the updated Fed dot plot as the shifts in FOMC outlook regarding rates are often strong catalysts of USD trends (recall USD bullish reversal in June). Assuming that the dot plot will indicate the median forecast of two rate hikes (instead of one), money market rates in the US will be forced to adjust upward again, which could pull the dollar along with it.

It is also worth noting an interesting technical trend continuation pattern, which is formed by the dollar index - the "triangle":

If we assume that the uptrend will continue, the nearest target where resistance can be expected is the level of 97.70.

As for the Bank of England meeting this week, the risk of disappointment is high. In November markets priced in a December rate hike due to inflation threat similar to the one in the US, however closer to the meeting the chances of such an outcome began to dwindle. Particularly discouraging was the PM Johnson's warning that Britain could face a wave of new cases due to the spread of Omicron in the country while the head of the Ministry of Health said that there is no certainty that the government will keep schools open. It is clear that the central bank cannot but take these concerns into account.

If the British Central Bank disappoints this week, postponing the rate hike until better times, in combination with the aggressive Fed, this could mean that the GBPUSD fall may accelerate and bears may start to target the next important support at 1.30. Buyers weren't particularly resisting when GBPUSD tested the lower bound of the main downtrend, the 1.3150-1.32 zone, last week:

At the ECB meeting, rather moderate expectations are formed: the regulator seems adamant in its view that inflation peaks by the end of 2021 (albeit higher than expected) and starts to decline in 2022. Accordingly, there is no outlook about early rate hikes. It is worth noting that the market as a whole agrees with the ECB in its opinion on inflation: Bloomberg experts polled in December also that suggest inflation might have peaked in the Eurozone that’s why there is no need to rush for the ECB.

Accordingly, the fate of EURUSD is likely to be decided by the Fed this week, since no surprises are expected from the European Central Bank. EURUSD looks set to resume downtrend targeting 1.10:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Surging US inflation expectations suggest the Fed may act big in December


The Fed’s decision time looms and markets appear to be increasingly sensitive to inflation reports from the US, the predictive power of which, regarding the policy of the Central Bank, is increasing. Suffice it to recall that the moderate CPI report for November (no surprise on the side of acceleration) disappointed buyers of the dollar, causing a decline in the US currency index from 96.40 to 96.20 and a positive reaction of stock indexes. At the same time, yesterday's NY Fed report on consumer expectations raised the stakes on the hawkish decision again, disappointing equity markets. The report showed that inflationary expectations of US households rose to shockingly high levels in November. Household inflation expectations for the year ahead jumped even higher, to 6%:

Inflation expectations affect future actual inflation, so it is important for the Fed to keep them under control - not to let them fall or soar too much. As we can see, so far it is not quite successful and the risk of an abrupt shift in the Fed’s policy grows. The report made a negative impression on markets, the major US stock indexes closed in the red yesterday, index futures again tend to decline today due to concerns about tougher restrictive measures in the monetary policy.

Employment growth in the UK fell short of expectations, amounting to only 149K instead of 228K. At the same time, wage growth beat forecasts - 4.9% YoY against 4.6%. The British economy, it seems, is facing the same problem in its recovery as, for example, the United States - a labor shortage due to the effect of hysteresis (long “idle” of the labor force). Consequently, firms are now spending more on wages, which poses the risk of higher end prices in the future, a strong if not key argument in favor of the Bank of England's unexpected rate hike this week. However, fragility of the recovery, increased risk of a surge in new infections due to the new strain speaks in favor of maintaining the stimulus bias in monetary policy, at least for several more months. In addition, considering employment in dynamics, it can be seen that the momentum in employment seems to be dying out, and with it, the pressure in wages may begin to subside:

The pound, as we can see, wavers in anticipation of the BoE decision, GBPUSD is consolidating near the 1.32 mark, bracing for an aggressive Fed maneuver on Wednesday. Against the euro, the pound is building up its advantage in a moderate way, the pair is “moving” in the channel with a downward slope, the focus is on a repeated test towards the lower parallel to the 0.8450 area, and then potentially to the 0.8350 area:

The rapid decline to the 0.8350 area is likely to require the Bank of England to unanimously vote for a rate hike and play down the risks of the Omicron strain on activity and, in addition, hint at a rate hike in February. Nevertheless, the base scenario remains the option where the Central Bank does not touch the rate at the next meeting, but hints at a February increase. In this case, the decline in EURGBP is likely to be moderate.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Strong US PPI rise calls for decisive Fed response



The cable rallied against the dollar on Wednesday thanks to release of a bullish inflation report which showed that the rise in consumer prices accelerated in November, beating forecasts. The headline inflation rate reached 4% against the forecast of 3.7%, while in the previous month inflation averaged to 3.4%. The BoE has a difficult choice: to agree to a greater inflation risk, leaving the policy soft to smooth out the risks of a new wave of a pandemic, or to raise the rate now by limiting the risk of inflation, but making the economy less resilient in the face of possible new restrictions, which the government seems to be mulling over. In any case, GBPUSD strengthened on the data release, which means that some market participants are betting on a hawkish outcome of the Bank of England meeting this week.

Release of US PPI report on Tuesday shows that inflation pressures rise in unabated fashion
despite the Fed assurance made earlier that the upside momentum should soon start to fade. The monthly growth in production prices exceeded the forecast and amounted to 0.8% against the forecast of 0.5%. At the same time, the core PPI rose almost double the forecast, and this is no less important, because this inflation gauge excludes goods whose prices are subject to strong monthly fluctuations. In annual terms, PPI shows extremely strong growth, of course, some can be attributed to the low base last year, but what is important to note, after some short stabilization in August-September, the indicator turned to growth again, which should probably worry the Fed, because in the end, this growth will seep into the consumer prices:

The data formed the basis for yesterday's rally in greenback index (DXY) to the level of 96.50, as now the perception of inflation threat by the Fed and its response, which we will learn about at today's meeting, is the key driver in FX.

Meanwhile, the dollar is trying to get out of the triangle pattern and resume the upward movement, anticipating a hawkish outcome of the Fed meeting:

It is possible that this is a trap, as it often happens, and the markets may be disappointed by the Fed's response to inflation challenges, which will cause dollar sell-off, as recent USD gains were fueled by expectations that the Fed will pull decisively ahead in the tightening race today. However, taking into account the latest data on inflation, namely, inflation expectations of US households, which jumped to 6% and PPI, which growth is beating expectations, the Fed does not have much room for maneuver. Inflation in the US needs to be contained, the question is how decisive the answer should be.




Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

US fiscal stimulus risk spoils Christmas rally

A new week has come and it must be admitted that “contrarian” New Year rally, despite the storm of decisions by central banks last week, did not take place. Last Friday's pessimism seeped into investor sentiment on Monday, European markets and US futures slumped. Investors were upset by the news that a large spending package in the United States, the so-called Build Back Better may not be approved (its approval has hitherto been taken for granted), as Democrat Senator Manchin unexpectedly objected, saying that he could vote against. The politician's stance really should be taken seriously: Goldman Sachs removed the fiscal stimulus from its baseline scenario, and also lowered its forecast for US economic growth in the first quarter from 3% to 2% in the first quarter, from 3.5% to 3.0% in the second quarter and from 3.0% up 2.75% in the third quarter.

Along with the sell-off of risk assets, the yield of Treasuries, both near and long term, continues to slide at a moderate pace. It is noteworthy that the dollar was growing on Friday amid correction of equities, and today it is declining along with them, especially losing ground against the European currency. At the same time, EM holds well against the dollar, USDRUB does not yield to risk-off trading near the opening. This all looks very much like investor bets are dropping on the Fed starting to raise rates shortly after the end of the QE and this is likely due to the fact that the FOMC was considering that fiscal policy would pick up the stimulus baton in the form of the aforementioned spending package, when monetary incentives begin to gradually recede into the background. Now a situation is potentially emerging where this will not happen, which implies a risk for the forecast of monetary tightening. In other words, the market may perceive now that the failure to approve the spending package will force the Fed to postpone the rate hike. Goldman adheres to the same position, already doubting its previous forecast that the first increase in the federal funds rate will occur in March 2022. Against this background, currencies, where central banks are actively trying to suppress inflation by tightening policy, look attractive.

In addition to the increased attention to the prospects for fiscal stimulus in the US, this week it is worth taking a closer look at such reports as consumer confidence in Germany from GfK, consumer confidence from U. Michigan, as well as profits from Chinese industrial enterprises. By the way, speaking of the Chinese economy, the story is gaining momentum that in the cycle of tightening-easing regulation, increasing-decreasing leverage in the economy by the Chinese government, a favorable phase is beginning, as forecasts for the growth of the Chinese economy are declining (only 3.3% YoY this quarter) as well as the growing risks of external demand, which to a large extent influences economic activity of China. A few weeks ago, instructions were issued to the banking sector to increase lending to small and medium-sized enterprises, companies engaged in the renewable energy sector and developers, and to increase the issuance of mortgages. In addition, PBOC recently lowered the reserve ratio for banks (the main policy instrument of the Central Bank). With the increase in the number of stimulus measures, it can be expected that the stimulating effect will seep into external markets, and in addition, this should stimulate the demand for risk locally, including for securities of distressed developers.

 

[tickmill-news]

FOMC December minutes: no time to wait

The minutes of the last Fed meeting was a surprise for investors, despite the fact that Powell at the press conference clearly outlined the course for policy tightening. Inflation in the US is on the rise and the covid is expected to only fuel this trend, so the central bank needs decisive action to maintain price stability. Minutes showed that officials discussed an increase in the pace of curtailment of asset purchases, as well as a transition to a rate-hiking cycle earlier than expected, while the document said that this opinion is shared by “many” of the participants, that is, the consensus tends to increasing the pace reduction of monetary support for the economy. In other words, at the next meeting, the Fed goal will most likely be to communicate the plans about a rate hike already in the first quarter of 2022. Previously, this scenario was not a baseline, although it figured in the forecasts of large US investment banks.
Equity markets, as expected, reacted negatively to the news; one of the important barometers of investor risk preferences, the crypto market, also tanked right after the release of the Minutes, which clearly illustrates what was the key driver behind crypto rally in 2021. Treasury yields also reacted accordingly, pushing through the previous local high (1.7%), although it should be noted that the scenario of Fed becoming more decisive in its response to inflation has been priced in since the beginning of the year, when 10Y Treasury yields began to rally sharply from the 1.5% pivot point:

The dollar reacted positively to the news, but somewhat trimmed gains today. Speculations about what the next step will be for the Fed is unambiguously favoring the strengthening of the dollar, since other central banks, in particular those with low-yielding currencies, cannot offer a compelling counter-argument to the Fed’s stance. Nevertheless, it should be noted that, for example, the German sovereign debt market is trying to price in that the ECB will follow the suit of the Fed - the yield on 10-year bonds opened with a gap up and is trading in the area of -0.04% at the time of writing. This is a highest level for two and a half years.
With increasing attention from central banks, including leading ones, to the outlook for inflation, today's German inflation report could spark a strong market reaction, especially if the forecast that price pressures have peaked in the main Eurozone economy is confirmed. Annual inflation in December is projected at 5.1%, anything below is likely to weaken the euro against the dollar, setting the stage for a breakout below 1.13:

Some support for EURUSD is provided by risk-off in the market - European investors are trimming their investments in foreign risk assets and the outflows are offering support to the common currency. When the fall in risk assets stabilizes, one can expect that the selling pressure on EURUSD will subside too
The upside potential for the dollar is expected to become more evident today after the release of ISM's services PMI report. Two sub-indices will be of primary importance - incoming prices and hiring. The second indicator will allow you to estimate what kind of surprise to expect from the NFP report. The Omicron wave in the US could have held back hiring and a weak NFP print may well be attributed to the continuing imbalance between strong labor demand and a shortage of labor supply. The dollar is likely to focus on wage growth rather than job creation, as this is now a key proxy for labor market imbalances and a possible Fed’s aggressive shift in stance.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Post-Fed Minutes market rush eases, NFP in focus


The rush in the markets after the Fed minutes has somewhat subsided and investors are turning their eye on the release of US labor market data today. According to the consensus forecast, the economy added 400K jobs while wages rose 0.4% on a monthly basis. The ADP report released on Wednesday, which more than doubled the forecast (807K job growth), laid the groundwork for expectations of a positive surprise today. However, the ISM Service PMI was disappointing yesterday, where the headline reading fell short of expectations, but remained strong (62 points), the hiring sub-index was also below forecasts (54.9 points versus 56.5 expectations). The sub-index of prices paid remained near multi-year highs (82.5 points). The key parameter in terms of the implications for the Fed's policy is wage growth, since the Central Bank is now concerned about inflation, and wage inflation is seen as one of the precursors of the growth of consumer prices. The lack of job growth relative to the forecast and strong growth in wages will most likely not change the expectations regarding the March Fed rate hike, which odds are now estimated by the market at about 66%:

The chances of a rate hike almost doubled after the release of minutes from the Fed's December meeting.

A weak Payrolls reading, combined with sluggish wage growth, could trigger a situation where early signs of a slowdown in the economy coincide with a hawkish shift in Fed rhetoric, which could worsen growth expectations and put risk assets at risk. Weak labor data have a positive effect on risk assets when there are expectations of slowdown and recession and expectations that the Fed is on an easing path. Now the situation is different, so the market will interpret the effect of a negative report on the labor market as it is, and not vice versa.

In favor of the strong Payrolls report is the important fact that the slowdown in activity due to Omicron began in the second half of December, while the collection of statistics for the NFP ended on December 18th.

The German inflation report surprised yesterday, providing significant support to the euro. Expectations that inflation will recede were not confirmed. The headline inflation rate was 5.3% YoY against the forecast of 5.1%, the spread between short US and German bonds retreated from the recent local high, given the fact that the outlook for accelerating inflation in both countries have somewhat leveled off:

Also, the European currency was supported by the data for the EU bloc: core inflation beat forecasts rising to 2.6% YOY, retail sales grew much faster than expected - 7.8% against the forecast of 5.6%.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

USD benefits a surge in risk-off, bonds point to a possible Fed overreaction

Asian and European markets are in the red on Monday with the weakness of US equities on past Friday being key catalyst of downward momentum. Investors increased demand for cash amid growing risk-off mood helping USD to stand out among G10 peers. Interestingly, 10-year bond yields extended decline after hitting 1.90% peak in the last week as market participants appear to be pricing in an excessive and actually belated Fed response to inflation, which could lead to a slowdown in the economy in inflation in the long term. The yield decline factor has a negative effect on the dollar. Sovereign debt of other advanced economies is also in demand today, which, coupled with the decline in risk assets, is a signal that economic growth forecasts may be being revised lower by the market.
In turn, short-term US bond yield resists decline reflecting expectations of an aggressive Fed tightening move at the upcoming meeting. The spread between 10-year and 2-year bonds is spiraling down, which often constitutes expectations of economic stagnation or a policy error by the Fed:

Escalating tensions between Russia and NATO is another source of bearish concerns. Oil shows uncharacteristic resistance to risk-off, remaining at a multi-year peak due to fears that sanctions pressure on Russia will exacerbate present supply issues in the energy market. Accordingly, any signs of a de-escalation of tension may open the way down for oil as the risk-off factor can be countered only by the factor of OPEC persisting short-term undersupply, which, in principle, have been priced in by the market. The ruble is the worst in the EM currency sector, braces for breakout of 79 mark, the highest level since 2020.
Regarding the Fed meeting, the key point will be the weight of the balance sheet offloading in the normalization of policy. If the Fed puts more weight on QT, the forecast of four rate hikes this year could be in jeopardy, leading to a rollback of expectations, taking away support from USD.
EU and UK Services and Manufacturing PMI data showed that the impact of the Omicron outbreak on economic activity was moderate, with price pressures building again in the services sector. The Bank of England will hold a meeting on the fourth of February and the chances of a rate hike are growing especially in light of inflation signals.
The Bank of Canada meeting will take place on Wednesday and we should expect a 25 bp rate hike thanks to progress in employment and clear signs that inflation needs to be contained. The case of USDCAD revisiting 1.25 could mean the risk of breaking the key trend line and moving to a protracted downward movement:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

EURUSD aims at 1.10 as the ECB will likely disappoint again next week



There was a sign of relief on geopolitical front, welcomed by asset markets, after the Russian Foreign Ministry said that a war with Ukraine was “unthinkable”, hinting that diplomatic resolution of the conflict may be in cards. The market focus today is on a portion of US price and employment data, namely PCE and employment cost indexes, which should help to calibrate better the chances of the Fed rate hike in March by 50 bp.

The dollar broke yesterday to a new high on the back of quickening divergence of the Fed’s policy with its major peers and Powell’s signal that the economy should be able to digest the rapid pace of rate hikes. Powell’s remark, that there is enough room to raise rates without the risk of disrupting the recovery of the labor market, thrown at a press conference, signaled that the Fed could go all out with the terminal interest rate being higher than expected in the end of tightening cycle. The US yield curve is flattening, which is the classic bond market fear that the Fed's policy will choke growth, which in turn leads to conclusion that inflation premium embedded in long-term yield becomes excessive and should be corrected lower.

Futures markets priced in 31 bp rate hike in March which means the dollar still has room to rise if incoming data points to strong economic activity early in the year warranting more aggressive Fed move. At the same time, ceteris paribus, weak US data in February may shift the market consensus back towards 25 bp, causing USD to fall out of favor and pull back a bit.

Q4 Labor Cost Growth in US is expected to be at 1.2%, despite a rather strong growth of 1.3% in the third quarter of 2021. The dollar is likely to react positively to higher-than-expected print, as wage dynamics are now under close attention of central banks due to running imbalances in supply and demand of labor which work as a good predictor of how long high inflation will persist and will there be a second and even third-round inflation effects.

Currencies that depend on the cycle and correlated with risk assets are likely to be able to go into an upward correction against the dollar next week, which cannot be said, for example, about EUR or JPY. German GDP data disappointed today (1.4% vs. 1.8% forecast), which was another reminder that the ECB is unlikely to rush to catch up with the Fed at the upcoming meeting. EURUSD may be looking for support somewhere near 1.10:

Looking at the second group of currencies, there is an interesting opportunity to buy the dip in AUDUSD after a strong fall in the area of 0.69-0.6950 before the RBA meeting next week. A set of strong Australian inflation data could form a solid foundation for a hawkish CB decision next week:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

B] Hawkish BoE and ECB put greenback under great pressure as policy gap with the Fed narrows [/B]


Dollar reversed gains made in the first half of Thursday session with the DXY shedding nearly half a percentage point after EU and UK central banks signaled that they would be catching up with the Fed in terms of policy tightening. The Bank of England raised the rate to 0.5%, however, the fact that 4 out of 9 officials voted for an increase to 0.75% makes it clear that the BoE has not finished the tightening cycle and if inflation persists, then the markets should be ready to price in another rate hike on one of the upcoming meetings, in March or maybe in May. In addition, the BoE has completed QE program and will gradually move to the sale of assets from the balance sheet.

The limit of the current cycle of raising rates by the Bank of England should be the level of 1%. For now, policymakers have said they will "consider" actively selling government bonds to speed up the process of reducing their balance sheet. Needless to say, this is uncharted territory for any mature central bank and could prove to be much more of a challenge than simply stopping reinvestment, especially if the Bank finds itself selling during a market turmoil.

In case of weak NFP print tomorrow, which may somewhat soften expectations regarding the Fed's March rate hike, GBPUSD has the opportunity to continue moving within the uptrend and test the level of 1.38 as the BoE’s policy gap with the Fed apparently narrows:

The ECB announcement contained no surprises, but Lagarde's hawkish comments allowed the Euro to challenge 1.14, the highest level since mid-January. Weak labor data tomorrow will likely give a green light for EURUSD to test the horizontal resistance at 1.1470:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Dollar is back on growth track thanks to hawkish NFP, possible upside surprise in January CPI

The surprisingly strong NFP report for January markedly eased pressure on the dollar as it reminded that the Fed is likely to lead a hawkish policy reassessment by the central banks of major economies. After release of the report, the two-year US bond yield surged by 9 bp to 1.3%, indicating that the report made a strong impression on the market, in particular due to low expectations after gloomy ADP print:

The strong labor market report also lifted the chances of a 50bp rate hike by the Fed from 8.5% to 32.7%:

Speaking about which currencies are more vulnerable to declines against the dollar than the rest in the current central bank tightening environment, it’s reasonable to focus on JPY and CHF. Central banks here are the least likely to react to inflation-related developments due to the long period of deflation and the fear of reacting too soon, breaking off the desired trend. The euro suddenly gained more resilience as the ECB took a big step towards tightening policy last week, after which short-term rates shot up (yield on 2-year German Bunds from 0.05% to 0.25%) due to which demand for cash rose. Over the weekend, the comments of the ECB official Knot turned out to be interesting, as they can shed light on the fate of EURUSD in the medium term. He said that it is possible to see ECB rate hike by 25 bp in October followed by increment hikes of 25 bp. The underlying market expectation after the ECB meeting is now the outcome, where the central bank will be raising rates by 10 bp starting from July. In addition, Knot said that inflation in the Eurozone is mainly generated by fuel prices, while in the US it is the result of rising consumption; it follows that the tightening cycle in the US may be more pronounced than in Europe. Therefore, we can assume that the breakdown of EURUSD towards 1.15 most likely will fizzle out soon and the price may soon look for reversal points. Sell-off in USD pairs, including EURUSD, may resume this week, in particular after the release of CPI in the US for January. Strong growth should increase the chances of a 50 bp Fed rate hike in March, which, in fact, is now the main potential driver for the recovery of the dollar. EURUSD is likely to test support at 1.1380 ahead of the CPI report, as the chances of a positive surprise in the data are high, especially in light of January's wage growth picking up to 0.7%, as shown in the NFP report.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

US CPI will likely surprise on the upside due to labor market imbalances


On Wednesday, sellers in the sovereign debt markets take profits before release of the key inflation data point for the market (US CPI), yields pulled back from key resistance levels (2% on 10-year Treasuries, 0.25% on German Bunds). Another driver of the rally could be acknowledgment, that there was an overreaction to the ECB and Fed meetings and actual pace of policy tightening could be slower. At the same time, demand for risk appears to be on the mend, European indices and futures for US indices rose, yield search puts constraint on early dollar rally, DXY continues to consolidate around 95.50 ahead of CPI print tomorrow:

Tomorrow's US CPI for January will decide the fate of the Fed's March rate hike by 50 bp (either make it a baseline scenario, or lower the chances). The report will be critical to answering the question of whether the Treasury sell-off continues and whether the 10-year rate goes beyond 2%, which could trigger a breakout move, as there was initial test of 2% key resistance zone yesterday.

Even with consensus of 7.3% in headline inflation and 5.9% in core inflation, there is some room for a surprise on the upside, primarily due to strong wage growth due to ongoing labor market imbalances (0.7% MoM in January vs. 0.5% expected). The jobs quit rate in the United States remains at an all-time high together with a significant increase in wages, they fell into a positive feedback loop - the negotiating power is now on the side of workers which is quite unusual:

Today, representatives of the Fed Bowman and Mester will have their say, the focus is on assessing the persistence of pro-inflationary factors in the economy. Fed rate hike by 25 bp already priced in, the chance of 50 bp outcome is approximately 25%. The ECB releases winter forecasts for growth and inflation today, markets are focused on inflation estimates in 2023, since the ECB is expected lift-off the rate next year. The euro is likely to react positively to the report if the inflation estimate will be above 2%. Also, today there will be a QA session with ECB official Schnabel, who was one of the first to start sounding the alarm about inflation and will probably try to draw attention to this issue again.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Despite major escalation markets are still reluctant to price in major spillover effects from Ukraine conflict

As geopolitical tensions increased sharply on Monday, policy tightening cycles of central banks and inflation challenges have been pushed deeper on the sidelines. The focus remains entirely on military operations in Ukraine, as well as the sanctions war between the West and Russia. The third package of EU sanctions, including financial, transport, technological, export and other restrictions, caused panic in the Russian currency market on Monday, which led to collapse of the ruble by more than 20% in the first two hours of the trading session. The Russian Central Bank raised interest rate to 20%, effectively limiting speculative pressure on the currency, carried out currency interventions for $1 billion, temporarily banned brokers from executing orders to sell securities from foreign investors, which caused the latter to panic. ADRs of Russian companies traded on the London Stock Exchange plunged 50-60%. Russian currency devaluation was apparently brought under control later in the session, at least partially. The stock market section of the Moscow Exchange is closed today.

Representatives of the Russian Federation and Ukraine sat down at the negotiating table in Belarus, but the chances of a peace agreement that would suit both sides are small. The Ukrainian authorities probably believe that the growing support of the West, primarily in the form of arms supplies, sanctions pressure, as well as reception of refugees, has significantly improved their negotiating position (than, for example, at the beginning of last week), due to the fact that Moscow receives a signal that Kyiv may be ready for a protracted conflict, while at the same time the original goals of the Russian intervention, steep price of the military campaign (primarily large economic costs), makes serious concessions for Russia unlikely.

However, de-risking in global asset markets, despite the risks of an even more escalation, remains quite contained. Greenback rose as US investors flew European asset markets and safe heaven demand increased in general. European stock indices traded moderately in red. Sovereign debt yields rebounded after falling early in the session. This suggests that there is no panic that the local risk will become a trigger for global recession, at least for now:

Gold posted moderate gains as well, which once again underscores the fact that investors are in no hurry to take Ukraine conflict beyond the scope of local risk:

Oil quotes showed mixed performance, financial sanctions against the Russian Federation have led to the fact that the price differential between Russian Urals with world oil benchmarks has widened, which indicates less market appetite for Russian grade of oil. An important event for the market will be OPEC+ meeting on March 2, where output policy for April will be discussed. The key uncertainty is whether OPEC+ will increase production faster, trying to avail of higher prices, or stick to the schedule. For Russia, it should be tempting to continue pushing oil prices up, urging OPEC to gradually hike output, as this will in some way act as a response to Western sanctions in the form of higher risks of cost-push inflation for Western economies. Therefore, the risks for oil prices, without taking into account possible de-escalation of the conflict in Ukraine, appears to be skewed towards further rally.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Market Watch March 7th: All eyes on commodity markets


FX developments are now entirely subject to the buying frenzy in commodity markets as severe disruptions in supply chains become increasingly evident. Prices for certain commodities are updating highs at an unprecedented pace, rumors about embargo of Russian exports and threat of stagflation in Europe are becoming key trading themes in major asset markets. In the current juncture, pressure on European currencies and currencies of emerging markets is unlikely to ease soon.


Dollar: risk aversion adds hefty premium

The dollar continues to outperform the G10 currencies as flight from risk intensifies. Option premiums in FX surged while sell-off in European equities gathered pace. US statements that embargo could be imposed on Russian oil exports (which is about 5 million b/d) led to a surge in oil to $139 and ruble depreciation to 140 per USD.

Other signs of stress in the market include continued widening of the FRA-OIS spread (an indicator of credit risk in the interbank market). Despite the fact that the Fed has a sufficient set of tools to provide liquidity and a generally high level of liquidity in banks after the pandemic, high uncertainty forces banks to cut lending. More information on this issue will appear on Wednesday, when data on the demand for 7-day USD swap lines from the Fed will be released. Last week, the ECB's auction on 7-day USD swap lines indicated rather high demand - $272.5 million from European banks.

The cutoff of 7 Russian banks from SWIFT on March 12th could also hide many black swan risks. The freezing of Russian assets is already affecting European fixed income market - the German Finance Ministry was forced to issue additional bonds maturing in 2024, as some of them were included in the frozen Russian assets. At the same time, ETFs to emerging markets are now facing capital outflows and, due to the fact that exit from Russian assets is not available, other emerging markets are under pressure. The most vulnerable among them are Brazil, Mexico and Poland.

Euro: Conflict in Ukraine causes more pain

EURUSD continues to decline against the backdrop of a lack of prospects for an early resolution of the conflict in Europe, and so far, the balance of risks is skewed towards further decline. This is also indicated by huge demand for insurance against the fall of EURUSD in options, even exceeding the demand that was at the beginning of the pandemic in 2020. Some resistance to the current decline in EURUSD can be expected at 1.0760-1.0770, stronger at 1.0640, this is the low of March 2020:

Pound: better than euro, but not very good either

At the same time, the pressure on the pound is less strong, as a high percentage of extractive enterprises included in the FTSE 100 index and which are now doing better, reduces capital outflows. In addition, the Bank of England looks more determined to respond by raising interest rate to fight excessive GBP decline. From the technical point of view, EURGBP has broken through the important support level of 0.8270, which in itself is a signal for further downside.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

USD poised to renew highs on China Covid issues, FOMC expectations


The dollar has got another growth driver. The PBOC unexpectedly lowered reference rate of CNY/USD, which may indicate its willingness to weaken yuan against US currency. This is usually seen as downside factor for Asian currencies which ultimately may also support USD demand.

Markets’ risk-on/risk-off swings continue to depend on the progress of peace talks between Ukraine and the Russian Federation as this determines expectations of sustainability of current trend in commodity inflation which hinders growth of a large number of companies, especially in those countries that are dependent on commodities imports. There is also some attention to the situation in China, where the outbreak of covid forced authorities to reinstate covid restrictions in large industrial and commercial centers - Shanghai and Shenzhen. This bodes ill for production and could create ripple waves in supply chains, which also have implications for inflation. China, judging by their stance, are not much willing to deviate from the policy of “zero covid cases”.

The role of renminbi in global FX have increased recently as since the start of the Russian special operation in Ukraine, CNY/USD has risen by several percent, which could look like the yuan is taking on part of the task of being a safe haven currency, like the dollar. However, the PBOC’s actions show that it may be willing to boost activity through exports growth and sees weakening of the yuan as a solution. USDCNY came out of a tight range gaining 0.7% in a few days:

Coupled with covid measures, this maybe be regarded as a signal of some slack in China economy or at least concerns about a slack, which may lend more heft to the current story of safe heaven USD.

If this interpretation of the yuan's weakness is correct, Asian currencies, as well as ZAR and BRL, commodity currencies from the EM sector, could come under pressure as well.

In this week, market movements will be also determined by the expectations regarding upcoming FOMC meeting, which will be held on Wednesday. The Fed is apparently forced to deliver a vigorous response to inflation shock, especially in the very sensitive (both politically and economically) spending item both US households and government – gas. Barring significant de-escalation in Ukraine (which could quickly unwind a large part of geopolitical premium in the dollar), USD looks poised to extend rally past recent highs.

In terms of technical analysis, USD overbought conditions have eased after the currency index soared to almost 99.50 in a very short period of time (two weeks), pulled back, and retested the resistance zone. Now there is a correction as part of the zone retest, there is no more flight into the USD based on surge of market risk-aversion, however rally looks persistent:

Also, as it became clear from the last meeting of the ECB, the potential of the US Central Bank and the ECB to respond to inflation by tightening policies is now significantly different. The ECB gave a signal that it is extremely constrained in actions, since other indicators of the economy and the degree of involvement in the trade war with the Russian Federation do not yet allow moving the rate, while the US economy, at least judging by the trend in employment, is in much better shape for these actions. Hence the formation of corresponding expectations for the dollar.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Greenback unwinds safe-haven premium, China Covid efforts in focus

Economic news from China today beat expectations in a positive way, especially surprising was the growth of retail sales as market set quite low expectations on the figure. Restrictions on mobility inside the country during the Lunar New Year, which were supposed to contain growth in retail consumption and social distancing measures introduced to combat Covid outbreak, unexpectedly had less effect on retail consumption. Positive news should help the PBOC to slow down or pause easing of monetary policy.
Retail sales grew by 6.7% in February against the forecast of 3%. Industrial production rose by 7.5%, almost doubling the forecast. Investments in fixed assets more than doubled the forecast and amounted to 12.5%. The yuan strengthened slightly against the dollar.

Global markets seem to be pricing in reduced level of risks of further escalation of the Ukraine conflict, oil has collapsed (down by 8% on the main benchmarks), gold declined 1.33%. Over the week, gold prices fell by 6%, oil by 23%.

The geopolitical premium in dollar is correspondingly reduced, EUR and GBP win back losses. Looking ahead to the end of the week, the main focus is tomorrow's Fed meeting. A 25 bp rate move seems to be warranted, shifts in expectations will primarily depend on hints about May decision (25 or 50 bp rate hike).

There is some positive momentum in the Russian ruble, however, due to capital controls and trade blockades, even a normally liquid market such as the foreign exchange market is now extremely illiquid in Russia. The market is trying to take into account the optimism before the upcoming talks between Ukraine and Russia, which are expected to take place today.

The leading indicator of risk aversion/risk-taking right now may be evolution of the covid situation in China. Major cities such as Shanghai and Shenzhen are experiencing a partial lockdown. It should be noted that the outbreak occurred in the northern part of China, where more heavy industry is concentrated. The measures introduced lead to suspension of production and shipment of goods. Attention is also drawn to the news about the new strain VA.2, which, according to preliminary data, is more severe than Omicron. Examples from the recent past show that when news about a new strain reaches critical mass (detection in several countries), markets lose their temper, so to speak, and go into risk-off.
This is how the dynamics of reported cases of Covid in China looks now:

The release of PPI in the US is scheduled for today, which will provide more information about price pressures in production chains and may also slightly correct expectations for tomorrow's Fed meeting. The indicator is expected to print at 0.9%. Later, ECB President Christine Lagarde will speak, who may give more information about how the ECB is going to deal with the consequences of the impact of trade sanctions on the Russian Federation.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

EURUSD forms a triangle pattern and downside breakout is likely


Markets are expecting a 25bp rate hike from the Fed today and indications in Dot Plot for an additional rate increase of 90-100 bp this year. Forecasts of a higher terminal rate this year should be a positive surprise for the dollar. The degree of concern about the conflict in Ukraine and its economic implications is also a very important element of today's Fed communication, since the level of investor confidence in the Fed forecasts will depend on this. Markets will also pay much attention today to the release of Canada inflation report for February, which will likely impact BoC’s decision at the upcoming meeting.

Statements by Ukrainian and Russian officials characterizing the progress of the negotiations point to a de-escalation, which is causing a pullback of recent movements in gold, oil, USD, as well as sovereign debt yields. One of the clearest examples was the statement by Ukrainian President Zelensky that the country would not be able to join NATO. The dollar, which has been fueled by geopolitical tensions all this time, is retreating, European currencies have accordingly acquired a growth driver. The Chinese Central Bank unexpectedly interrupted weakening of the yuan, which has been propping up UD demand, in addition, the announcement of Saudi Arabia that it is considering the possibility of accepting payment for oil supplies to China in yuan was unpleasant news for the US currency. After all, the long-term demand for the dollar is based, among other things, on the concept of the so-called "petrodollars".

Markets have little doubt that the Fed will raise rates by 25 bp today – chances of an increase by 50 bp. estimated at 10%. Technical policy adjustments such as reverse repo and banks' excess reserves rate changes will also be scrutinized by investors.
The main market reaction will depend on the published economic forecasts, as well as Dot Plot - the aggregate opinion of officials about how the rate will change this year, in the medium and long term.

The base case is an indication in Dot Plot that the interest rate will be increased by another 90 bp this year. However, the combination of a higher inflation outlook and lower GDP growth (i.e., stagflationary outlook) may suggest that the Fed will be limited in actively raising rates, and in this case the risk of a negative reaction to the dollar will be high.

However, in the medium term, the chances that the Fed meeting will be more positive for real rate growth in the US than the last ECB meeting for real rate growth in the EU are higher. Restoring trade links and addressing disruptions in EU supply chains is a medium-term factor that will have a negative impact on the EU economy, curb growth, fuel resilience of inflation and its broad impact. The US is now less exposed to these risks, which leads to a more favorable forecast for real rate growth.

EURUSD found a balance near the level of 1.10 ahead of the Fed meeting, the pair has been forming a characteristic triangle for a week, which usually precedes a breakout movement. If the Fed does take a decisive step forward today, investors will most likely be inclined to search yield in the US financial market for some time, which will put pressure on EURUSD. Based on these considerations, a downward exit from the triangle is a more likely scenario:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Breakout in USDJPY could signal new leg of the bullish rally with 7-year high as target



Powell's speech yesterday definitely impressed investors as the Fed Chair took the opportunity to communicate a possibility of faster rate hikes which was interpreted as the policy bias of the Fed getting more hawkish. Markets were quick to price in 50 bp hike on May as a baseline scenario, the odds of the outcome rose from 50% to 60%:

One of the Fed officials, James Bullard, said yesterday that it is appropriate to hike interest rate to 3% before the end of the year, market expectations center around 2.7%. New details from the Fed exacerbated US yield curve inversion – short-term Treasury yield rose so much that the spread between 10-year and 2-year bonds narrowed to 0.17%, reflecting increasing market concerns about the Fed’s policy error:

High oil prices are fueling speculations that the global economy will soon slide into recession. It is appropriate to recall the 80s when the then head of the Fed, Volcker, faced dilemma similar to Powell’s - an inflation shock due to high oil prices and the need to tighten policy. Then the rate was raised to 15%, which turned out to be excessive and plunged the US economy into recession. The dollar then rose significantly. Now the Fed has also set a course for tightening, and with each new statement the bar is getting higher.

The combination of high oil prices and increasingly hawkish Fed policy stance is a strong precondition for weakening of the Japanese yen. Today we see a significant rally in USDJPY by almost 1 percent. The status quo of the Bank of Japan increases risks of further collapse of the yen, it is quite possible that the breakout of 118.5 on USDJPY (the upper limit of the medium-term trend) and then 120, an important resistance level, should bolster speculations about a rally towards the 7-year high at 125:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.