Currency and market analytics by Tickmill UK

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Double bottom in EURUSD suggests bearish breakout towards 1.08 may be in cards

Fixed-income markets of advanced economies show signs of recovery after a heavy sell-off on Tuesday. European currencies cede ground against USD after a brief rebound. US 10-year Treasury yield bounced off 2.40% and is moderately down. GBPUSD fall intensified after release of February inflation data, which together with the dovish BoE shift in March hit UK real yields outlook badly. Annual inflation in England accelerated to 6.2% (forecast 5.9%) – the highest level in almost 30 years:

Producer price inflation also hit a new high of 14.7%, setting the stage for high consumer inflation next month.
The dollar resumed advance against the background of an increasing number of signals that the Fed will tighten monetary policy much faster than the central banks of other developed countries. Following the speech by Powell and a number of other top managers of the Fed on Monday and Tuesday, there was a strong reassessment of expectations for the next two Fed meetings. Markets now expect the rate to be at least 75 bp higher after two next meetings, the probability that interest rate will be 100 bp higher estimated at about 35%. This means that markets are quite seriously considering the scenario that the Fed will raise rates by 50 bp for two meetings in a row.

Another powerful USD driver are expectations for the Fed's terminal rate (the rate level at which the Fed will complete tightening cycle). Now it is at the level of 2.75%, but may soon reach 3%. It is clear that the vector of markets’ interest rate expectations suggests more near-term USD gains are ahead with the biggest advance to be seen against currencies where central banks persist with low rates, as well as against European currencies, which continue to be pressured by uncertainty around the Ukraine conflict and its economic consequences.

With the equilibrium in sovereign debt markets, USDJPY has also stabilized, however, the pair is apparently bracing for a breakout of 121. Also, pressure on the yen and European currencies is exerted by a strong increase in oil prices, which creates a dilemma for the central banks of these countries – slowing growth potential and high inflation which greatly limits ability of monetary policy to affect output. Attempting to contain inflation by raising rate, the central bank only stifles growth.

EURUSD dived below 1.10 again forming double bottom at 1.0950, suggesting bearish breakout may be in cards. In case of a leg lower, retest of horizontal support at 1.08 looks highly likely in the near term:

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.

 

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Dollar renews rally ahead of payrolls release, USDJPY targets 125


Stagflation risks seem to take their toll and after a short pause European currencies and the Japanese yen continued to depreciate against greenback. The dollar index rose by almost half a percent advancing past 99.00 handle. USD also rises on the assumption that the US March labor market report will surprise on the upside cementing market view that the Fed will raise interest rate by 50 bp two meetings in a row.

Among currency pair majors, a particularly strong reassessment of expectations occurs in USDJPY and GBPUSD. The yen slipped more than 1% against the dollar and technically any significant resistance can be expected near 125 handle. Cable tumbled by half percentage point against the dollar as markets gradually come to realize that the Bank of England may have promised too much in terms of tightening policy and will likely be more dovish at the next meeting. The ECB has been less hawkish in its recent policy guidance, being more cautious in dropping hints about unwinding of monetary stimulus, hence there may be less pressure on EURUSD from dovish reassessment of future ECB policy.

The US yield curve inversion reached a new extreme, with the spread between 30-year and 5-year US Treasury yields reaching zero for the first time since 2006:

This means that markets expect a short period of relatively high rates followed by a long period of low interest rates. High and low rates, respectively, accompany periods of ups and downs in the business cycle. Periods of yield curve inversion are often accompanied by strong dollar.

There may be also some focus on EU inflation report slated to release this week. Price growth is expected to accelerate, over 6% in Germany and 6.7% in the Eurozone. Core inflation is expected to exceed 3% YoY. However, given clear signals of cost inflation due to the strong rise in energy prices, the effect of the data on foreign exchange market may be insignificant, as investors are likely be prepared for an upside surprise.

Several of the ECB's talking heads will also speak this week, including Lagarde. Despite expectations that the ECB will raise rates this year and more than once, policy gap with the Fed is growing, and ECB officials are unlikely to be able to do anything about it.

Important economic reports on Britain are not expected this week, Rishi Sunak and the head of the Central Bank Bailey will make comments in Parliament. The dynamics of the pound will depend on the behavior of the dollar this week.

The Bank of Japan intervened in the bond market, however, it did not succeed in holding back capital outflows. The yen looks vulnerable to further declines due to a combination of high fuel prices (together with Japan's high reliance on energy imports) and Fed policy expectations. The movement of USDJPY towards 125 seems to be a matter of time.


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.

 

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Technical setup in the Dollar Index suggests upside rebound is in cards


The rebound in SPX over the past 10 days was in the 2% of the strongest bear market rallies (defined as a fall 20%+ from ATH) in nearly 100 years of observations, indicating speculative flows could play a good part in it. According to Nomura strategist McElliott, the rally was fueled by buying frenzy of retail investors, suggesting there is a high risk that the rally isn’t sustainable:

Yesterday SPX added 1.23% in spite of moderately negative background in geopolitics and persistent inflation challenges. European markets do not share the optimism of US indices today - main equity indices bear moderate losses within 1.5%. There is conflicting information on the de-escalation of the conflict in Ukraine: nodding its head initially that, yes, the situation is moving towards a truce, the West later changed its stance and began to interpret the “partial” withdrawal of Russian troops from Kyiv and Chernigov as another maneuver to buy time. Clearly, the surge in risk appetite seen in recent days could be very volatile.

The dollar, within the continuing negative correlation with the US stock market, lost another half a percent today. The situation resembles a long squeeze against the background of the emergence of a clearly-defined catalyst that is easier to interpret by majority of the market (“soon end of the war”) and monetary policy divergence factor is likely to come back into spotlight soon.

The dollar index has formed a nice range of 97.80-99.40 on the daily timeframe as part of a bullish trend. Often this pattern indicates that the trend will continue. Selling of the dollar in the last few days has been rapid, the RSI is approaching the overbought zone. Betting on a false probe lower or a rebound from 97.80 looks an interesting opportunity:

Yesterday's reports on the US economy (Case-Schiller index, JOLTS, Consumer Confidence) refuted hopes that inflation in the US is slowing down. At the same time, the market is strengthening the opinion that the Fed will continue to revise the pace of tightening policy upwards. The gap between Fed-targeted interest rates and inflation expectations has never been so wide – the Consumer Confidence report pointed to household expectations of inflation at 7.9%, while the Fed interest rate is in the range of 25-50 bp. Markets are predicting 9 more rate hikes of 25bp each this year (i.e., range 250-275 at the end of the year):

The head of the Central Bank of England, Bailey, in his speech yesterday warned that the British economy is sliding into stagflation - a state characterized by low rates of real output and high inflation. He called the ordeal Brits are facing a historic shock to real incomes. The Central Bank is really in a dilemma: if the rate of real output (real income growth) is already low) how to contain inflation by tightening policy without sending the economy into recession? In the second quarter, according to the forecasts of the Central Bank, inflation will accelerate to 8%. Nevertheless, the Central Bank is betting that price growth will begin to slow down at the end of this year (the timing has already been shifted more than once). The easing position of the Central Bank will probably remind the pound sterling more than once.


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.

 

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New cycle high in US CPI is not enough for greenback to push higher

US CPI in March surprised on the upside adding some strength to greenback. Broad prices rose by 8.5% against the forecast of 8.4%. On a monthly basis, consumer price index jumped 1.2%:

However, core inflation, which excludes fuel, slowed to 6.5% vs. 6.6% expected, which tells us that fuel has made a big contribution to the rise in headline inflation. Looking under the hood, we see that in March, the increase in energy prices in the United States amounted to as much as 11% MoM:

The US is facing a cost-push inflation shock, but the pass-through of this inflation to other consumer prices will depend on persistence of the trend – fuel and food prices are notorious for high month-to-month volatility. If oil prices turn into a bearish correction, the chances of aggressive rate hikes by the Fed, currently priced in the interest rate markets, will decrease, as details of the report show that this is the fuel prices that drive up headline inflation rate. Elsewhere, inflation has been fairly modest, and the recent boom in used car prices has turned into deflation, with prices down 3.8%. Serious concern from the Fed can only be expected if price growth becomes broader, which is not yet the case.

There were no surprises in the German inflation report - consumer prices rose by 7.3% yoy, the main contribution to the rise of headline reading was also made by energy prices.

The unemployment report in the UK was somewhat disappointing; job growth was only 10,000 against the forecast of 50,000. Unemployment was 3.8%.

On Wednesday, the dollar index made a second attempt to gain a foothold above the level of 100, so far to no avail. There is some calm on the geopolitical front, barring escalation the situation is stabilizing. Nevertheless, oil prices rebounded, Brent and WTI added an average of 4.8%. EURUSD consolidates near 1.09, the Cable posts modest gains ahead of important data releases. Tomorrow's UK inflation data may come as a bullish surprise for the markets, so a pullback in GBPUSD towards 1.30 can be seen as a good entry point for long position on expectations of a strong CPI.



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.

 

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Gold is poised to retake $2000 level and here is why

US inflation report for March released on Tuesday stirred debates about inflation peaking (core inflation 6.5% vs. 6.6% forecast, used car prices -3.8%), but the bearish impact on the USD was short-lived - Fed hawk Brainard came to the rescue with comments about interest rate and QT, which fueled rally of Treasury yields. According to Brainard, the Fed may decide on balance sheet runoff as early as May and started to sell assets already in June. Regarding rate hikes, Brainard hinted that the Fed will not drag out the process of tightening and will quickly bring it to the desired level. The bearish candle on the dollar index (drop from 100+ to 99.80 points) on the CPI release swapped for a very aggressive rally towards a new local high at 100.50 points. Interestingly, after leaving the March range of 97.80-99.50, the breakout and subsequent rally faced little selling resistance at 100 and 100.50 points, while the price range during the rally was unusually tight:

The breakout occurred at about the same time that the EU began to develop the thesis of protracted Ukraine conflict. Statements of EU officials that the hostilities may not end soon and that "the war must be won on the battlefield" undermined the market's hopes for early peace talks, which led to an increase in the geopolitical premium. In the same period, gold, a traditional defensive asset, also moved into growth, gaining 2.5%:

The new phase of the escalation is only about a week old and is probably far from its climax, so in the absence of large-scale de-escalation announcements, demand for the dollar and gold will remain high and the rally will continue. In this regard, the bet on retest of $2000 in gold looks justified. At the same time, the weakness of the Euro, the British pound, and the Japanese yen, which is also under pressure due to continuing rally of longer maturity Treasury yields, will likely only increase.

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.

 

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Bearish ECB signal sets the stage for further EURUSD decline, 1.05 level in sight


Costly in terms of economic costs, the policy of “zero covid cases” forced the Chinese Central Bank to cut reserve ratio for banks by 25 bp on Monday. According to the PBOC, this should boost liquidity in the banking sector by 530 billion yuan which should in turn stimulate lending. The easing measures taken by the PBOC send a warning signal to global asset markets about potential setback in China growth in 2Q. Data on the Chinese economy for 1Q came out better than expected, except for retail sales, which plunged in March by 3.5% YoY, more than twice as much as expected. Unemployment rose from 5.5% to 5.8%.

EURUSD struggles to recover after collapse on last Thursday below the previous local low, to 1.0750:

The catalyst for selling was the ECB meeting, in particular Lagarde's downbeat comments, which showed a high level of concern about macroeconomic stability. Together with very modest initiatives to use monetary tools to combat the blow from inflation, the ECB basically acknowledged that there is little it can do in the current juncture. Lagarde said that the downside risks to the economy rose substantially and inflation became broader (dimming hopes that inflation will subside as oil prices pull back). The eagerness of the ECB to respond was quite disappointing - according to Lagarde, quantitative tightening (selling bonds from the balance sheet) is not yet discussed, and QE will end only in the third quarter. Bloomberg, citing its sources, reports that ECB policymakers “still see it as possible” to raise interest rate in July, that is, the baseline scenario is that there will be no rate increase at the next meeting, the first increase is expected to happen only after the end of APP, i.e., in the 4Q of this year.

The contrast between the policy stances of the ECB and the Fed reveals more and more nuances that speak in favor of a weaker Euro. The Fed pledged not only to raise rates at a high pace, but also hinted that balance sheet runoff may begin as early as July. The ECB is not only not going to catch up, but also hints that the pace of tightening may slow down due to "significant risks" to growth. In this regard, the risks for EURUSD, in my opinion, are skewed towards further decline.

From the viewpoint of technical analysis, a rebound in EURUSD within the current downtrend can be expected at 1.0650 (March 2020 low), a reversal - in the range of 1.045 - 1.05:

In one of the previous articles, I discussed new local highs for the dollar and gold. Now we see the dollar index has broken through 100.50, and gold has approached $2000. I do not think that this is the limit, primarily because hopes for a peaceful resolution of the conflict in Ukraine are fading before our eyes, and the rhetoric is increasingly concentrated around the scenario of a protracted confrontation. All this promises a long period of high inflation coupled with low output rate. In this economic regime, the dollar and gold are usually seen as one of the best instruments for hedging.


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.

 

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The long overdue USD pullback has finally happened. What's next?


US 10Y Treasury yield bounced off the key 3% area, dragging down greenback and initiating a chain of pullbacks in other assets that have demonstrated exuberant moves recently. DXY fell 0.6%, the sell-off started from the “round” 101 level as bidding eased on concerns of extreme USD valuation (2-year high), Gold pulled back from the key $2000 level, USDJPY made a U-turn in the area of 129.50.

USD sell-off wasn’t preceded by any new important information on de-escalation of the conflict in Ukraine or a change in the position of the Fed. On the contrary, the “second stage of the special operation” of the Russian Federation in Ukraine is gaining momentum, and some Fed officials such as Bullard, do not rule out a 75 bp rate hike (three standard increases of 25 bp), comparing the recent performance of the US economy with an outstanding second quarter of 1990 when the Fed opted for 75 bp hike. This suggests that the sell-off has been driven by profit-taking trades. Bullish view on the USD is still valid however solid buying pressure will likely reappear when DXY reaches 100 level.

Buyers also steered clear of the idea to buy Gold at critical $2000 level which became the trigger of a profit-taking move. Bearish momentum has been added to initial decline, as a result, the price fell to $1940. Barring major triggers of risk-aversion, the “second leg” of the correction will likely ensue from the $1955-1960 area. If price breaks out below the major trend line and finds little support below it, the sell-off will likely continue till the price reaches $1900. However, price staying above the trend line will likely invigorate bullish efforts and buyers may attempt to retake $2000 level:

The Japanese Central Bank warned that USDJPY movements cause concern, but is in no hurry to intervene. In addition, the Bank of Japan once again announced unlimited purchases of 10-year bonds in the market in order to keep the yield below 0.25%, which once again underlines the striking gap between the Bank of Japan and its peers in terms of tightening policy. USDJPY went below the 128 level, the level of 127.50 remains the focal point for bulls as fundamental background in the Yen has not changed much - due to low domestic rates, Japanese investors will be forced to continue to search for yield in foreign markets, that will hold back the strengthening of the yen. Today it is worth paying attention to the content of the communiqué after the meeting of the G20 finance ministers, where the Japanese authorities can once again draw attention to recent excessive weakness of the yen.

The economic calendar today is not particularly remarkable, markets may pay attention to the US home sales report for March, as well as speeches by the Fed officials, Evans and Daly. Evans said yesterday that he would support the idea of raising rates by 50 bp twice this year. European markets will be watching the Le Pen-Macron debate today to see what chances Le Pen has to narrow down the gap. Polls show significant lead for Macron – 56% vs. 44% for Le Pen.

The pound resists dollar strength with price action being increasingly determined by expectations regarding BoE meeting on May 5th. The bank is expected to hike interest rate by 30 bp. The IMF has reduced growth forecast for the UK economy from 2.3% to 1.2%, it is interesting whether this will somehow be reflected in the Central Bank forecasts regarding policy moves this year. Barring hawkish surprises in the upcoming BoE’s Bailey speech, GBPUSD will likely struggle to rise above 1.31 level:

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.

 

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Reserve Bank of Australia hikes interest rate, vows to double down on fight with inflation


The 10-year Treasury yield has finally reached an important 3% milestone, however, slipped below the level on lack of bearish consensus, greenback index stabilized at 103.50, the S&P 500 fell below 4100 on Monday, however, there lack of persistence from the sellers helped the index to close in green above the 4100 level. It seems that the dollar finds itself relatively comfortable near multi-year highs as investors expect that the previously outlined path of the Fed tightening and its hawkish dot plot, despite stagflation in Europe and slowdown in the Chinese economy, will remain in place. The RBA hiked interest rate by 25 bp in light of heightening inflationary expectations in the country, signaling that it will do more to contain inflation pressures.

While asset prices have already penciled in the Fed's fairly aggressive pace of tightening, increasing the risk of major disappointment in case of potential dovish tweak of the Fed at the upcoming meeting, lack of appeal of overseas markets relative to the US is currently providing strong support for the dollar, so a dovish impact from the Fed meeting may prove to be short-lived.

The RBA beat expectations delivering 25bp rate hike against the forecast of 15 bp and also announced that it would not reinvest income from maturing bonds into buying new ones, thus effectively putting an end to the QE program. AUDUSD rebounded on the decision which, nevertheless, could present an opportunity to short the pair as the bearish trend remained largely intact. Short-term outlook for risk assets, and therefore currencies correlated with risk demand, remains unfavorable due to numerous signs of a slack of the key economies such as China or EU, which also speaks more weakness for AUD. AUDUSD buyers are expected to provide significant resistance around the January low of 0.6970-0.70:

An important proxy for expectations for the pair is now the covid crisis in China, and judging by the dynamics of the incidence and the tightening of the fight against the epidemic, positive changes will not come soon, which means that the forecast for AUDUSD, in terms of the impact of this factor, remains negative.

EURUSD continues to fight for 1.05, the price is stabilizing near the level, as the market is waiting for more certainty on the Fed's monetary path, which should appear at tomorrow's meeting. The pair may also be pressured by news related to the new package of EU sanctions against Russia, as well as the embargo on oil or gas, as this will directly affect inflation expectations and its negative effects on the European economy. Nevertheless, the EURUSD rate, having fallen to a multi-year low, already priced in enough negativity and risks, so the bar for disappointment seems very high. On the other hand, more verbal intervention by the ECB, in particular from less hawkish members of the Governing Council, could allow the pair to rebound with confidence. A potential breakout of the pair below EURUSD is likely to be accompanied by strong momentum, and it is this nature of the price movement that can become a reliable signal that the pair is primed for a reversal.

The pound sterling, in turn, is waiting for the decision of the Bank of England this Thursday. Stagflation risks have already forced the BoE to soften its rhetoric in March, and investors expect further easing at the upcoming meeting, despite the consensus that the BoE will raise rates by 25bp. The latest data from UK retail sales showed that consumption began to decline in March in response to the significant increase in consumer prices and the risks that policy tightening will burden the economy are growing. The Central Bank understands this very well. The fall of the GBPUSD below the short-term and long-term bearish trend lines suggests that in the event of a movement below 1.25, the pair will most likely look for support at the lows of May and June 2020 (area of 1.21-1.23):

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]

Preview of the FOMC meeting: balance sheet run-off announcement is the key thing to watch

The Fed is expected to deliver a 50 bp rate hike today and announce the start balance sheet runoff. Markets will be interested in the pace of QT, since this will determine supply of longer-maturity Treasuries on the market in the medium-term which has a great influence on greenback demand. For example, the pullback of 10-year Treasury yields from 3% to 2.92% caused dollar sell-off on Tuesday and also helped EURUSD and GBPUSD to defend critical support levels - 1.05 and 1.25. The pairs continue to stay range-bound ahead of the FOMC meeting:

Such dynamics suggests that the pairs could finally choose direction after the Fed meeting, which is unlikely to be limited to one session, since significance of the Fed meeting in May is high. Firstly, the macroeconomic background has changed significantly, it became clear that high inflation will last longer than previously thought, and secondly, a plan to reduce assets from the balance sheet will be made public. This monetary tool, given the amount of funds on the Fed's balance sheet, which is at a record level and amounts to almost $9 tn, will have serious consequences for the US fixed income market:

The Fed accumulated on its balance sheet mainly long-term bonds and MBS which means that balance sheet runoff will primarily impact the far end of the yield curve (the aggregate of interest rates on bonds depending on the maturity). The dollar is known to be the most sensitive to the movements of long-term bonds yields so the dollar may respond significantly to the balance sheet decision. A short-term breakout in EURUSD, GBPUSD below 1.05 and 1.25 cannot be ruled out if the Fed simultaneously raises rates by 50 bp and chooses aggressive pace of selling assets, as this will leave the central banks of the EU and the UK further behind in the race to tighten monetary policies. If the rate of balance sheet reduction comes below consensus ($50 billion per month), it will most likely be difficult for greenback to advance to new highs, as the bar for a market surprise is high.

Admittedly, the Fed has plenty of room to act aggressively, with the number of new US job openings reaching a new record high of 11.266 million:

It is clear that there is a serious shortage of workers in the United States, which will likely continue to translate into robust wage growth, and hence consumer inflation, since wages are both the costs of firms, which are passed onto final prices, and the basis of consumer demand, which also determines price growth in an economy.

The ADP report released today was somewhat disappointing - job growth amounted to only 247K against the forecast of 395K. However, given the record high number of open vacancies, the data may be interpreted as another signal that employers could not find workers and most likely this was reflected in the growth of wages, which the NFP will tell us on Friday.

During the Fed meeting, the market may also implement the “sell the facts” strategy, this must be taken into account because the markets have probably price in incoming information on inflation, labor market, activity in the manufacturing and services sectors, as well as external supply shocks. A continuation of the dollar rally will likely require shocking Fed action, such as a 75bp rate hike, which is unlikely to happen.

Retail sales in the Eurozone in April did not live up to expectations, growth amounted to only 0.8% in annual terms against 1.4% forecast. Such dynamics complicate the task for the ECB to move to raise rates, but some officials are in favor of a July hike. Nevertheless, the centrists from the Governing Council are silent, therefore, serious catalysts for the growth of the Euro from the ECB, at least until the June meeting, are not expected.

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]

Too difficult to resist to buy the dip as S&P 500 tumbles to crucial 4000 points support level

Some stabilization in risk demand after yesterday's sell-off is helping currencies correlated with economic growth expectations (high-beta currencies) to regain some of what they lost yesterday. Against this backdrop, the dollar's rally is being thwarted, but any correction lower could be met with strong support as the Fed has taken a major lead in the tightening race, stagflation concerns have not gone away, and risk asset sentiment remains highly volatile. SPX also played its role when reaching a critical support of 4000 points, which can be perceived by the broader market as a technical buy signal.

Futures for US stock indices are in moderate plus, not exceeding 1%. The catalyst for yesterday's sell-off was broad market panic as central banks signaled their intention to hike interest rates at a time of deteriorating global economic growth prospects. These include stagflation in Europe, risks of a recession in the fourth quarter, continuing devaluation of the yuan as a sign of predicaments in the Chinese economy, as well as high degree of geopolitical risk related to the conflict in Ukraine. It is no surprise that the dollar is holding its positions and is not in a hurry to move into a correction despite the relative overbought (highest level in 20 years). Currencies that correlate with the business cycle were hit more than others, which also indicates the nature of the correction - investors are reducing their exposure in countries that show outstripping growth rate in the business cycle upswing phase. So, for example, since the onset of broader economy growth concerns, AUD, NZD lost 3-4% against the dollar while EUR and GBP losses did not exceed 1-2%:

The slowdown in China affects the economies of New Zealand and Australia, for which the Middle Kingdom is one of the main trading partners while global liquidity concerns primarily affected the Norwegian Krone. Since May 5, the USDNOK currency has risen by almost 5%.

The Fed said yesterday that liquidity in key markets is falling, which could result in investor flight. The warning exacerbated the fall.

The economic calendar today is not particularly interesting, investors could pay attention to the NFIB report on small businesses in the US, in particular, how firms assess the situation with hiring. Also speaking today are a number of Fed officials, the focus is how intensified market correction will affect their forecasts for policy tightening and whether fears of stagflation in the US will be voiced.

Demand for risk will continue to determine currency moves in the short term. Given the potential for SPX to rebound, there may be some demand for commodity currencies (CAD, AUD, NZD), the dollar may go slightly negative. However, as mentioned above, a steady decline in the dollar at this stage is unlikely and long positions on the correction towards 103.50 on the dollar index (DXY) look quite justified.

EURUSD, in turn, may correct higher, however, given the discussion of the oil embargo from Russia, the potential for strengthening above 1.0650 in the next few days looks unlikely. Bullish momentum for the pair can be set by ECB officials such as Joachim Nagel and De Guindos, whose rhetoric will likely be associated with the prospect of a rate hike in July. However, the number of ECB rate hikes this year remains a subject of debate, and it is to these comments that the Euro may be particularly sensitive.

Technically, the pair continues to stay in the range from 1.048-1.060 in anticipation of new important information. Such information will probably be the announcement of an embargo on Russian oil, since in this case the EU will likely face a new round of inflation, which, as the behavior of the pair in March-April has already shown, has a very negative effect on the Euro:

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 April CPI could be the key catalyst for S&P 500 rebound, deeper greenback sell-off


An attempt by S&P 500 to decisively break below 4000 points on Tuesday was not successful, however, the subsequent rebound has not yet found wide support among buyers. Retail and institutional sentiment indicators are in an extremely bearish zone (13-year high), which increases the odds of a rebound in case of emergence of some bullish catalyst:

Today's US CPI release for April appears to be a good potential bullish trigger. Headline inflation is expected at 8.1% (down 0.4% compared to March), core inflation at 6% (down 0.5% compared to March). Core monthly inflation is expected to come at 0.4% and this is where the market will look for a signal that price growth starts to fade as YoY inflation will likely be distorted due to base effects. If MoM inflation falls short of expectations, pressure on the Fed to fight inflation, as the market perceives it, will ease, and policy tightening will shift to a less aggressive pace than has been priced in.

However, three Fed officials (Mester, Waller and Barkin) were quite open yesterday in favor of two consecutive 50bp rate hikes in June and July, after which the Fed will have to conduct an interim assessment of impact of the rate hikes on inflation in order to understand how to proceed further in the second half of the year. Lower-than-expected monthly core inflation will likely help market to rule out the case for 75 bp rate hike at the upcoming meeting, which in itself will already be a bullish signal for the market.

At the same time, the ECB continues to ramp up its hawkish rhetoric. This can be seen from yesterday's speech by member of the Governing Council Nagel. In his opinion, the risk of “late action” has increased significantly, the ECB should curtail its bond buying program as early as July (the ECB spoke about September at the last meeting) and raise interest rate on deposits in the same month if incoming data reveals no signs of inflation easing. Inflation in the German economy was 7.4%, according to data released today.

The continued consolidation of USDCNY around 6.73 at least means that there is one less reason to sell risk today. Tesla CEO Elon Musk described the lifting of the Shanghai lockdown yesterday as "rapid," which is also encouraging. Consumer inflation in China beat expectations accelerating to 2.1% YoY, once again emphasizing that the challenge posed by inflation is global.

The dollar continued to snap back recent gains on Wednesday, the greenback index fell below 103.50 (a weekly low). If US equities bounce today, a stronger move down to 103 will likely follow. According to JP Morgan, the dollar's recent strength is due to a downward reassessment of growth forecasts outside the US rather than the hawkish Fed. Despite the fact that the Fed pushed back on 75 bp rate hike, long positions in USD, according to the bank's analysts, still make sense. In the stock market, JP Morgan sees the defensive sector (companies whose revenues are less correlated with the phases of the business cycle) as the favorite, which tend to outperform in the bear market and hence will draw increased attention from market players.

In my opinion, in the event of a worse-than-expected CPI report today, EURUSD has a chance to make a tactical bounce, given that there is a necessary prerequisite for this – substantial decline in the last few months and range-bound movement, which is a classic technical analysis case for a reversal. The pair is also near the lower bound of the existing bearish channel, which could be also used by market players as an indication of support zone:

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]

Gloomy China data sows panic, but EURUSD still has a chance to rebound


A glimmer of hope after equity markets’ rebound last Friday was dampened after release of China economic data on Monday. Industrial production in China contracted 2.9% YoY against the forecast of 0.4% growth, retail sales collapsed by 11.1% missing estimate of -6.1%:

Unemployment also rose, from 5.8% to 6.1% in April. The data overshadowed the news that the government are beginning to gradually lift the lockdown in Shanghai, China's major industrial and financial center.

S&P 500 futures were up at the beginning of the session, but after the release of the data, the price went down and found some balance around 4000 points. European markets are in the red ahead of release of the EU inflation data, which is likely to indicate resistance to fading, increasing chances that the ECB will begin to prepare markets for earlier action in policy normalization. In particular, the case with the July rate hike remains the main uncertainty for the markets in the ECB's action plan. Despite the fact that more and more officials are talking about the benefits of a rate hike in July, there is still no final clarity. Therefore, the inflation report has every chance to impress the market, in particular, there is a risk that the Euro may tactically strengthen against the dollar.

Other important updates include an updated Goldman Sachs forecast for the growth rate of the US economy in 2022. The investment bank cut its forecast growth rate from 2.2% to 1.6%, likely reflecting the White House's austerity plan, under which the government intends to reduce the public debt by 1.5 trillion dollars.

The dynamics in the foreign exchange market remains highly dependent on the mood of investors in the stock market, where there are desperate attempts to find a balance after seven consecutive weeks of decline. Local macroeconomic data continues to play a secondary role, especially in non-core economies. The role of the real rate differential has also decreased somewhat (capital flows to where there are expectations of a higher real rate), as anxiety and even panic about stagflation and recession due to the instability generated primarily by commodity markets come to the fore. As long as these factors continue to influence, demand for the dollar is likely to remain elevated. In particular, data on retail and existing home sales in the US may reinforce the view that the US economy is now one of the most resilient to the challenges of stagflation.

If the S&P 500 manages to stay above 4000 today at the American session, which will allow us to consider the state of the market as stabilization, EURUSD will have a chance to grow to 1.05-1.055 (especially if inflation in the EU is higher than the forecast in tomorrow's report), and GBPUSD - to 1.2320, a previous support zone:

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]

Flight from risk gains momentum, setting stage for a rally in Gold


The flight from risk assets becomes more apparent on growing concerns about global slowdown and even recession, in particular, markets appear to be pricing in that the US economy will not be able to carry out soft landing (lowering inflation while maintaining positive GDP growth) that the Fed pledged to deliver in spite of aggressive tightening cycle, which led to textbook reactions in various asset classes: stock prices fell, bonds, as safe-haven instruments, rose in price, and the dollar fell, as foreign investors apparently reduced their exposure in US papers.

The magnitude of collapse in US equity markets on Wednesday (the worst in two years), which saw S&P 500 falling by 4% and Nasdaq erasing 5% from its market cap ensured proliferation of bearish momentum to Thursday trading. SPX futures broke below another key threshold of 3900, European indices suffered losses by an average of 2%. Further events are likely to unfold according to the classic scenario: the Fed will bend at some stage of equity sell-off, soften the rhetoric, which will become the main signal for a reversal. But given that most FOMC officials, including Powell, use the word "committed" in their comments regarding the short-term future of the policy, it may take quite a while for markets to see a welcomed policy shift.

The speed and the magnitude of equity markets downside should also imply there are concerns about potential downbeat surprises in corporate earnings and firms’ forward guidance, which, in principle, have already started to materialize. For example, $200bn Cisco released “shocking” earnings report yesterday that fell short of expectations in many respects (including forecast of negative growth in revenue in 4Q against expectations of positive growth), which led to a price drop of 20%:

The situation with covid in China remains controversial, while Shanghai gradually lifts lockdowns, an increase in the number of new cases in Beijing and Tianjin indicates a high risk of new social restrictions in these cities. In particular, a lockdown in Tianjin, a major port city in China, is a major risk for the markets, as it could exacerbate supply chain disruptions, which are well-known for their inflation effects in the countries which import China goods. As the positive trend in the reopening of Chinese economy started to show cracks oil prices were hit hard erasing 8.5% since Wednesday afternoon.

The decline in oil prices and reduced investment demand for the dollar allowed EURUSD to reclaim 1.05 level. Minutes of the ECB meeting are due today, which may offer additional support to the battered Euro as based on the comments of ECB officials, the commitment to fight inflation is gaining broad support in the Governing Council, which is likely to be reflected in the Minutes today. EU money markets price in 100 bp rate hikes from the ECB this year, respectively, the ECB should soon begin to actively catch up with expectations, otherwise the Euro may quickly cede ground to the dollar as monetary policy gap will set to widen again.

The rebound in demand for safe-heavens is not yet so clear, but is already visible in gold, given that we are at an early stage of factoring in recession expectations, the upside potential for gold prices, provided recession expectations take roots, is high. From the viewpoint of technical analysis, the price of gold has been in a well-formed bearish corridor since mid-April, while on May 16 we saw the first signs of a bull market. A breakout of the upper bound of the corridor (~1835-1840 dollars per ounce) could trigger extension of the 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]

Resilient US consumption helps stock to recover but May NFP could bring Fed tightening bets back into the market



The macro data on the US economy released on Friday showed that high inflation in April failed to stifle consumer momentum in an economy that has a history dating back to post-COVID fiscal stimulus. Although household incomes did not grow as fast as expected (0.4% m/m, vs. 0.5% expected), consumers increased spending by 0.9% m/m, compared to 0.7% expected. The fact that spending has outstripped income growth suggests that consumers are willing to spend savings to maintain lifestyle, which means that consumer confidence may be not so low as depicted in U. of Michigan consumer sentiment data.

Positive US consumer data countered fears that the Fed has taken to tightening policy when the consumer trend approached a tipping point, which could exacerbate the reversal trend, in other words, led to hard landing after the boom. The reassessment of fears led to the fact that the bullish momentum in the US market on Friday did not meet with any significant opposition, which allowed the S&P 500 to close in positive territory by 2.5%, rising to a three-week high:

Core PCE, this time without surprises, retreated from 5.2% to 4.9% in April, which in itself was a very positive signal, given how many times the market has been wrong before, underestimating inflation rates. As the Core CPI and Core PCE went into decline, the market could begin to think that inflation had peaked and would now gradually decline towards the Fed's target level:

On Monday, risk assets are trying to borrow the optimism of last Friday, the main European stock markets are rising, SPX futures added another 1%, approaching 4200. The dollar index is trying to hold support at 101.50, but is under pressure due to rising demand for risk assets. China continues to ease social restrictions and is preparing measures to support the economy. Shanghai allowed businesses to reopen starting June 1, and Beijing authorities said the epidemic was under control, prompting a reassessment of lockdown risks and economic costs in the Chinese stock market, while overseas markets, in turn, priced in lower risks of disruptions or delays in supplies.

The EU continues to discuss the sixth package of sanctions against the Russian Federation, which includes a partial embargo on Russian oil, details should appear today. Brent has topped $120/bbl and time spreads are widening, reflecting market expectations that the near-term demand picture is getting more positive.

Data in focus today: German inflation report. Consumer price growth is expected to accelerate from 7.4% to 7.6%. With the ECB signaling that it will act if the data warrants to do so, an inflation rate in line with expectations or higher could trigger a surge in EURUSD to 1.08 or slightly higher. However, with the release of the May NFP this week, which could dampen the chances of the now hotly-discussed "September pause" in rate hikes, buyers may prefer to wait out the release before adding to long positions, or may take profits. Actually, the execution of such a scenario on the market may lead to a correction towards 1.07 in the second half of the 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]

Despite expectations of 75 bp rate hike from the Fed tomorrow, Dot Plot is the key thing to watch


US money markets appear to be confident that the Fed will deliver a 75 bp rate hike at the meeting tomorrow. With US inflation trending higher towards 40-year high, a 50bp move, while the target range of Fed interest rate is 0.75-1.00%, clearly presents a risk of losing central bank credibility:

There is also a non-zero probability of a risky 100 bp move which will be shocking in the short term, but possibly more effective in the medium term. Against the backdrop of such expectations, the dollar will likely stay bid at the dips even if equities stage a relief rally today. The dollar index is likely to continue consolidating around 105.

Fear of inflation was a dominating theme for bond and equity markets on Monday as evidenced by rare weakness both in stocks and bonds. Safety could only be found in dollar cash as the dollar is the most liquid currency, which makes it valuable during heavy equity sell-off and major risk-off moves. The SP500 index deepened into bearish territory, declining below 3750 points, the yield of 10-year bonds reached 3.4%, gold briefly strengthened to $1875 after release of US CPI data for May, however since yesterday it has erased almost 3.5% falling to $1820:

The fact that gold did not work as a safe haven asset during the sell-off tells us about two things. First, fears of stagflation in the US appear to be still low. Secondly, bullish momentum in gold arises when opportunities to search for yield are greatly reduced or when uncertainty (the risks that can’t be measured) increases, hence neither of these concerns are gaining traction.

Today, futures for US equity induces trade in green, indicating high chance of a relief rally during today NY session. The US producer price report helped equity sentiment to stabilize, indicating a slight slowdown in producer price inflation relative to forecast, which was a welcomed sign in the current rough global inflation picture:

Based on money market expectations, the rate hike by 50 bp tomorrow is likely to elicit strong bullish response in equities that will last for some time. A 75 bp move is priced in by the market, so in the event of such an outcome, the markets will focus on dot plot and QT comments. 100bp shock rate hike unlikely, but in the event of such an outcome, it is quite possible to see the S&P 500 move towards 3700 and even lower.

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]

Preview of the Fed meeting: 75 bp move is fully priced and “sell the facts” scenario is likely in the Dollar



The Fed will likely yield to the hawkish market expectations and hike interest rate by 75 bp today. Nevertheless, even with such an aggressive move, it cannot be ruled out that the dollar will go into decline following the meeting. Why? Since last Friday, when the May CPI was released, the dollar index has strengthened by a significant 2.4%, setting a new local extreme (105+). Such a move has likely already priced in a 75bp increase in the federal funds rate, so without additional surprises related to the pace of the timeframe of QT or a sharp revision in Dot Plot, a FOMC meeting broadly in line with expectations could become a profit taking signal. In other words, the classic “sell on the facts” scenario can be executed in the dollar market.

Asset prices on the market, as well as expectations for the June meeting of the Fed, have changed significantly over the past week. Futures on the Fed rate have completely priced out an outcome where the Fed hikes rate by 50bp. This was supported by inflation data for May and inflation expectations from U. Michigan: headline inflation rose from 8.3% to 8.6% and 5-year inflation expectations of households jumped from 3% to 3.3%. Media reports, that the Fed policymakers were seriously discussing the possibility of raising rate by 75 bp, did their job as the market regarded them as an attempt by the Fed to prepare the markets for such a move during the blackout period - the week leading up to the meeting, when Fed officials are not allowed to make policy statements. In terms of market dynamics, key U.S. stock market indices are down nearly 9% and there is a chance the Fed may try to choose a softer path to limit correction or even boost stock market gains so that the welfare effect smooth out the negative impact of inflation on consumption propensity.

The upcoming Fed meeting is especially important because it will feature an updated Dot Plot - a chart showing the distribution of FOMC participants' assessments of where the interest rate should be in the short, medium and long term. The latest Dot Plot was published in March and looked like this:

It's been three months since then and inflation hasn't gone down, so markets now expect the Fed's rate to be in the 3.5-3.75% range by the end of the year. The Fed will most likely move the median forecast to this range, but officials’ expectations regarding the rate next year and 2024 will become more important for the market. If at least a few officials are in favor of raising the rate to 4% and above, then most likely we will see a new rally in DXY to 105.50 or even higher, as expectations for tightening from other major central banks are much more modest.

US retail sales data for May came with a big downside surprise today pointing to increased risks of stagflation for the US economy:

It is interesting that the negative reaction of the dollar to the report did not last long, as a weak consumption report could increase the chances that the Fed will fight hard against the main negative factor - high inflation and aggressively raise the rate today:

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]

The Fed is ready to pay a high price to suppress inflation



The Fed raised key interest rate by 75 basis points and signaled that a similar move could be expected in July. The announced pace of tightening means that the federal funds rate is likely to be above 3% by the end of the year, therefore the dollar will likely offer one of the best real yield prospects among G10 peers in the second half of the year. However, a decisive fight against inflation will have its costs, namely, mounting risks of a "hard landing" of the US economy, in which case the Fed may need to ease policy as quickly as it tightened it.

After the first in 22 years rate hike by 50 bp in May, the Fed accelerated the pace of tightening and moved to a 75bp hike, confirming the trend of major central banks to step up the pace of policy normalization. Markets were preparing for such an outcome in advance, in particular, these expectations were based on US inflation data for May, which showed that inflation peak had not been passed, as well as household inflation expectations from U. of Michigan, which jumped in the previous month, threatening to deanchor from the Fed target. This, in turn, was fraught with a loss of credibility in the Fed, which is a major cost of conducting monetary policy, so yesterday the Fed showed determination and hinted that even 75 bp rate hike is not the limit.

New Fed forecasts indicate that the pace of policy tightening will remain high for at least the next few months or even until the end of the year. The median interest rate forecast for the end of this year has changed from 1.9% to 3.4%, from 2.8% to 3.8% for the end of 2023, from 2.8% to 3.4% for the end of 2024 and from 2.4% to 2.5% for the long term. Even traditional FOMC doves expect federal funds rate to climb above 3% by the end of the year:

In the accompanying statement, the Fed excluded the wording that the Central Bank “expects inflation to gradually decline to the target level”, instead using “committed to fighting inflation and is “highly attentive” to risks in this area.

Such an aggressive stance in monetary policy was not without an increase in expected costs, which the Central Bank acknowledged in its GDP and inflation forecasts. According to the fresh economic staff projections, the Fed lowered its expected GDP growth rate in Q4 2022 from 2.8% to 1.7% and from 2.2% to 1.7% for Q4 2023:

The risks to the Fed projections on the path of the interest rate are clearly on the upside. The natural movement of inflation towards the target level at the pace desired by the Fed implies that supply should adjust to strong demand. However, restrictions due to covid in Asia and a shortage of labor in the US suggest that this will not happen quickly. Therefore, inflation can remain sustainably at elevated levels, forcing the Fed to destroy consumer demand with monetary tightening in order to bring inflation back under control.


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]

Central banks of major economies fail to keep up with the Fed tightening pace



Volatility in FX market remains stubbornly high, a series of upside surprises in inflation data for May apparently caused "tectonic shifts" in policy stances of many central banks, which rushed to drop hints about the need to speed up tightening process. And in overall, we can say that their words do not diverge from deeds. The dollar index plunged yesterday towards support at 104 level after the Swiss Central Bank surprised with a 50bp rate hike with additional bearish greenback pressure coming from expectations that the Bank of Japan and Bank of England will follow suit:

However, BoE’s and BoJ decisions fell short of hawkish hopes as the Japanese Central Bank decided to leave the rate and QE settings unchanged while the Bank of England unanimously raised the rate by modest 25 bp (no votes for 50 bp which is quite dovish in the current setup). The Cable is losing moderately against the dollar on Friday while stubbornly dovish BoJ was apparently a big surprise for the markets, which expected a rate hike. Lack of the hawkish move sent USDJPY up by almost 2% and a retest of the 135 level seems to be around the corner.

Given recent comments of the BoJ that it’s ready to dampen any irrational move in the exchange rate, an upside spike in USDJPY above 135 will likely to be a red line for the Bank of Japan. This has some serious implications as a powerful attempt to reestablish normal USDJPY exchange rate may require the BoJ to sell other reserves from the balance sheet, which could be US Treasuries. Upward pressure in long-term yields, such as a rally in 10-year Treasury rates to 3.4% or more, will likely allow the dollar to focus on a retest of recent highs.

The recent significant gains of the dollar led to increased number of currency interventions from major central banks. For example, the Central Banks of Switzerland and the Czech Republic were selling reserves in order to contain the fall of their national currencies. The Bank of Japan, apparently soon, will also apply unconventional measures. The risk of intervention by a major player in the foreign exchange market and relatively high yields to maturity in bond markets are likely to maintain elevated volatility levels in FX space.

The dollar, taking into account all these factors, is likely to continue to strengthen. The US economy, unlike many others, went into the inflation shock with economic output above potential which means risks of stagflation in the economy due to monetary tightening in the US are lower than in its major counterparts, which means that real yield outlook in the US is set to remain the most attractive. In addition, at the time of powerful risk asset sell-offs, liquidity in the market tends to decrease which creates additional demand for dollar as for the most liquid asset.



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 goes all-in to fight inflation and markets are yet to grasp this shift in the policy stance


The tectonic shift in the Federal Reserve’s policy, according to which the regulator no longer expects that inflation will naturally find its way to the target level and goes all in to suppress it, is still being digested by financial markets. Risk demand recovers slowly, despite the fact that last week's drop largely removed overbought, European and Asian equity indexes show mixed performance today with gains barely exceeding half a percent. Powell's testimonial is due this week, which will likely be used by the Fed chair to shape correct expectations for the July meeting and he will most likely pitch discussion to explain why another 75 bp move may be needed. Consequently, bullish surprises for the dollar seem to be not over, and any pullbacks in the Dollar index are not expected to linger. EURUSD is likely to find support at 1.04-1.0450, but the risk of a breakout below the near-term support zone is not negligible:

Stock indices sluggishly rise on Monday, US markets are closed due to the national holiday. One gets the feeling that investors have not yet fully realized the large-scale changes in the policy of the Fed. Last Wednesday, the regulator hiked interest rate and did not rule out that in July it could raise the rate at the same pace, but by the beginning of this week it became clear that such a scenario became baseline, derivatives based on the Fed rate (overnight interest swap), priced in additional 70 bp tightening in July.

Over the weekend, Fed official Waller spoke openly in favor of a 75bp move especially if there are no surprises in the macroeconomic data for June, also saying that inflation needs to be reduced no matter where it comes from. Waller is a known hawk and it's clear that his mindset probably isn't dominating most FOMC members, but the signs that the Fed is putting more, if not all, effort into fighting inflation have become clear enough that it will take time for the market to fully price it.

At the same time, along with tightening of the Fed's policy, the chances are growing that the economy will fall into recession next year, which will force the Fed to move to cut rates and resume QE. According to BoFA, the probability that the US economy will fall into recession next year has risen to 40%, while high inflation will persist due to the resilience of pro-inflationary factors on the supply side. In other words, destroying consumer demand may not be enough. Bank analysts expect GDP growth to slow to near zero in the second half of next year as lagged tightening of financial conditions starts to cool demand in the economy. The rebound in 2024 will be moderate.

This week the economic calendar is not particularly remarkable, the markets may pay attention to the real estate data in the US. Indeed, the US real estate market is now gaining attention, as rapidly rising mortgage rates and declining consumer confidence indicate that this week's reports could be disappointing, especially the existing sales numbers:

The significance of this data should not be underestimated, as housing construction makes a significant contribution to GDP (about 2%), and home sales are positively correlated with retail sales data. Existing home sales are expected to rise by 5.4m from 5.61m in the previous month, the weaker figure could fuel risk aversion in the market.



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 is poised to break 1.06 but further upside looks limited


After a turbulent past week, calm has finally returned to the markets. Demand for risk assets slowly recovers: European indices have been rising for the third day in a row, US futures rebounded by more than 1.5% on Tuesday. The dollar index (DXY) fell against the euro and the pound, rose against commodity currencies amid falling oil, and gained significantly against the Japanese yen on worries that BoJ can’t handle situation in the JGB market. The Fed appeared to be unconvincing last week with a 75bp rate hike as US debt market yields continue to rise. The yield on 10-year US bonds rose from 3.19% to 3.29% since last Friday:

Optimism in the markets looks like an appropriate reaction to Biden's announcement that he is considering temporarily abolishing the federal fuel tax. However, this initiative must be approved by Congress, which will not be easy because the Republicans want the situation with high gas prices to cause maximum damage to the reputation of the US president and the Democratic Party. If the tax holiday can be passed through Congress, then on the monetary policy front, we may see more confident action from the central bank. In this case, we can expect a higher investment demand for the dollar. In general, the fiscal policy factor, which has receded into the background after the post-COVID stimulus, may again begin to play a significant role in the pricing of the dollar.

The main events of the economic calendar today will be the release of statistics on existing US homes sales, as well as the speech of Fed policymakers Tom Barkin and Loretta Mester. Home sales are expected to slow down again, but investors are likely to be reluctant to see this as a signal to lower interest rates, having already been burned their fingers last month when they tried to price in "September pause" in the Fed tightening. The next important event for the dollar and for the bond market will be Powell's testimonial in the Senate on Wednesday, which, judging by the latest Fed meeting, will also be hawkish, and therefore the dollar downside will most likely be limited.

The EURUSD consolidates around 1.055 searching for a new catalyst. News that the ECB has developed a new anti-fragmentation tool for the bond market seems to have been able to reassure investors as the yields of EU peripheral bonds turned into decline. The spread between the yields of 10-year Italian and German bonds, the main indicator of credit risk in the EU debt market, fell to 199 basis points from 242 bp last week:

In the run-up to Powell testimonial, EURUSD will likely remain in the range of 1.05-1.06, however barring any ultra-hawkish hints, the dollar can be “sold on the facts” causing EURUSD to retest or even break 1.06. However, given that stagflation risks persist and are higher for energy import-dependent EU countries, a break above 1.06 could be a good opportunity to short the pair:

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