official Daily Market Notes by Tickmill.co.uk

[tickmill-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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-analytics]

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:

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-analytics]

S&P 500 is again the red and more downside seems likely

Risk assets traded in the red on Wednesday, with the dollar rebounding from its recent short-term downtrend as debates about impending recession successfully enters the mainstream. Several large investment banks have already estimated the chances of a recession starting from the 4th quarter of 2022 at more than 50%, which, against the backdrop of the central banks’ “no-tolerance” inflation policy, becomes an even more depressing forecast. Governments and central banks have practically no tools left to smooth out the recession: one way or another, their effect is reduced to creating positive demand shocks, which is unacceptable in conditions of high inflation and negative supply shocks.

The dollar index is again approaching multi-year highs as bearish factors are at play in both two key asset classes – stocks and bonds. Slightly negative dynamics is also observed in the sovereign segment of the debt market - bonds with 10-year maturity in the US and Germany offer a slightly lower yield than yesterday.

Of the latest economic updates, we can highlight the data on inflation in the UK. Headline monthly inflation was 0.7%, better than expected, consensus again underestimated producer price inflation, annual PPI of input prices reached 22.1% (forecast 19.4%), monthly PPI - 2.1%. UK inflation figures are the highest in 40 years:

 

Investors have not yet received a clear explanation from the British Central Bank what it will do with high inflation, at the last meeting there was a modest increase in rate by 25 basis points, there wasn’t any clue in the policy statement that the Central Bank will throw all its efforts into fighting inflation (as stated Fed), that’s why the inflation report made a negative impression on the pound, which today is more actively losing ground against the dollar compared to the European currency. GBPUSD is testing from above 1.22, mainly bearish sentiment for the pair will remain until the price remains below the resistance zone of 1.2320 -1.2380:

 

The oil market is showing a long-awaited positive momentum, with prices moving towards the $100 per barrel level, as fears of a subsidence in demand due to the threat of a recession seem to be beginning to outweigh the signals of a shortage on the global supply side. Lower prices allow us to expect a weakening of general inflation in the coming months and the markets will probably gradually begin to price in this important signal, however, in order to consolidate this optimism, it is necessary to see a softening stance on the side of central banks, primarily from the Fed.

Classic recession indicators confirm that pessimism is slowly starting to dominate sentiment. The spread between 10-year and 2-year US Treasuries is approaching zero again:

 

All in all, equity prices seem not have bottomed out, the dollar's medium-term rally has not run out of steam, and downward risk asset pressure will likely remain abound until the market begins to expect that the US Central Bank is ready to soften rhetoric in response to market participants' fears of a recession. Technically, the S&P 500 index is near the lower bound of the trend channel, which points to higher chance of a rebound, however, unlike previous movements towards the lower bound, market participants were less active in buying the dip intraday, so the price may try to test the level of 3600 and below in an attempt to elicit more powerful bullish response before we can talk about an upward correction:

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-analytics]

Another day of relief rally in equities keeps dollar under pressure

A batch of latest estimates of PMIs in Eurozone released yesterday triggered a wave of mild risk-off and showed how the difference in expected growth rates between the EU and other economies is becoming an increasingly important driver in the foreign exchange market and, judging by the latest data, does not bode well for the European currency. Manufacturing PMI in France fell from 54.6 to 51 points (forecast 54), in Germany - from 54.8 to 52 (forecast 54), in the Eurozone - from 54.6 to 52 points (forecast 53.9). The slack of activity in services sector was less severe as rising share of services in consumption continues to support the sector, this trend emerged after covid and has not yet fully exhausted itself. Indices of activity in the service sector and manufacturing in the UK were generally in line with forecasts, which limited sell-off in the British currency.

Downbeat vibes in equity markets on Thursday were replaced by another leg of relief rally on Friday as gains in US equities somewhat diverted attention from recession risks, S&P 500 at the close approached 3795 points, DOW breached 30600 points. Nasdaq showed the most significant gains among key indices - 1.47%. However, betting on a full-fledged rally is premature as incoming data gave only the first indications of a possible recession and investors will probably prefer to remain in a wait-and-see stance. 

The pound strengthened against the dollar despite a dismal retail sales report, buoyed by an overall uptick in risk asset markets. The annual decline in retail sales in May reached 4.7% (forecast -0.5%), retail sales excluding fuel decreased by 5.7%, reflecting the decline in the purchasing power of household income due to extremely high inflation.

Heightened fears of a recession are fueling recovery of the government bond segment in the debt markets of developed countries. Thus, the yield on 10-year treasury bonds has decreased from the local peak value of 3.50% to 3.11% in the last 10 days:

Demand for long-term bonds rises when investing in a long-term bond becomes more profitable than investing in a series of short-term bonds. At the same time, time spreads between bond yields also narrowed, suggesting growing expectations that after a short period of monetary tightening, an equally rapid reduction in interest rates will follow.

Several FOMC members are already openly calling for a 75bp rate hike in July and then reduce the pace of tightening to 50 bp. In his speech yesterday, Fed Chairman Powell downplayed the threat of recession and focused on positives such as labor market gains. In addition, he said that the goal of quantitative tightening is to reduce assets on the balance sheet by $2.5-3 trillion. The Fed's current assets on the balance sheet is close to $9 trillion, with about half bought up in 2020-21:

 

Bullard, speaking today, also said that there were no signs of a recession and that the rate hike would slow the economy down to a natural trend. The Fed official openly spoke in favor of raising the rate to 3.5% by the end of the year.

The Fed's hawkish stance is likely to support the dollar in the short term, so a correction now looks unlikely. The dollar index has been consolidating in a narrow triangle for the last week, which usually precedes a breakout movement. Support for the index is at 103 (50-day SMA), in early June, the index rebounded from the level, confirming that bullish sentiment continues to dominate the US 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-analytics]

Two reasons to sell the Dollar this week

Stock markets posted solid gains on Friday delivering a crushing blow to seemingly dominating bearish sentiment in risk assets. The catalyst for the rally appears to have been speech of Fed Powell to the US Congress last week, in which he acknowledged that there is a risk that monetary tightening could lead to a recession. This could be seen as a signal that the Fed would execute more than expected caution in the process of rate hikes. In addition, the quarterly and semi-annual rebalancing of funds may create additional demand equity markets and increase pressure on the dollar.

The S&P 500 is up almost 8% from the lows at the beginning of the month, with 3% of that done on Friday. The rally occurred, among other things, due to reassessment of the pace of tightening on a global scale - some money markets revised the pace of monetary policy tightening down, by 25-50 basis points. Powell's speech to Congress, which included remarks about a recession, could be the basis for those expectations, as such remarks were clearly inconsistent with the ultra-hawkish pace of rate hikes that the market priced in at the beginning of last week. This week, central banks will likely shed more light on those apprehensions, and Powell's speech at the ECB's symposium in Sintra on Wednesday could be the key event on this topic. 

The improvement in risk sentiment has weakened the dollar and there is a risk of the dollar index falling below the 104 level towards 103.40 support, given the consolidation near the level with little attempts to rally. Markets will be watching particularly closely this week for quarterly and semi-annual rebalancing by fund managers making buy decisions, which could support the market until Thursday. In the absence of negative shocks on the economic front, which is quite possible, given that this week is not rich in macroeconomic reports, stock markets may gain a little more this week.

Commodity currencies showed the highest correlation with the stock market in the last three months in the foreign exchange market, which is why USDNOK and USDCAD have the potential for decline this week.

Against the backdrop of the emergence of factors that could further weaken the dollar this week, the risk of strengthening EURUSD and GBPUSD is growing. The volatility of EURUSD is decreasing and the price dynamics is more and more reminiscent of movement in a range. This week, the pair may test the upper limit of the range (1.0630-1.0650), however, given that the week is not full of macroeconomic events, further rally is a big question:

The main driver of the short-term rally of the GBPUSD may also be recovery in demand for risk. Growth potential in my opinion is limited by the level of 1.24, EURGBP may fall towards 0.8550. Last week, markets lowered their forecasts for cumulative BOE rate hikes this year by 30 basis points, but the pound held firm as the Fed's policy was similarly corrected.

The technical breakdown for GBPUSD is as follows:

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-analytics]

Inflation in Germany eases, taking off some pressure on the ECB to deliver faster rate hikes

Signs of escalation in geopolitical tensions and fresh warnings of recession in top economies pushed stock markets off balance, with the S&P 500 closing down 2% and Nasdaq shedding 3% on Tuesday. European markets picked up the negative baton today, the main equity indices in Europe fall by 1-1.5%. Yesterday it became known that Turkey was able to resolve differences with Sweden and Finland, which means that the path for these two countries to join NATO is now open. The risks of Russian retaliatory measures and a possible new round of escalation boosted demand for defensive assets (bond yields of longer-maturity bonds declined) and dampened risk appetite.

Apart from rising geopolitical tensions there were signs of deterioration on macroeconomic front - the Conference Board report on consumer confidence in the US missed expectations big time, the main indicator fell more than expected (from 103.2 to 98.7 points, forecast 100.4 points). The biggest part of disappointment came from the slack of leading component in the index – household expectations, the corresponding sub-index fell from 73.7 to 66.4 points, the lowest print since 2013:

The reason for decline is the drop in the savings rate of American households to 4.4% in response to the rising cost of living and, accordingly, the growing concern about future consumption level:

 

The Conference Board's index began to show co-directional dynamics with another popular U. Michigan consumer confidence index, which has been falling for several months in a row, which increases predictive power of these soft data points.

However, pessimism increases not only among households, but also among US businesses, which was reflected in the fall of the Richmond Fed manufacturing activity index from -9 to -19 in June, with a forecast of -7:

 

Concerns about European growth outlook intensified after release of Morgan Stanley report on Wednesday, which said that the Eurozone economy could fall into recession in the fourth quarter. The two main factors behind the recession, according to the bank's analysts, are a decline in energy supplies from Russia and sustained higher inflation rates, which are reflected in the negative dynamics of consumer expectation and business climate indices. Positive economic growth rates, according to the report, can be expected no earlier than the second quarter of next year on the back of increased firms’ investment. The report also says that the ECB will likely raise rates at each meeting this year bringing the rate to 0.75%, but in September, should economic conditions worsen, the bank may be forced to pause tightening.

June inflation report in Germany reduced pressure on the ECB to expeditiously raise interest rate. Headline inflation was 7.6% against the forecast of 8%, monthly inflation slowed down to 0.1% against the forecast of 0.3%. EURUSD reacted positively to the news, however, the reaction was modest helping the pair to defend the level of 1.05. 

Markets will also be closely watching the speeches of the heads of US, EU and UK central banks at the forum in Sintra today. Key thing to watch is the balance between recession/inflation comments. Increased mentions of a recession will likely be interpreted as a signal that policymakers are concerned about costs and risks of aggressive tightening and should prompt market repricing of prospective tightening pace to a less aggressive one. At the same time, the emphasis in speeches on the threat of accelerating inflation or inflation expectations deanchoring will likely be taken as a hint that the pace of tightening will remain high and a negative reaction is likely to follow in risk assets.

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-analytics]

Dollar resumes rally and stocks fall on hawkish Powell comments in Sintra

The dollar remains near the highs of this year, a significant rally was observed on Wednesday after the speech of the Fed head Powell in Sintra. After the Powell testimonial in US Congress featured with marked dovish bias there were expectations that Powell would emphasize in his Sintra speech that too aggressive tightening could hurt the economy, but the Fed chief said the US economy is in good shape and that the Fed remains committed to contain inflation. In addition, the heads of the ECB and the Fed said that the low inflation regime is a thing of the past. Accordingly, the risk that the Fed may dial back some of its hawkish plans decreased, which led to rebound of the dollar and bearish equity reaction which is set to continue today. As a result of Powell statements, the dollar index rose to the level of 105, interrupting the movement in the correctional bearish triangle:

Today, the release of the May US PCE is due - a key inflation measure for the Fed, which also gives insight into changes of consumer demand in the economy. The headline reading is expected at 4.8% YoY. In addition, there will be data on initial and continuing jobless claims, which should help to assess short-term trends in the US labor market and refine estimate for the June NFP, which will be released next Friday.
Activity in the services and manufacturing sector of China rose in June compared to May showed PMI released on Thursday. However, index components showed that full recovery will take some time.

The rebound of the non-manufacturing PMI index in June occurred primarily due to a sharp increase in activity in the construction sector, the corresponding component rose from 52.2 to 56.6 points. This indicates that the authorities are increasing investment in infrastructure, and developers with state support are increasing the pace of construction of housing and offices.

The recovery of the manufacturing sector index from 49.6 to 50.2 did not come as a surprise, given the covid relief. At the same time, the index of new orders grew from 48.2 to 50.4 points.

The hiring component showed that labor demand was lower than in May. This indicates a risk that June retail sales will fall short of expectations.
The price component in both the services and manufacturing sectors recovered poorly despite the localization of lockdowns in the country, coupled with rising costs, this means that pressure on margins rose.
In general, PMI reports showed that private demand in the economy recovered weakly in June and growth was stimulated by government purchases.

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-analytics]

Markets are worried about a recession and the trend will only gain momentum

The toxic mix of hawkish central banks ready to tighten monetary policy "no matter what" and a series of weak macroeconomic data on the US and European economies has become a catalyst for sell-off in risk assets, rally of bond prices and dollar strength. A growing number of market participants believe that central banks are rushing to raise rates (aka "policy error"), which could, if not cause, then at least exacerbate the course of a possible recession. Looking at the two main asset classes - stocks and bonds, we see a flow from risk assets to safe havens (long-term bonds) - bond prices rise (yields decrease accordingly), and stock prices decline. For instance, the yields of 10-year US and German bonds returned to the level corresponding to the beginning of June:

 

In the risk assets market, considering the key S&P 500 benchmark, the rebound after the correction to the low since December 2020 did not last long, bearish sentiment again prevailed this week. The sellers may target the 3550-3570 zone, which will correspond to the test of the main bearish trend line:

 

Given these trends, the demand for the dollar, as a defensive asset, is set to remain high and it is very likely that we will see new highs in the dollar index in the near future:

Consumer spending in the US for the first four months was revised down, and after release of the May report, which indicated a significant slowdown in growth, it became clear that the flywheel of the US economy is starting to slow down. The Fed's policy of raising rates, along with a slowdown in consumer spending, is likely to lead to the fact that economic growth forecasts will become less optimistic, while the risks of a recession will increase.

The report, published on Thursday, contained important positive news for the Fed - the preferred inflation measure for the regulator - the core consumer spending index - eased from 4.9% to 4.7% (4.8% forecast). A decrease in the indicator means that the imbalance between supply and demand has somewhat eased, which means that inflation pressure in the economy is less than expected. The rest was less positive - the nominal monthly growth of expenditures amounted to 0.2% (forecast 0.4%), and in real terms it even decreased by 0.4% (forecast -0.3%). At the same time, the April figure was revised down - from 0.7% to just 0.3%. Along with deterioration of consumption data for the first quarter, the market is coming to the realization that the American consumer was not as resistant to inflation as it seemed.

The details show that the indicator of consumption of durable goods behaved the weakest. It sank by 3.5%, while the consumption of non-consumer goods decreased by 0.6%. Service consumption rose by 0.3%, but this was not enough to compensate for the weak behavior of other components.

The component-by-component dynamics of US consumer spending is as follows:

The decline in core inflation is a very good sign, but at 4.7% it is still twice as high as the 2% target. The Fed has signaled that it is ready to sacrifice strong demand to regain control of inflation, so the prospect of high pace of rate hikes is not yet in doubt. After Powell's speech in Sintra, where the head of the Fed announced the good shape of the US economy and the need to reduce inflation, this prospect only became clearer. Other than a strong labor market, there really isn't much to brag about: consumer confidence is at multi-year lows, the housing boom is waning, and fuel prices are likely to remain high. It follows that in the second quarter, the picture of consumption in the US may not be so rosy, and therefore fears of a recession in the fourth quarter of 2022 are likely to only gain momentum.

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-analytics]

Recession risks keep dollar bid, set to curb risk appetite further

Major currency pairs struggle to choose direction on Monday, European indices move back into modest positive territory, US futures slip with S&P 500 futures trying to defend the 3800 level in order to prevent development of bearish momentum.

Last week we saw a significant rally in key sovereign debt markets (US, EU), with long-term bond yields falling to their lowest level since early June. The market now considers the 325-350 bp range to be the most likely outcome of the series of Fed rate hikes by the end of this year against 350-375 bp a week ago. In other words, market expectations for cumulative Fed rate hikes this year have been cut by 25 bps:

Growing risks of slowdown and even recession of the global economy is likely to continue to constrain the hunt for yield this week, based on this, a significant pullback of the dollar, which again rushed to multi-year highs, appears to be unlikely. An argument in favor of a slight correction in the dollar may be extreme positioning according to the CFTC data: the speculative long position on the dollar is now at a two-year high, which suggests a potential long squeeze.

Two significant reports this week are the minutes of the Fed meeting and the report on the US labor market for June, which is traditionally released on Friday of the first week of each month. FOMC "minutes" may raise expectations that the Fed will raise the rate by 75 bp for the second time in July if the content of the report indicates a strengthening of consensus that such a move is warranted.

Given the deteriorating growth forecasts for the US economy, the Fed's commitment "by all means" to reduce inflation, the US labor market report is likely to provoke a classic reaction in the event of a surprise: job growth below the forecast (270K) will strengthen expectations that the Fed will tighten policy aggressively in a slowdown and trigger risk-off, while higher-than-consensus job growth will support risk assets as fears that the economy will not bear the burden of policy normalization will likely subside. Only a very weak labor market report, such as contraction in the number of jobs, could lead to expectations of lower rate hikes, which will appeal to risk assets and could lead to a rebound.

As for the European economy, the inflation report caused a minimal market reaction, as asset prices already factor in a fairly aggressive ECB rate hikes (140 bp for this year) and market participants' focus on data that will help to clarify recession risks. As for the Eurozone, the main factor of this risk is the reduction in energy trade with the Russian Federation, fears of an escalation in this direction significantly affect the markets. The risk of a bearish breakout and movement of EURUSD towards the previous local minimum (1.0380) is, in my opinion, higher than the risk of a correction to 1.05, given potential negative development of the sanctions war.

Another significant event this week will be the RBA meeting on Tuesday, which will take place before the opening of European markets. The main question is whether there will be a 50 bp rate hike or the RBA will decide to go with modest 25 bp. The first outcome is not fully priced in by the money market, so 50 bp move will likely trigger upside in AUDUSD. Nevertheless, given negative sentiment of investors regarding currencies correlated with the phase of a business cycle of the global economy, AUDUSD recovery will probably be short-lived, with 0.70 level seen as the key resistance where a downside may resume:

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.