Currency and Stock Markets. Daily Insights

[stoch]

Gas shortages, risks of cautious ECB decision suggest downside risks for Euro remain high



The long squeeze in greenback continues on Tuesday, the dollar index (DXY) sank by almost 1%, Euro, Swiss franc and Australian dollar scored the largest gains among the major currency pairs against the dollar. EURUSD is trying to gain a foothold above 1.0250 ahead of the meeting of the European regulator on Thursday. The ECB could lift interest by 50 basis points and although this is not the baseline scenario, central banks have been often making unexpected rate decisions recently, and EURUSD gains seems to be driven by technical rebound and expectations of an upside surprise in rate decision.

The macroeconomic background of the European economies slightly improved after release of data on employment in the UK, job growth in June significantly exceeded the forecast (296K against the forecast of 170K), unemployment remained at the same level of 3.8%, contrary to expectations of growth to 3.9%. The final estimate of annual inflation in the Eurozone was adjusted downward to 3.7%, in line with the forecast.

Despite swift rebound in EURUSD in the first two days of this week, the risks around the ECB meeting remain high, as can be seen from the parabolic increase in volatility in the derivatives market, which pricing depends on rate of the ECB rate (swaptions):

Source: Bloomberg


Adding to the uncertainty is the prospect of resuming gas supplies via the Nord Stream 1 pipeline to the EU after maintenance is completed on July 22. Earlier, Russia's gas monopoly Gazprom sent a force majeure letter to several European customers, which markets took as a signal that gas supplies would not resume after the maintenance is completed. The IMF warned about strong recessionary risks for EU in the event of a gas embargo from the Russian Federation, in particular to countries most heavily dependent on Russian gas (the Czech Republic, Hungary, Slovakia and Italy), while the EU said a 1.5% decline in the economy is possible in case of an embargo in the worst-case scenario.

The risks of worsening of the EU gas shortages and prospects of unsatisfactory policy stance of the ECB in the fight against inflation on Thursday maintain significant downside risks for the Euro, so EURUSD rally should likely be interpreted as a relief rebound in the ongoing bearish trend. If the ECB does not raise the rate by 50 b.p. and will act according to the base scenario (25 bp rate hike), and if there are no convincing details on the normalization of spreads in the EU government bond market (aka anti-fragmentation tool), EURUSD may resume moving towards parity and potentially stage a breakout below the 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.

 

[stoch]

Despite the rally, the risks for EURUSD, GBPUSD are skewed to the downside


Rising optimism about returns in risk assets and narrowing gap in the expected pace of tightening between the Fed and other central banks were the main drivers of broad USD sell-off on Tuesday. The dollar index (DXY) dropped to 106.40, however, selling pressure in the second half of the day eased yesterday, the price entered short-term consolidation and today it rebounded to the area of 107 at the start of European session. Risk assets came under selling pressure as well, major equity indices declined by 0.5% on average.

The idea that the gap between the Fed and other central banks gained traction after reports that the ECB could still raise rates by 50 bp on Thursday. In addition, strong UK employment data increased the chances that the Bank of England will also deliver a 50 bp rate hike at the meeting in August. The EU and UK money markets price in nearly 200 bp tightening by the ECB by May 2023, the same for the Bank of England. However, there is a substantial risk that markets will scale back their expectations of ECB and BoE tightening, given fragile growth forecasts for the European and British economies. At the same time, the prospect of a 200bp Fed rate hikes confirmed by the official opinion of the FOMC (Dot Plot) looks more reliable due to the fact that the US economy is better protected from global challenges, such as reduced gas supplies from Russia. For this reason, the risks for EURUSD, GBPUSD are skewed to the downside.

The UK inflation report released today increased the odds that the Bank of England's current tightening course will send the economy into stagflation. Annual inflation exceeded the forecast and amounted to 9.4%. Monthly inflation accelerated to 0.8%. The rise in import prices, which is also ahead of forecasts, indicates that either retailers will have to put up with further margin cuts or raise prices, so a 10% year-on-year increase in food prices is likely not to be the limit and accelerate towards the end of the year.

At the same time, core inflation seems to have peaked and started to slow down to 0.4% vs. 0.5% forecast. There are other signs that inflationary pressures in supply chains, which were one of the key drivers of inflation in 2021, have begun to ease - used car prices have continued to decline and are now 8% lower than their peak in January.

GBPUSD reacted negatively to the report bouncing off from the short-term resistance area:

EURUSD rose above 1.02 yesterday after reports that the ECB considers a 50bp rate hike on Thursday. ECB Chief Economist Lane will reportedly make a formal proposal at the meeting, and markets are now trying to estimate the number of members of the Governing Council who will support this proposal. At the moment, it is known that only three officials spoke in favor of raising the rate by 50 bp, the markets estimate the probability of such an outcome at 50%.

Even with a hawkish outcome of the meeting, the ECB will have to try to support the European currency, given the worsening growth forecasts for the EU economy. EURUSD strengthening potential tomorrow may be limited by the level of 1.0350 as part of a rebound from the 1.00 level, after which the price will test the upper limit of the short-term downtrend:

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.

 

[stoch]

Despite Dollar correction the risk of EURUSD retesting parity is high


The Fed week is unlikely to be as turbulent as the last week featured with ECB meeting as the risk of surprising policy decisions at Wednesday meeting appears to be low. Chances of a “super-aggressive” 100bp rate hike decline as incoming data for July point to both increased preconditions for a slowdown in headline inflation (lower gasoline prices) and a smaller-than-expected damaging effect of high inflation on consumption (retail sales +1% MoM in June). The consensus forecast suggests that the Fed will raise rates by 75 bp. The decision of the ECB to limit forecast horizon of its policy actions to one meeting (moving away from forward guidance), means that EURUSD will now be more sensitive to incoming data and this week's EU CPI may cause higher-than-usual volatility.

After consolidating in the 106.50-107 range last week, the dollar index (DXY) drifts towards 106 points on Monday thanks to increased demand for risk. European indices trade in positive territory, US bond yields rise across all maturities, German and British bonds are moderately declining in price. Market optimism rose on the news that Gazprom will supply gas to European customers in “corresponding volumes”, which, firstly, became a signal of reduced geopolitical risks, and secondly, helped investors to revise EU growth outlook towards a more optimistic one.

Despite the low potential for surprises, the fact that the Fed intends to raise rates proactively should provide support for the dollar in August-September. In addition, the odds that the ECB and the Bank of England will revise the interest rate path towards fewer rate hikes are higher than those of the Fed.

Recession fears are likely to further curb the rally in risk assets and also offer support to the dollar. Other potential drivers of the currency market this week include releases such as US GDP for the second quarter (consensus forecast 0.5%). The report is likely to have a short-term impact on the market, as it is unlikely to change the stance of the Fed, which is ready to pay a high price to return inflation to a comfortable path.

The heightened reaction of the EURUSD to the PMI reports on Friday (which proved to be quite pessimistic, especially for the German economy) indicates increasing sensitivity of the Euro to incoming data as the ECB decided to abandon forward guidance, shifting focus of investors to other data sources such as macro and corporate reports. Today the report on business climate in Germany from the IFO agency was released, which did not live up to expectations - the main reading was 88.6 points against 90.2 forecast. On Friday, data on inflation in the Eurozone is due, headline inflation is expected to accelerate from 8.6% to 8.7%, core inflation - from 3.7% to 3.8%.

Market expectations on the ECB policy appear too hawkish and incoming macro data on the Eurozone economy creates the risk of correction of these expectations in favor of more moderate ones. The consequence of this is higher risk for EURUSD to test parity again than to rise to 1.04-1.05:

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.

 

[stoch]

Preview of the FOMC meeting: hints on interest rate path in 4Q could be the key thing to watch


Greenback index continues to consolidate in a tight range on Wednesday in the run-up to FOMC meeting. The range has been forming for about a week and indicates short-term equilibrium in USD supply and demand before release of the key market information. The presence of the pattern suggests that a breakout on Fed information will indicate the direction of a fresh trend leg. From a technical perspective, market looks poised to test lower edge of the channel (105.70-106) before possible resumption of the upside:

The risk of surprise in the policy today is quite low, according to Fed funds rate futures, the chance of a 75 bp rate hike is more than 90%. At least two Fed speakers stated unequivocally that they will vote for 75bp, leaning towards the idea that US inflation spike in June above 9% was transitory. In addition, data from U. Michigan showed that inflation expectations declined in July, which in fact is one of the key goals of Fed’s monetary tightening. It’s also important to note that the Fed rarely goes against market consensus, so most likely today we will see a rate hike of 75 bp and lack of significant market reaction to this outcome.

Instead, market participants can focus on hints that may help to assess the size of rate hikes in 4Q meetings. Current consensus market estimate of the rate path suggests that the Fed will deliver 50 bp in September and 25 bp in November and December. Any surprises in this direction will likely determine short-term demand for USD and US Treasuries of shorter maturity.

The Fed will not release updated economic forecasts and Dot Plot at today's meeting, so keep in mind that Powell's press conference and FOMC statement will be the main sources of information.

The Conference Board's report on consumer confidence, released yesterday, pointed to a weakening US expansion in the third quarter. The key indicator has been declining for the third month in a row, although not as fast as in June. The current conditions index, based on consumer assessments of business prospects and the state of the labor market, fell from 147.2 to 141.3 points. The expectations index also moved lower, but the decline turned out to be insignificant - from 65.8 to 65.3 points:

Inflation expectations, according to the CB report, fell to 7.6% from 7.9% in June.

The moderately weak report and the signal of easing inflation expectations have become another argument in favor of the fact that the Fed will be cautious today, raising the rate by 75 bp and will likely hint at slowdown in the pace of policy tightening in line with current expectations.


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.

 

[stoch]

Fed signals increasing policy flexibility, Euro takes dovish clues from persistent inflation


US equities rose and the near end of the yield curve fell following the Fed meeting (2-year Notes 3.1% -> 2.99%), as the Fed rhetoric began to shift from high inflation to a potential economic slowdown due to policy tightening. Recall that in May and June, the comments of the Fed officials, including chair Powell, tried to convince the markets that the Fed was throwing all its efforts into fighting inflation and unfortunately the US economy will have to pay the high price in terms of slowing growth rates. At the time, equity and dollar markets traded the idea that the Fed was tightening when the US expansion started to show first cracks, which could potentially exacerbate downturn. However, data on June retail sales (+1% MoM), U. Michigan inflation expectations (7.9% -> 7.6%), US gasoline prices in July showed that a favorable mix of still decent growth rates and slowing inflation is emerging in the economy, which should in theory increase Fed flexibility and help the central bank to slow down costly tightening process. The Fed's vague forward guidance outlined yesterday and the move away from a front-loaded tightening approach in favor of data oriented one (the ECB did the same at the last meeting) had two important consequences: the dollar and markets in general should become more sensitive to incoming data that will pave the way for the next Fed decision, and the risks of a dovish Fed tweak at the upcoming meetings, increased.

Analyzing the probability distribution of how much the Fed rate will rise by the end of the year, it can be seen that the 100 bp outcome still has the highest probability, but the probability of 75 bp outcome increased while the odds of 125 bp and higher decreased, signaling dovish market interpretation of the yesterday FOMC meeting:

Today's release of US GDP data will be the first test of the dollar's reaction function to incoming data. Consensus forecast is 0.5% QoQ in the second quarter, but data on firm inventories and foreign trade point to downside risks.

The release of the Durable Goods Orders report yesterday underpinned demand for risk, as the figure was well above the forecast - growth in June was 1.9% MoM, against the forecast of -0.5%. Apparently, good dynamics was ensured by the growth of orders in the defense sector, excluding orders in this sector, the gain was 0.5% against the forecast of 0.2%. Orders for durable goods is the function of consumer expectations, as they are expensive purchases, so the better-than-expected print provided additional positive information on household expectations.

Inflation data in Germany disappointed, the report showed today that inflation slowed down from 7.6% to 7.5%, missing forecast of 7.4%. At the same time, the price level increased by 0.9% MoM, falling short of 0.6%. Considering that the ECB at the last meeting signaled that the significance of incoming data in policy is increasing, the initial negative reaction of EURUSD to the report is likely to gain momentum.

From a technical point of view, the potential reversal of EURUSD after the parity test began to fade - the price, after the rebound to 1.025, fluctuates in the range of 1.02-1.01, slowly sliding down against the backdrop of negative news on inflation and growing risks of an energy crisis, especially in light of news about falling gas flows from the Russian Federation via the Nord Stream 1. As I wrote in the previous article, the risks in this story are skewed towards further escalation, and therefore there should definitely be bearish bias due to concerns of slowing activity on the back of lower gas consumption and likely higher inflation in the coming months. The pair is in a clear bearish trend and, as we know, without meeting resistance, the trend tends to continue. There are no resistance factors yet, so the downward movement should rather be considered as a continuation of the bearish trend:

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.

 

[stoch]

Was market reaction to US GDP number too emotional? Looking under the hood, it may seem so


Demand for risk increased markedly, greenback declined and US bond yields took out recent lows (2.8% for 10-year bonds, 2.9% for 2-year bonds), finding an equilibrium at the lowest levels since April, as the US economy unexpectedly for many, including doomsayers, showed negative growth rate in the second quarter. Nominal output fell by 0.9% QoQ, missing estimate of 0.5%, which formally means that US entered recession. The release of the report made a strong impression on the dollar, as earlier at the meeting the Fed made it clear that after hiking interest rate by 75 bp two times in a row, further rate hikes will be much more dependent on incoming data i.e., adjustment of the path of tightening in either direction is now more likely. After the release, the dollar index fell from 107 to 106.50, and then continued its gradual decline to 105.50, from where it was able to rebound:

The contraction in US GDP has cast a shadow over the investment thesis that US assets provide the best risk/reward ratio in the face of a global slowdown, high inflation, geopolitical risks and a cycle of central bank tightening. In addition, the weak report spurred a revision of the Fed's policy tightening forecasts: the expected aggregate size of the rate increase by the end of the year was reduced from 100 bp to 90 bp.

However, looking at the details of the report, one can find arguments in favor of the fact that the market reaction to the weak report was excessive and, in fact, the US economy did not enter a recession. If we look at the contribution of each component of GDP, we can see that growth was pulled down by volatile components - firms' investment in inventories (-2% of the total) and investment in fixed assets (-0.7% of the total). Consumer spending growth in the second quarter was positive at +1%:

The downturn phase of the business cycle is usually characterized by contraction in consumer spending and rising unemployment, but so far in the US, these two indicators do not give cause for concern. In the labor market, initial jobless claims have risen for the fourth week in a row, but the Fed has warned that tightening policy will have some costs, so the deterioration in individual indicators is not much of a surprise.

The Fed officials' argument that recession risks are exaggerated also continues to be based on the fact that the classic signs of lower consumer spending and rising unemployment are absent. Raphael Bostic said in an interview yesterday that the economy is far from recession, but he shares concerns that a "self-fulfilling prophecy" effect could actually make matters worse.

In general, in my opinion, the effect of a weak report on GDP should come to naught next week and the dollar index will be able to resume growth. From a technical point of view, the dollar index completed bearish pullback to the lower edge of the main trend channel, which creates conditions for a rebound:

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.

 

[stoch]

Despite risk of slowing Fed tightening, Dollar correction may be over and here is why



The planned visit of US House speaker Nancy Pelosi to Taiwan has the potential to exacerbate relations between the US and China, which in the foreign exchange market will be expressed in the strengthening of the dollar, increased demand for safe heavens, weakening of the CNY and currencies that get clues from the moves of the Chinese currency (AUD, NZD). AUDUSD upward momentum is under additional threat as the RBA signaled that inflation peak is finally in sight. EURUSD may slide towards 1.02.

Rumors that the Fed will slow down the pace of tightening after a series of weak US reports since last week (in particular, downbeat GDP figure in 2Q) kept dollar pressured at the start of the week. However, betting on the continuation of the long squeeze becomes risky, as by correcting expectations for tightening, the markets are unlikely to drift away much from the Fed's guidance, risking making a mistake. Geopolitical and economic uncertainty outside the US persists, so the idea that the dollar will be in demand as a defensive asset for some time remains justified.

Reports that the speaker of the lower house of Congress Nancy Pelosi will visit Taiwan and the sharp reaction of the Chinese authorities, who promised a military response, keep investors in suspense, risk assets are in the red and the dollar attempts to gain foothold on Tuesday, pricing in escalation. Among the G10 currencies, the most vulnerable to the escalation are the AUD and NZD, which have already lost 1.3% and 0.6%, following growing Renminbi weakness.

This week is fully of US labor market reports, the significance of which has grown in light of the fact that the Fed shifted to meeting-by-meeting approach, hinting that policy actions will more depend on incoming data. In addition, signs that US inflation is easing increase the importance of other macroeconomic parameters, including labor market parameters. This week will see the JOLTS report on new vacancies, ADP on Thursday and NFP report on Friday. The focus will also be on speeches by Fed officials such as Charles Evans, Loretta Mester and James Bullard. In my opinion, the risk of upside correction in DXY to the level of 106 increases, given that the bearish pullback from yearly high pushed prices to the edge of the medium-term channel, in addition, another technical level, the 50-day moving average, has acted as a support:

Reports on the European economy are not expected today and events in geopolitics are likely to be the main drivers of EURUSD. Any unfavorable development in relations between China and the United States will most likely have a negative impact on the European currency, firstly, due to the growth in demand for the dollar as a defensive asset, and also due to the fact that trade risks will increase, because EU exports rely heavily on Chinese demand.

Even if the situation with Nancy Pelosi's visit to Taiwan takes a de-escalation course, EURUSD strength is highly doubtful, as EU growth prospects are vague due to the risks of an energy crisis while potential recovery in risk demand may increase the tendency to use the euro as a funding currency, which will lead to increased supply of the common currency.
The pair in the short term may resume movement to 1.02 and test support levels below.

The RBA raised rate by 50 bp today, as expected, but the signal that further policy action will increasingly depend on incoming data increased the risk of a pause in tightening in case of downside surprises in the data. Increased tensions in US-China relations have intensified the fall of AUDUSD, in case of an escalation, there is a risk that the pair will test 0.69. The meeting report is out on Friday and due to the shift in priorities for what to focus on, the report will likely contain some market-moving information that will cause volatility in AUD.

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.

 

[stoch]

Upbeat US ISM release suggests hopes of Fed dovish shift may fade quickly




Provocative from Chinese point of view, Nancy Pelosi's visit to Taiwan and the promised tough response from the Chinese authorities met with a rather tepid market reaction yesterday, the main US indices closed in a moderate minus, the dollar index met resistance at 106.50 and turned lower on Wednesday. The Fed's verbal interventions have brought back to reality dreamy Treasury investors, who have recently been increasing their bets that the central bank will soften the pace of tightening or be forced to cut rates in 2023. Yields on 10-year bonds jumped yesterday from 2.52% to 2.7%, which also provided support for the dollar. The OPEC+ meetings passed without surprises for the market, the participants agreed to moderately increase production.

Pelosi's visit to Taiwan received a lot of attention, primarily because of China's alarming warnings, but further developments showed that an escalation had been avoided. China "retaliated" by banning sand exports to the island, expanding restrictions on fruit shipments to Taiwan, and announcing military exercises Aug. 4-7. It also became known that the Chinese manufacturer of batteries for electric vehicles changed his mind about investing in the construction of a plant in the United States. That's all.

There were also speculations that China might respond by dumping Treasuries, causing market instability, but China's decline in Treasury holdings is due to other reasons, most notably the need to sell foreign exchange reserves to contain CNY devaluation. The mainland yuan has been under significant pressure from an outflow of investors who expected the hard lockdowns to trigger a severe slowdown in China. In addition, China could sell bonds as a precautionary measure, alarmed by the case with the freezing of Russian foreign exchange reserves.

A number of Fed officials who spoke yesterday hinted that investors may be delusional in expecting the central bank to slow down policy tightening or that the tightening cycle will quickly give way to an easing cycle in 2023. Loretta Mester said yesterday that she sees no signs of much easing in inflation, and that the risks of wage inflation due to a strong labor market (which will cause spillovers to consumer inflation, aka second-round effects) are high. Therefore, the Fed will raise rates and will do it vigorously. Comments from other Fed officials also focused on a strong labor market, a major pillar of the economy that keeps the Fed on course. As a result, 10-year yields jumped up yesterday:

The ISM report in the US non-manufacturing sector today pointed to a favorable combination of the dynamics of inflation index and other indicators, including leading ones. The overall figure beat estimates, rising from 55.3 to 56.7 points (forecast 53.5 points). The price index fell from 80.1 to 72.3 points, indicating a weakening increase in inflationary pressure, while the index of new orders rose from 55.6 to 59.9 points, business activity - from 56.1 to 59.9 points. The hiring index is getting out of the negative zone - 49.1 against 47.4 points. In general, the report proved to be much better than expected, due to which the dollar was able to bounce even higher:

The raft of upside surprises in the report suggests that the much-discussed “soft landing” by the Fed officials - reducing inflation while preventing economy from falling into recession is feasible. In my view there is a risk that market players will again price in the outstripping growth rates of the US economy compared to competitors, and therefore better real yield outlook. In turn, this will likely be one of the main bullish drivers of the dollar.


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

 

[stoch]

Decreasing US economic uncertainty pushes equity prices back into bull territory


Incoming data on the US economy continues to surprise on the upside, triggering massive unwinding of recession bets and luring investors back into risk assets on decreasing uncertainty. One such report was the ISM report on the non-manufacturing sector released yesterday which surprisingly showed that the sector continued to expand in July at a healthy pace despite aggressive Fed rate hikes and consumer spending pressured by high inflation. The behavior of the index components proved to be even more unexpected: the price index fell from 80.1 to 72.3 points, indicating that pipeline inflation pressures decreased, the new orders index rose from 55.6 to 59.9 points, laying the groundwork for expansion of activity next month, while the business activity index, contrary to expectations of a decrease, rose from 56.1 to 59.9 points.

ISM Report Price Index

ISM Report New Orders Index


The reason why the report had major bullish implications for the market is simple – accelerating inflation combined with the Fed's ultra-aggressive pace of rate hikes led to a sharp rise of recession plays in May and June. The point is that the tightening was supposed to suppress high inflation, but at the cost of “demand destruction”—lower consumer spending and reduced investment. However, a number of recent data, in particular the ISM report, have shown that the scenario of a "soft landing" of the economy, which the Fed hopes so much for – bringing inflation back under control while maintaining positive growth rates in consumer demand and investment - is becoming more realistic. The July reports did indeed show the first signs of an easing in price pressures, while at the same time, activity and output indicators, leading indicators such as new orders continued to rise, and in some cases even better than estimates. Given that there is still much uncertainty priced in risk assets, the current rebound should have some room to continue especially if data continues to show resilience of economic activity to the Fed tightening and inflation. The next report in focus is labor market’s NFP which will likely extend the streak of positive US data surprises, giving another boost to risk assets (i.e., equities) and greenback.

Also yesterday, two Fed officials, Barkin and Daly, made comments, refuting rumors about policy easing cycle next year. According to the policymakers, the inflation comedown will likely be slow (due to the fact that approximately 50% it is driven by supply-side factors) while fears that policy tightening will drive the economy into a recession that will require rate cuts, are exaggerated. In general, this week, the Central Bank increased verbal interventions to curb the rise of market expectations that the pace of policy tightening will slow down or that the easing cycle will start next year. As a result, the odds that the third rate hike by 75 bp will take place in September increased from 26% to 45.5%:

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.

 

[stoch]

Better than expected China inflation hints US CPI report may deliver bullish surprise today


US bonds remain under selling pressure ahead of release of the US inflation report today. This makes it more difficult for yields to rise further in the event of a positive surprise, however, the near end of the curve may be more sensitive to the release, as the Fed, as we know, can only influence short-term market rates. In addition, inflation data may finally affect expectations regarding the Fed's decision to sell bonds from the balance sheet (quantitative tightening).

The first half of the week proved to be trendless for the dollar, the US currency erased gains fueled by the strong unemployment report published last Friday. There will be a major event today in terms of implications for Fed policy that is likely to be the most important not only this week, but even this month. The US CPI is expected to indicate a weakening in headline inflation and an acceleration of core inflation above 6% YoY.

Sustained high core inflation, which is more difficult to control via monetary tightening should be an argument in favor of the Fed's position, which says that much remains to be done to restore price stability. In addition, core inflation, in line with the forecast, should reinforce expectations that the Fed will raise rates by another 125 bps before the end of the year. If there is no significant acceleration above the forecast, which will be very unexpected, because preliminary data indicate a reversal in the price growth trend, then the impact of the report on the foreign exchange market will be limited to keeping dollar within its current range (106-107 on DXY). There is still a little more than a month before the Fed meeting in September, and if volatility remains low, interest in carry trading will additionally provide moderate support to the dollar due to the fact that the supply of low-yield currencies such as EUR and JPY will increase.

EURUSD continues to dangle near annual lows, and apart from an increase in expectations of easing of the pace Fed's tightening, there are no reliable fundamental grounds to hold bullish view on the pair. Geopolitical risks and uncertainty in the EU's energy security continue to be a source of significant premium in the common currency. Since there are no reports on the EU economy today, the movement in the pair will most likely be tied to the release of CPI. The decrease in potential volatility in currency options suggests that the market has no desire to test lower levels (1.00-1.01). At the same time, technical analysis indicates a gradual increase in pressure from buyers after the main rebound wave, which increases the chances of an upward breakout:

The decline in inflation in China in June, both manufacturing and consumer, increases the chances of seeing a favorable outcome for the markets of the US CPI release today. Today's report on China showed that consumer inflation was 2.7% against the forecast of 2.9%, manufacturing inflation - 4.2% against the forecast of 4.8% in July.


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