Daily Forex News

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All eyes on Europe – Huge volatility expected in EU equities

The platform is set to start the new week on a positive footing after the solid retail sales last Friday.

The index of US500 closed retail at absolute highs after the Friday gain of 1.9% which brought the loss on the week to 1%- the bulls need the index to break 3950, which could set off the trend and look at the short position in CFTC report, if the rally of Friday continues. If it happens, we can see some systematic players cover short and propelling the market higher. The impact that may have an options market makers too and the need to buy back delta hedges is also there.

The earnings of US in this week with 14% of the US500 market cap reporting could get Netflix and Tesla workout from clients.

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What is expected in BOJ meeting

Bank Of Japan next meeting on Thursday on interest rate decision. Many countries are aggressively increasing the rates to put brakes on inflation. The BOJ is unlikely to do anything, as inflation rate sits at 2.5%.

EUR/JPY had been moving higher since 7th of March 2022. The pair began moving higher in an upward slop channel as inflation began to rise in Europe. EUR/JPY pulled back because Euro got hit across the board. On the 5th of July, the pair broke below the upward sloping channel and pulled back to 38.2% Fibonacci retracement level from the lows of March 7th to highs of June 28th,as well as horizontal support, near 136.70. The support held on and EUR/JPY has gone bid for the last 5 days.

EUR/Jpy is currently up against resistance of 61.8% Fibonacci retracement level from the June 28th highs to July 8th lows near 141.44. This is also the top trendline of a short-term channel the pair has been in since July 12th . If price breaks above the channel, the next resistance level is at the July 5th highs of 142.37.

EUR/JPY can move up to test the June 28th highs at 144.28. The RSI is in overbought territory, an indication that the pair may be ready for a pullback. If EUR/JPY does move lower, the first support is the bottom of the channel trendline near 140.05. Below there, horizontal support sits at 138.80, then the lows from July 8th near 136.86.

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Signs of Disinflation Continue

There are some promising signs on the inflation data which is released today for UK and Canada. UK producers lower the prices to 1.8%, which is the disinflation in the third consecutive month. Core CPI also showed to 0.4$ m/m which is also its third straight month on disinflation.

Canada’s producer prices also reduced -1.1% in June, first reduction since Aug 2021 and when it was on fast pace in May 2020. The annual rate peaking in April 2022 at 18.1% could be attributed to basing effects, it is good to see the m/m PPI prints trending their way into contraction. Expectation is lower PPI going forward. As producer prices are an input for consumer prices, it is a good news for consumers.

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European Central Bank Interest Rates

The European Central Bank also joined the global rate hike on yesterdays announcement, announcing a larger then expected 50 bps deposit rate increase, to 0.00%. The ECB said a further normalization of interest rates could be expected at upcoming meetings.

ECB also approved the Transmission Protection Instrument, a tool aimed at supporting orderly conditions across Eurozone, in particular the region’s peripheral makets such as Italy and Spain. Full details are not released yet, and the scale of TPI purchases depends on the severity of the risks facing policy transmission.

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EUR/USD – Euro US Dollar

Last week the European currency showed a slight growth to a high of 1.0272. Reason behind this was the most banal corrective rebound of EUR/USD breaking the equality level of 1.0000, the bottom at 0.9951 on 14th of July, the resumption of Russian gas supplies to Europe and the most important expectation of a rise in the euro interest rate of 50bp. This happened in reality for the first time in past 13 years.

The explanation given by ECB of the rate normalization was, obvious and consists of an updated assessment of inflation growth and the announcement from ECB for the launch of a new instrument which is the TPI.

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This Weeks’s currency pair, EURUSD

The ECB hike of last week is the highest hike in past 11 years which brought the interest rate from -0.50% to 0.00%. Further normalization of interest is appropriate, indicating that there will be another hike from ECM on their next meeting on 8th September. Another new program was introduced by the committee of new bond buying called Transmission Protection Instrument to be used if it is needed. TPI will allow ECB to buy bonds in any country which is in Eurozone whose yields may be surging due to unwarranted financial conditions.

Last weeks poor PMI data to the Eurozone with European PMIs showing that manufacturing was slowing. A number of country’s manufacturing readings fell below the 50 level, indicating manufacturing activity is in contractionary territory. For the Eurozone as a whole, the flash Manufacturing PMI was 49.6 vs 52.1 previously, while the flash Services PMI was 50.6 vs 53 previously. This brought the composite number down to 49.4 from 52 in June. On Monday, Germany released its Ifo Business Climate. The reading was 88.6 vs 90.2 in June. The expectations component fell from 85.5 in June to 80.3 in July, its lowest level since April 2020. This seemly confirmed the PMI data.

This week EU will release its flash CPI for July. Expectations are for 8.6% YoY vs 8.6% YoY previously. The core CPI is expected to go up 3.8% YoY from 3.7% YoY previously. If this print continues higher, the ECB will have some bring decisions to make.

The FOMC meets today and tomorrow to discuss interest rate policy. Expectations are that the committee will raise rates by 75bps, which will bring the Fed Funds rate from 1.75% to 2.50%. The last CPI reading for the US was 9.1% YoY. On Friday, PMI data of US was released. The Manufacturing component was 52.3 vs 52.7 in June.

EUR/USD has been moving in a lower channel since Feb 2022. It began moving aggressively by mid-June when it was at 1.1500 and reached 1.0340 which was the low since Jan 2017 but couldn’t break through. On July 14th it broke the level of 1.0000 since then the pair has been consolidating mid-range near 1.0250 as tomorrow’s FOMC meeting looms.

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AUD Second Quarter Increase | Xtreamforex

In the second quarter of 2022 Australian inflation data has increased to 6.1%, but below the agreed expectations relaxing the fear of a surprising 75bp rate increase when the RBA has a meeting next week.

CPI rose by 1.8% Quarter On Quarter(QoQ) and 6.1% Year On Year(YoY). This was the highest increase since the introduction of the Goods and Services tax in the beginning of 2000.

The RBA’s preferred measure of inflation, increased by 1.4% Quarter On Quarter and 4.9% Year On Year, which was above the market expectations of 1.2% QoQ and 4.7% YoY.

Necessary inflation is now 190bp above the top of the RBA’s 2-3% target band, and the yearly trimmed means was highest since the ABS first published the series back in 2003.

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The FOMC raised rates by 75 bps which was widely expected

As widely expected, the Federal Open Market Committee raised the range of its target for the the federal funds rate by 75 bps, which brings the top end of the range to 2.50%. There was widespread support for another supersized rate increase-the FOMC raised rates by 75 bps at its last meeting in June. The FOMC has now hiked rates by 225 bps since March, this much increase never happened in past 40 years.

In todays decision, the committee again pointed to that fact that inflation remains high. For sure the YoY rate of CPI inflation rose from 8/6% in May to 9.1% in June, which was higher then others, and likely most FOMC members, had expected at the time. The statement also repeated that “the committee is strongly committed to returning inflation to its 2 percent objective”. This sentence, which was used previously in the June statement, in connection with the unanimous vote to raise rates by another 75bps today, indicates that inflation remains forefront in the minds of most FOMC members.

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The US Economy || US rate hike cycle concludes in 2022

Last week was very active for global rebirth in risk appetite despite a run of data which pointed to deteriorating US economic growth. This is because the softer tone of US data and the FOMC’s acceptance of it implies a reducing risk of the rate hikes in excess of those already increased.

Increasing the rate hike for the second time to a mid-point of 2.375%, Chair Powell showed a greater degree of comfort over the outlook for inflation in the July press conference. In part this stems from 2.375% being within the 2.3% interest rate range th FOMC believe to be neutral for their economy. However, the greater comfort of inflation is also a consequence of building apprehension over the outlook for growth. The press conference also made clear that the FOMC wish to undertake “just the right amount of tightening” to bring about below trend growth, not to make mistake by creating the pre conditions for recession.

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Upcoming News for this Week:- FOMC, RBA, BOE

FOMC

The FOMC increased rates by 75bps increasing the Fed Funds rate from 1.75% to 2.50%. The statement confirmed that spending and production were soft, however job increase remain strong. The Fed put softer data aside by saying that it anticipates ongoing increase in the Fed Funds rate. It was announced by the Fed Chairman Powell that the rate decisions will be made on a meeting to meeting basis which depends on the incoming data. On one side it was announced that another unusual large market rate hike could be expected and it could also be possible to slow down the rate hikes to get more restrictive. For now the Fed is data dependent. IF the labor markets continue to be strong, the Fed will continue hiking. If there are cracks in the labor market, the Fed may pull back the pace of rate hikes.

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Upcoming Market Updates: AUD, NZD, EUR, GBP, USD, JPY

AUD: AIG Manufacturing Index, it measures level of a diffusion index based on surveyed manufactures.

NZD: Building Consents m/m, it measures change in the number of new building approvals issued.

JPY: Final Manufacturing PMI, it measures level of a diffusion index based on surveyed purchasing managers in the manufacturing industry.

AUD: MI Inflation Gauge m/m, it measures change in the price of goods and services purchased by consumers.

AUD: ANZ Job Advertisements m/m, it measures change in the number of jobs advertised in the major daily newspapers and websites covering the capital cities.

EUR: Spanish Manufacturing PMI, it measures level of a diffusion index based on surveyed purchasing managers in the manufacturing industry.

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Swiss National Bank, CHF

A message from Swiss National Bank was sent to market last week which was that it may take monetary policy measures at any time between regular assessment dates if circumstances require that. Last meeting of SNB on 16th June surprised markets and hiked interest rates by 50bps from record low of -0.75% to -0.25%. There is no schedule meeting of SNB until 22nd September this year. The Central Bank cited increased inflationary pressures as the reason for the rate hike after CPI reached a high of 2.9% YoY in May which was the highest in last 14 years. In June, inflation rose to 3.4% YoY and with CPI for July to be increased today, the SNB knows it may have to act inter-meeting if inflation, continues to rise. The expectation for the July SPI is 3.5% YoY. If the data comes in hotter than expected, be on the lookout for another rate hike before next meeting.

EUR/CHF is trading at its lowest level since Jan 2015 if we look at the weekly timeframe, when SNB dropped the peg of the Swiss Franc to the Euro. The last weekly low was 0.9776, which happened the week after the peg.

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AUD/USD After RBA Meeting

Policy rate as expected by RBA was raised by 50 bps to 1.85% last Tuesday. This is the fourth consecutive hike and steepest in almost 30 years. This helped a little to raise AUD/USD which was down by almost 1% from the beginning of this week. This release leaves the pair to trade below psychological level of 0.70. The recent tensions between China and Taiwan have added to weaker AUD, but some of the factors have been primary driver behind this latest move.

Latest guidance from the RBA that near-term future hikes may not be standing as the one this week was likely the bug factor behind the fall of AUD/USD. RBA also admits that it is trying hard to slow down the inflation, which hit 6.1% in second quarter without any big impact on Australian economy. A cadre of Fed speakers this week haven’t given any indication that Fed is looking to ease up on raising interest rates. Currently, the RBA, like many other major central banks, doesn’t appear capable of keeping pace with the Fed in terms of policy tightening.

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Employment Rate Change In Canada

Employment change in Canada is better than expected and this will help Bank Of Canada to hike again in next meeting which will be in September.

NFP tomorrow, markets will be focusing on the data, and Canada will release the July Employment Change data as well. It is expected that the Unemployment rate will remain unchanged at 4.9%. 25,000 gain for Employment change is expected vs a June reading of -43,200. Most of the job losses from June headline were due to a decrease of 39,100 part-time jobs.

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RBNZ survey of Expectations, NZD

The expectations form RBNZ ‘s latest survey shows inflation over coming years will remain high. The trend is seen higher in recent quarters looks like arrested and the expectations easing at some of the key medium-term horizons.

Lets look at the details, expectations for inflation one year ahead is consistent at 4.9%. Expectations at this short horizon will follow actual inflation closely. And the latest survey expects the risk of high inflation of 7.3%int the year to June, that lack of movement will be welcome news for the RBNZ.

Central Bank’s main focus is on expecting long horizon for the next couple of years. This is a better guide to how businesses will adjust between prices and wages, and signal if the inflation target is viewed as decent. Today’s news will also have been welcomed by the central bank.

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US CPI Preview: Are we past peak inflation?

Price pressure may show slowing down while the Fed’s preferred Core CPI measure shows that underlying inflation is still rising.

Tomorrow the US Bureau of Labor Statistics will release the July Consumer Price Index report.

Economists are expecting CPI headline to come in at 0.2% MoM , 8.8% YoY, with the core CPI report expected to print at 0.5% MoM, 6.1% YoY. Last month’s headline CPI printed 9.1% YoY, while the core CPI was 5.9%.

The biggest factor could be the gas prices, which have now fallen for over 50 days straight. Analysists estimated that the gas prices fell at least 10% in July from June levels, likely subtracting 0.5% or more off the headline CPI reading this month. Food prices were also lower to some extent in July than August, setting up a dynamic where the headline inflation reading may show price pressures fading while the Fed’s preferred “core” CPI measure shows that underlying inflation is still rising as home prices and pent-up demand for economic reopening offset the more volatile components.

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USD/CAD: A Tale Of Two Labor Markets

Traders are still trying to digest last week’s US jobs report, but one thing is clear that The US labor market is outperforming Canada’s labor market.

Markets are starting to settle into the traditional “Dog Days of Summer” trade, major indices, commodities and currency pairs seeing relatively little movement on the day ahead of tomorrow’s highly expected UC CPI report.

Traders are still trying to digest last week’s US jobs report, but one thing is clear: The US labor market is outperforming Canada’s market. Whereas the US just saw its strongest job growth in five months, a new revolving low in its unemployment rate, and has fully recovered all of the job losses since the start of the pandemic, Canada has now seen two consecutive months of outright declines in full-time employment.

Central banks world wide remained hyper-focused on inflation, but an outright contraction in employment, especially against a backdrop of falling commodity prices and a slowing global economy, could certainly prompt some to slow or pause their tightening cycles. This now is the reality that the BOC has to wrestle with, presenting a possible bullish catalyst for the US dollar relative to the loosie.

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Gold Loses Some Sheen as Hawkish Fed Outweighs Softer Inflation

It’s been difficult for Gold to keep its bullish movement even though inflation data supporting the view that the Fed’s rate hikes are slow. Perhaps a bit of base and stability is needed for gold to gear up for a clean breakout above $1800.

After the soft CPI data and today’s weaker than as it was expected PPI data added to the belief that inflation has reached it’s peak. As a result, US stocks initially expand their gains to three-month highs, before easing back.

Investors are betting that softening inflation will allow the Fed to increase interest rates less aggressively. We can also see bond yields rise with the 10-year breaking the high of 2.816%, with production rise with the 10 year breaking Wednesdays high of 2.816%, with the production in Europe also rising. This kept a cover on Gold and Silver, however the dollar did dell against most of the currencies-especially those risk sensitive commodity dollars.

Investors of Gold will be keeping a close eye on bond production. For as long as they don’t rise too much then we should see the metal start continue to shine as it has done over the past 3 weeks.

Rebound in the production of bonds underscores uncertainty about the future path of inflation and interest rates. A couple of Fed officials have already said the Fed wants to see more evidence that inflation is on a down path. With odds of 75 basis point hike having dropped, the Fed is careful not to push too hard against that, but at the same time leave the door open for such an aggressive hike should incoming data from now until mid-September show another upsurge in prices or if employment once again probes to be very hot.

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JPY/NZD Weekly Fundamental Forecast: RBNZ Hike May do Little for NZD

JPY

Divergence is increasing on Yen future prices and market positioning. Yen is at it’s 24-year low, net-short exposure is at its least bearish level since March 2021. Over 27k gross shorts were closed over the past two weeks, with 8.5k gross longs added to it. Gross longs are also at their most bullish level since the pandemic. And this suggests that traders do not believe the Bank OF Japan will retain their ultra-easy monetary policy for as long as the central bank suggests. But it also means that prices could be too low relative to market positioning, or market positioning has jumped the gun and may need to reserve course. As divergences between prices and market positioning rarely last for too long.

NZD

NZD futures are on the cusp of flipping to net-long exposure for the first time since April. Admittedly it was only net-long for a single week but it does at least show the appetite to be short in almost non-existent, with net short exposure sitting at -276 contracts.

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August RBNZ Preview and what next for the NZD/USD

It is widely expected that the Official Cash Rate will be raised by 50 bp taking the cash rate to 3% in tomorrow’s meeting of Reserve Bank of New Zealand. It will be the RBNZ’s fourth consecutive 50bp hike in a tightening cycle that started in October.

RBNZ committed to make sure consumer price increase returns to within 1 to 3 percent target range last month and said that it would continue to increase rates on a speed to maintain price stability.

Despite a slight increase in the unemployment rate to 3.3% in second quarter of 2022 the labour market remains tight beyond the maximum sustainable level and inflation at 7.3% y/y is miles above target. The RBNZ will likely revise higher inflation forecasts and reiterate its forecast for a terminal rate of 3.9% by mid-2023.

The NZDUSD increased 3.4% last week to close above 0.6450 for its best week since June 2020. However, following the latest bout of dour Chinese economic data released yesterday, the NZD/USD has given back just under half of those gains to be trading at 0.6358.

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