Daily Market Analysis & Trading Ideas

[Analytix]

Mixed Economic Signals: Eurozone GDP in Line with Expectations, Weakened Sentiment, and Potential Dollar Surge


Second estimate of Eurozone GDP for the first quarter came in line with expectations, showing a modest quarterly growth of just 0.1% and a YoY output gain of 1.3%. However, the ZEW Economic Sentiment Index for the Eurozone and Germany fell more than anticipated, indicating worsened sentiment. With EURUSD nearing 1.09, buyers remain cautious as potential surprises loom ahead, including Powell's upcoming speech this week.

Despite lingering concerns over the US banking sector shocks, stock markets are holding up well, with the expected volatility index of the S&P 500 (VIX) near its lowest levels in two years. Market nervousness is also fueled by political games surrounding the issue of raising the US debt ceiling.

Today's focus lies on the US retail sales report and speeches by top Federal Reserve officials, Williams and Bostic. After a 0.6% decline in March, a rebound of 0.8% in total retail sales and 0.4% in retail sales excluding automobiles is expected. The Federal Reserve has emphasized its data dependence in deciding future rate actions, and with low chances of rate hikes (10-20%), strong retail sales data could shift the risks towards an increase in the dollar and bond yields.

Disappointing data from the Chinese economy, including retail sales, investment in fixed assets, and industrial production, came in below forecasts:

Demand for safe-haven assets increased following the release of the Chinese data, leading to a decline in yields of major world government bonds:

Considering that the VIX index is near the lower end of its historical range, the probability of a potential upward spike is growing, wherein stock indices would climb, and the role of the dollar as a safe-haven asset would come to the forefront once again.

Commodity markets also weakened after the Chinese data. Oil prices dropped by approximately a dollar, while commodity currencies such as the AUD, NZD, and CAD are trading near opening levels or on the defensive. Looking at the NZDUSD pair, a rising triangle pattern can be observed on the daily timeframe, indicating a slight bullish bias. The nearest resistance levels are at 0.64 and 0.655, while support is found in the 0.613-0.615 zone. It is expected that the price will continue to move within the triangle and, after a possible retest of 0.615, aim for 0.64:

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.

 

[Analytix]

Dollar Index Surges to Highest Level in Months, US Equities Rally


The dollar index has risen to its highest level since the end of March, the rally yesterday was accompanied by a pickup in US equity market and bond rout (a signal that the Fed may be again behind the curve). Major US stock indices closed in positive territory, US futures extend the rise today, with the S&P 500 consolidating near 4200 points before a potential breakout. Interestingly, gold has left the $2000+ zone, trading near $1970 per ounce on Thursday. This is likely due to the increase in risk-free rates in the US, which represent opportunity costs for the yellow metal. When the real interest rate rises, the missed opportunity cost of investing in gold also increases, as gold is known to offer zero yield. The yield on the 2-year Treasury bond has surged to 4.16%, and the yield on the 10-year bond has reached 3.59%:

As seen in the chart above, yields are currently at their highest level since mid-April and are essentially reaching the resistance levels from early March (4.2% for the 2-year bond and 3.6% for the 10-year bond). Interestingly, within just one week, the bond market has apparently priced in another 25-basis-point rate hike by the Federal Reserve in June. Overall, it becomes clear where the dollar is gaining strength: higher expected interest rates in the US (relative to other countries) are stimulating capital inflows into US bonds.

The EURUSD pair, after bouncing back to the 1.09 level as expected, has retested the general ascending trendline. The price is likely to attempt to test the 1.08 level and seek support in the 1.07-1.08 area:

A similar situation is observed in the GBPUSD pair: the price has bounced off the key resistance line and may return to the upper bound of the short-term ascending channel, which will now act as support (1.235):

Tomorrow, Powell's speech is due, and judging by the bond market's near-term performance, the comments from the central bank's head will likely indicate a hawkish stance. However, the bar for surprising the market should be set high, as expectations for June decision have already been significantly revised.

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.

 

[Analytix]

Treasury Yields Rally And Recession Fears Abate. No Fed Pause in June?


The rally in Treasury yields is encountering minimal resistance, and mid-March levels have already been reached:

Recently, comments from top Federal Reserve (Fed) officials arrived with unusually unambiguous positions. The emphasis was on "no signs of significant decline" in certain service sectors (Jefferson) or that “a year is not long enough to feel the full effect of interest rate hikes so far” (Jefferson), that the fight against inflation remaining a "critical priority" (Logan), and that "data doesn’t yet show that pause in June is appropriate" (Logan). In less than a week, the market revised the odds of a June pause from 98% to 58%:

It should be noted that central bank officials rarely express their position on future monetary decisions clearly for two reasons: firstly, the market would immediately incorporate it into prices, rendering the future decision ineffective, and secondly, due to inherent future uncertainty, it is desirable to leave room for maneuver. The tone of the above comments, in my view, clearly indicates that officials are preparing the markets for a rate hike in June.

Even the centrist Powell needs to adjust his position; the market expects additional hawkish surprises in today's speech by the head of the Fed. Bowman and Williams, two other Fed officials, will also make verbal interventions today.

Market optimism was supported by data on the US labor market and the manufacturing sector: initial jobless claims interrupted their rising streak and decreased from 264K to 242K in the week ending May 13 (forecast was 254K). Continuing claims also declined, decreasing from 1.807 million to 1.799 million (forecast was 1.818 million). The Philadelphia Fed's Manufacturing Activity Index, an indicator with moderate significance for the market, also surprised on the upside. The overall index rose from -31.3 to -10.4 points (forecast was -19.8 points). The leading contributor to the positive change was the sub-index of new orders, which rose from -22.7 to -8.9 points (forecast was -25.7 points).

Increasing yields, strengthening dollar, and the surprisingly "carefree" position of investors in stocks (VIX near multi-year lows, another sharp decline yesterday) are observed in the absence of any significant news on the macroeconomic front, changes in fiscal policy, etc. The statements from Fed officials arrived slightly later, only this week when the market had already priced in most of the Treasury yield rally. In my opinion, the key to understanding what is happening in the market lies in the April NFP report. Wage growth turned out to be significantly higher than expected (0.5% vs. 0.3% forecast), and unemployment dropped to an extremely low 3.4%. Incoming data, judging by the market's reaction and the comments from central bank officials, should soon indicate an acceleration in inflation. However, this should already be priced in and have a minimal effect.

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.

 

[Analytix]

Powell disappoints market hawks, dollar braces for Fed Minutes surprise


Risk-free rates in the US have decreased by 5-10 basis points, and gold prices have risen after Powell's speech on Friday. The head of the central bank avoided the hawkish "chorus" of other top Fed managers and chose a more cautious tone:

Key highlights from Powell's speech:

- Financial markets have been trying to price in a slightly different (i.e., more hawkish) trajectory of the central bank's interest rate for some time.
- Incoming data confirms the FOMC's position that it will take some time to reduce inflation.
- There is still time to monitor the incoming data.
- There is no consensus on whether the policy tightening conducted so far is sufficient.
- Credit market shocks may limit the scope for policy tightening.

Compared to the statements of other officials last week, Powell's comments are much less definitive and seem like an attempt to restrain the rapid reassessment of the chances of a June hike while not completely ruling out tightening in June.

European currencies have moderately risen against the dollar, and the yen is consolidating near a multi-month resistance level (138 yen per dollar). Analyzing the technical chart of EURUSD, we can generally speak of an equilibrium: the price broke the bullish trendline, thus delaying the euro's rally against the dollar this year, which was widely advertised in April. However, upon reaching horizontal support at 1.08, it found sufficient buyers, while sellers tempered their enthusiasm after Powell's speech:

This week, there are two potential catalysts for a potential bearish breakthrough: the Fed minutes (Wednesday) and Core PCE on Friday. The inflation forecast is 4.6% YoY, but it should be noted that the market has underestimated inflation as measured by Core PCE in recent months. Even in the case of a downward movement, strong support should emerge near 1.07 with the formation of a double bottom. The rationale is simple: the ECB has no intention of backing down on rate hikes. Earlier last week, one of the ECB officials admitted that a strong tourist season may boost inflation.

The technical chart for USDJPY resembles a true resistance breakout: the price above 138 met some bearish pressure in anticipation of a rebound, but the movement quickly run out of steam and draw buying interest:

With the scheduled reports for this week, the risk is increasing that the price will move towards the 140 area, where profit-taking bearish momentum emerge, and a correction will ensue.


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.

 

[Analytix]

Financial Markets Update: Gold's Technical Chart Signals Potential Downside, Hawks Gain Momentum


After a fragile and fleeting Monday equilibrium following the "balanced" statement by the head of the Federal Reserve, Powell, the markets have once again begun reassessing the chances of a rate hike in June. Gold prices have declined, US Treasury bond yields have risen, and the dollar is growing. An interesting technical setup is being formed on the gold price chart:

The first thing that catches the eye is a very clearly formed ascending channel, which increases the probability of channel boundaries being tested as support and resistance zones (as a significant number of market participants are likely to see the same on the chart). In early May, the gold rally encountered resistance near the upper boundary of the trend corridor, which coincided with the historical high formed in March 2022. Subsequently, the price entered a correction phase. There was a retest of the 1950 zone, followed by a rebound after Powell's statement on Friday, which, judging by the subsequent downward movement, was used as an opportunity to short on the retracement. There is a high probability that there will be a retest of the 1950 zone followed by a downward breakthrough, after which the obvious target will be the lower boundary of the channel in combination with the 100-day moving average (represented by the blue curve on the chart). This corresponds approximately to the zone of $1925-1930 on the chart.

Now, let's discuss why there is growing excitement among hawks. Yesterday, two other top Federal Reserve officials, Kashkari and Bullard, expressed clear hawkish inclinations in their comments. Kashkari mentioned the possibility of raising the rate to 6%. Bullard effectively stated that he would vote for at least another 50 basis points of rate hikes this year, as more efforts would be required if inflation were to accelerate again, compared to overshooting with tightening.

Jamie Dimon, the CEO of JP Morgan, called for preparing for higher rates this year, while BlackRock changed its outlook on credit instruments from "overweight" to "neutral," apparently anticipating pressure on credit papers due to potentially higher rates.


Earlier, two other representatives of the Federal Reserve, Logan and Jefferson, also made explicit calls to raise the rate.

A similarly interesting situation has developed for the USD/CAD pair:

After a period of one-week consolidation near the 1.35 level, forming a triangle pattern, the price broke above the upper boundary and tested the 1.3550 level. A similar triangle pattern has formed on the WTI chart since the beginning of May, but the price seems to be heading upward ahead of the OPEC+ meeting in early June. The Saudi Arabian Energy Minister warned speculators this week that being short on oil positions may end poorly for them, as it did in April. Speculators' short positions in oil futures have reached their highest level since 2020, increasing the chances of a short squeeze if OPEC+ announces another production cut. However, before the OPEC meeting, there are expected to be several events related to Federal Reserve policy (Core PCE, FOMC meeting minutes), so there may be developments regarding the USD/CAD pair, with a move towards 1.36 and then a correction downward on strengthening oil prices.


Today's economic calendar is not particularly interesting. The activity indices in the manufacturing and services sectors of the Eurozone indicate continued weakness in the industry, with moderate expansion in the services sector. This has negative implications for the Euro, as it is an export-oriented economy (contributing 50% to GDP), and foreign currency supply is shrinking. Later, data on activity in the US manufacturing and services sectors will be released by S&P Global, as well as data on new home sales in the US. Additionally, Fed official Logan will make comments.


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.

 

[Analytix]

UK inflation spike sparks global market concerns. S&P 500 on the point of breaking downside

The data on British inflation has seriously concerned the markets about the prospect of a renewed acceleration of inflation worldwide. The core inflation (which excludes volatile goods) jumped from 6.2% to 6.8% in April. It was expected that the pace of price growth would remain unchanged.

In just one month, the price level rose by 1.2%. Let me remind you that central banks in developed countries try to keep price growth at around 2% per year. In the UK, more than half of the annual norm was reached within a month.

Inflation in developed countries, especially in open economies, tends to quickly spread to other countries. In other words, the rise in price levels is more or less synchronous. Therefore, financial markets hurried to factor in a higher chance of aggressive measures from the central banks of leading economies into prices, resulting in the start of a correction. Bears dominated the American session yesterday, and today the decline continues in major European markets and US index futures. The dollar and gold are rising, as the best way to weather the storm in financial markets is to temporarily give up the search for yield. The flight-to-safety factor outweighed the factor of rising alternative costs in gold quotes, thus strengthening the asset. In the bond market, the capital outflow from stocks to bonds outweighed the factor of aggressive central banks. Yields are moderately decreasing after a seven-day rally.

Currencies sensitive to expectations of an expansion phase in the global business cycle, such as the AUD and NZD, were hit hard, declining by 0.5% and 1.8% respectively.

Oil prices are trying to hold steady as rumors grow that OPEC+ will decide to voluntarily cut production again. Currently, considering the absence of significant competition from shale oil, it is reasonable to expect that the alliance will be inclined to exercise price control by selling less but at higher prices. Of course, there is also an element of forecasting future demand growth, which can also affect sentiments in the risk asset markets.

The acceleration of inflation in the UK fits well with the picture where Fed officials have recently started hastily preparing the markets for a higher interest rate this year. There is a high probability that, given the synchronous inflation growth, a similar dynamic can be expected in the United States.

During the correction, the S&P 500 index declined into the range of a two-month consolidation, where both investors and speculators with short positions were indecisive:

Considering the growing concerns about a renewed acceleration of inflation and the counter-reaction of central banks, the intensity of which could prematurely disrupt the expansion phase of the economy, risks are shifting in favor of breakthrough downward movements. The immediate attractive target for sellers appears to be the 50-day moving average, which is in the range of 4110-4115 points. The release of the Federal Reserve meeting minutes, scheduled for today, could act as a catalyst for the movement.

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

 

[Analytix]

US data surprises on the upside, confirming Fed concerns about inflation rebound


Core PCE for April confirmed market concerns that consumer inflation in the US is accelerating again:

Overall, it is not surprising as top Federal Reserve officials complained about sustained high inflation throughout the past week. They argued that interest rates should be higher, and some officials even hinted quite transparently about their voting intentions in June. This behavior is atypical and even risky for central bank officials, as they consciously risk losing flexibility in their response, which could result in significant costs (loss of credibility => less predictable response to policy decisions) if incoming data suggests otherwise. Nevertheless, the Core PCE, the first-quarter GDP estimate, and other data have put everything in its place.

Regarding the assessment of US GDP data for the first quarter (the second estimate), output growth also exceeded expectations, reaching 1.3% compared to a forecast of 1.1%. Once again, consumer demand stood out with strong growth. This is the component that the Fed can and should suppress with a higher interest rate to achieve its inflation target. Consequently, the pressure on the Fed to raise rates has increased further after the report.

Other data, such as jobless claims and durable goods orders, also exceeded expectations in a positive sense.

The chances of tightening in June, as priced in by interest rate futures market, have risen to 66%. Just twenty days ago, the chances did not exceed 1%, meaning this outcome was not seriously considered:

This week, on Monday, there is a calm atmosphere as the market has largely priced in the aggressive move by the Fed in June. Therefore, entering long positions on the dollar or shorting gold in the first half of the week can be risky. Most likely, there will be a slight correction of the previous week's movements. The overall target for gold seems to be achieved, and a rebound from the lower boundary of the trend channel and the 50-day moving average is looming:

On Friday, the US unemployment report for May is expected. Considering the obvious positive momentum in the economy, the risks are skewed towards stronger readings than the forecast. The market will likely try to factor this in. This should be reflected in a resumption of long positions on the dollar and short positions on gold. Therefore, breaking the lower boundary of the trend channel remains a relevant idea, but for the second half of the week. EURUSD may rise before the inflation report for May (scheduled for Thursday), but it is unlikely to offer the market anything more interesting than the Non-Farm Payrolls (NFP) report at the moment. Therefore, as a catalyst for strengthening the Euro, the inflation report may prove to be short-lived.

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.

 

[Analytix]

Inflation surprise for the ECB



EURUSD slipped by almost half a percent during Asian trading on Wednesday:

As mentioned in the previous article, it might be wise to hold off on shorting the dollar.

Other majors are also losing ground, except for the Japanese yen, which is holding up quite well. The moderate decline in USDJPY coincided with a correction in the stock markets, which could be the first sign of risk-off sentiment as Japanese investors are known to be active players in foreign bond and equity markets.

The US economy is expanding, accompanied by rising interest rates. However, borrowing costs will eventually become burdensome. The Federal Reserve is curbing demand in the economy and intends to continue doing so (how else to tame inflation?), which will inevitably dampen revenue and dividend growth forecasts for companies. Without revenue and dividend growth, holding stocks loses appeal. The question is when the market perception of the Fed "overdoes it." Recently, the Fed played catch-up (expectations of economic expansion outpaced expectations of policy tightening), but the gap is gradually closing. A bear market will emerge when the market perception expects a tightening that will soon derail expansion.

In the context of the growing fragility of the market, the following chart is also interesting: the ratio of FAANG stocks (the major big tech companies) to SPX, which serves as an indicator of concentration risk in the US stock market. It has rapidly risen since the beginning of 2023 and is now near a key resistance level:

In the Eurozone, inflation appears to be taking a step back. In France, price growth slowed from 5.9% to 5.1% in May, while in Germany, it dropped from 7.2% to 6.1%. The decline was expected, but not to this extent. In the German services sector, inflation slowed by 0.2% to 4.5%:

In a scenario where ECB officials are concerned about the "second-round" inflation through the wage-demand feedback loop, inflation behavior in the services sector is one of the best indicators of how effectively rate hikes are working. Both Fed and ECB officials have mentioned this multiple times. Therefore, the ECB will have to slow down, at least in its communication. The market has already started reassessing the odds, and a 50 basis point hike is now highly questionable. In this situation, the dollar is unquestionably favored over the euro, leading to a sharp decline today.

The decline in EURUSD since the beginning of May has been characterized by very weak attempts to resist it. Today's inflation data create unfavorable informational asymmetry for the euro: key data for the EU has been released, and it is negative for the euro, while releases for the US are scheduled on Thursday (ADP) and Friday (NFP), with expectations leaning toward hawkish surprises. These two observations increase the likelihood of downward breakout moves, and meaningful support for the pair, in my view, may only emerge around 1.0550-1.06.

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.

 

[Analytix]

Is dollar rally losing steam? New banking sector shocks prevent the Fed from rising too high and too fast



Contrary to expectations, the number of job openings per unemployed person in the United States increased again in April. JOLTS reported this yesterday:

After several months of decline, demand pressure in the US labor market starts to rise again. The previous reading has also been revised upward. Since Federal Reserve Chair Powell started focusing market attention on labor market imbalances as the primary source of inflation, the importance of JOLTS data has significantly increased. That's why lower-than-forecasted readings in January and February induced a stock market rally and a decline in the dollar, while yesterday's hawkish surprise led to a pullback in risk assets and some strengthening of the American currency.

However, despite the initial boost after the release, the dollar rally has started to lose momentum. The market paid attention to yesterday's comments from a top Federal Reserve manager, Jefferson, which clearly attempted to shift expectations regarding a rate hike from June to July. The main arguments cited were conflicting statistics and vulnerabilities in the banking sector. This is how the situation looks on the hourly chart of the dollar index:

In the latter half of the two-week rally, the price began to press more closely against the trendline and eventually broke below it, followed by a retest from below. The double test of the 104 level marked it as a short-term support level.

Concerns about potential shocks to the banking sector are reflected in the correction of the financial sector of the S&P 500, which has retreated by 4% from its local peak set on May 22. The decline was also fueled by yesterday's report from the FDIC that deposit outflows occurred at a "record" pace of 2.5% in the first quarter.

Interestingly, this decline coincides with the weakening of the dollar rally. Remember that new shocks in the banking sector are one of the main factors preventing the Federal Reserve from hiking too high or too fast:

Inflation data from France and Germany took away bullish interest from the Euro, as rumors circulated that a 50-basis-point tightening by the ECB, which was widely expected before, may be too much. Market sentiment has also been influenced by the weak activity in China's manufacturing sector, with the corresponding PMI index falling deeper into contraction territory, from 49.2 to 48.8 points.

ADP and NFP reports are due today and tomorrow. Based on incoming information, if job growth and wages align with expectations, it may reinforce the belief that the Federal Reserve will postpone a rate hike. Hawks can only be saved by a significant surprise on the upside, particularaly in wage growth. However, JOLTS data allows for some hope in that regard.

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.

 

[Analytix]

Dollar index: Bearish channel keeps short-term buying pressure in check


The dollar upturn eventually lost steam yesterday as there was no significant correction in risk assets following new local high in the S&P 500. The dollar index (DXY) dipped below 104 points:

A bearish correction channel continues to form, as mentioned in the previous article. However, the price is trying to press against the upper bound, as some investors are definitely hoping for a surprise from the Federal Reserve next week. This is also indicated by the technical chart of gold, where the price is pressing against the lower bound of the key channel:

The probability of a rate hike, according to rate futures, is decreasing. This week, the disappointing ISM report on the service sector contributed to this. There is hope that the inflation report for May (scheduled for release on June 13) will once again tilt the scales towards tightening:

Officials from the Federal Reserve (Richard Clarida) and the European Central Bank (Klaas Knot), who spoke yesterday, confirmed their intentions to tighten policy. Knot allowed for two more rate hikes in June and July, after which the course of policy will be determined by incoming data. Clarida stated that the tightening cycle is likely not over and that the rate is unlikely to be lowered before the beginning of 2024.

The Bank of Canada is expected to leave its policy unchanged today, but if there is a rate hike, it will be the second central bank, following the Reserve Bank of Australia, that is not hesitating to tighten. Considering the economic proximity between Canada and the United States, the market may interpret this event as a signal that the Federal Reserve will not lag behind, leading to dollar 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.

 

[Analytix]

Dollar extends pullback but buying pressure may resurface in the run-up to May CPI report



The trend corridor for USDCAD held its ground despite the unexpected decision by the Bank of Canada to raise interest rates by 25 basis points at yesterday's meeting:

Based on numerous touches of the lower boundary line, the range of 1.33-1.3350 has proven to be an area of increased interest for buyers, so sellers did not dare to push further. Uncertainty related to the June meeting of the Federal Reserve is also weighing on the market, as its outcome could boost the dollar.

The Canadian regulator justified the rate hike by noting that inflation has remained significantly above the target level, which is not desirable because anchoring high inflation expectations in consumer minds reduces the effectiveness of monetary policy. However, the accompanying statement no longer includes the formulation that the central bank is ready to raise rates further if necessary. The Bank of Canada expects inflation to slow down to 3% in the summer, but achieving the target level by the end of 2024 is once again in question as that corresponding wording also disappeared from the statement.

Two major central banks, the Bank of Canada and the Reserve Bank of Australia, have now re-engaged in the race for monetary tightening. Interestingly, after the Bank of Canada's meeting yesterday, the likelihood of the Federal Reserve raising rates in June increased from 22% to 32%. Expectations for tightening by the European Central Bank also had to be revised:

As seen in the chart above, the yields on 10-year US and German bonds jumped by 10 basis points after the Bank of Canada announced the rate hike yesterday.

However, according to the latest Reuters poll, only 8 out of 84 economists surveyed expect a 25 basis point rate hike. The majority believe that Fed policy will remain unchanged in June.

The dollar is on the defensive today, but a key risk event, the CPI report, gives hope for a reversal closer to its release next Tuesday. Two critical levels where buyers may make their presence felt are 103.30 (June low) and 103 (lower boundary of the correction channel):

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.

 

[Analytix]

Markets struggle to pin down a turning point in US expansion




The dollar hit a corrective low yesterday following release of US labor market data:

The US Dollar Index (DXY) fell below the 104.40 level, marking a low point in the retracement since the beginning of June, which sparked some buying interest around 103.30 as discussed in the previous article. Breaking below the horizontal low further "solidifies" the correction pattern, so the majority of buyers may now shift their focus to the lower boundary of the channel and start buying the dollar against major counterparts once it reaches that level. This coincides with the key round level of 103 points.

Unexpectedly, initial jobless claims rose from 233K to 261K (forecast was 235K), which intensified the sharp decline in the US currency yesterday (the magnitude of the drop exceeded 0.6%). Typically, the release of jobless claims passes unnoticed, even in the case of a surprise, but not this time. This, firstly, indicates an intensified search for a turning point in the trend of US economic expansion in the market and, secondly, reflects the lack of consensus regarding the upcoming FOMC meeting next week. The bond market also showed sensitivity to the report, with the yield on 10-year bonds decreasing by approximately 10 basis points after the release:

Next week, we can expect three key events: the US inflation report for May on Tuesday, the FOMC meeting on Wednesday, and the ECB rate decision on Thursday. The consensus for monthly US inflation is 0.4%, and anything higher could tilt the scales in favor of a hawkish decision by the Federal Reserve. Considering that the market currently prices in about a 33% chance of a rate hike, a reassessment could lead to a significant strengthening of the dollar and a rebound in bond yields, especially since the FOMC meeting follows the next day. The market also assigns a high probability of a 25 basis point rate hike by the ECB, so a bullish outcome for the Euro implies a clear hint from the ECB that it’s not done with tightening. It is worth noting that in the case of the Fed pausing and an uncertain forecast for tightening in July (the market consensus expectation), we may experience a significant decline in the dollar, as historically, after a pause, the Fed had mostly been cutting rates after some time. The case for a rate hike is supported by the labor market (+330K jobs in April), as well as unexpected policy tightening by the Bank of Canada and the Reserve Bank of Australia, which may indicate an underestimation by the market of rebound in global inflation. The case for a decline is supported by comments from top Fed officials suggesting that it may be prudent to get more information about economy’s response to policy tightening.

Among other major reports next week, US retail sales, industrial production, and consumer sentiment from the University of Michigan should be noted.


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.

 

[kellahd]

very detailed outlook to the current market. Nice to have all these analysis well presented

 

[Shade1081]

Will be waiting for the 60fib retest and reversal at that point for my entry long. Major news events in the coming week starting Tuesday. Good luck everyone!!!

 

[Shade1081]

Will be waiting for the 60fib retest and reversal at that point for my entry long. Major news events in the coming week starting Tuesday. Good luck everyone!!!

This was money in the bank $$$ great start to the week.

 

[Analytix]

Chances of a Fed June pause grow, focus shifts on July decision


The US inflation report for May could have caused serious market tremors yesterday, but this time the market's forecast was accurate. Core inflation accelerated to 0.4% on a monthly basis, while headline inflation slowed down to 4.0%. Considering the market consensus that the FOMC will skip a rate hike in June unless there are surprises in the incoming data, the chances of this outcome increased, which actually weakened the dollar a bit. However, further trading showed that the equilibrium before the FOMC is at 1.08 for EURUSD and 103 points for the Dollar Index (DXY). On the daily chart, it looks like that Euro’s strengthening against the dollar is at its initial stage:

The overall market reaction to the CPI report can be characterized as an increase in risk demand, as G10 currencies sensitive to business cycle fluctuations showed the highest intraday returns yesterday. For example, NOK and SEK performed well, which usually happens during rotation in search of yield within Europe. At the same time, the yen weakened and, overall, it has not followed the general pattern of strengthening against the dollar since the beginning of June. The technical chart of the yen index indicates consolidation before a possible downward breakthrough:

For USDJPY, this will roughly correspond to the level of 141.80-142.00, which was the peak in November 2022. According to the previous currency intervention, the tolerance limit of Yen depreciation set by the Japanese authorities is 145 yen per dollar. The Bank of Japan's meeting on Friday could be a potential catalyst for yen weakening, and the "suspicious" range of USDJPY, despite the dollar weakness, may indicate growing chances of disappointment with the decision on Friday, meaning that hawkish policy changes are unlikely to occur.

In addition to the FOMC statement and Powell's press conference, the markets will likely pay attention to the Dot Plot (expectations of top Federal Reserve officials regarding interest rates in 2023, 2024, and the long-term period). If the median forecast indicates another rate hike in 2023, the chances of a July hike will increase, which should support the dollar. Currently, the chances of tightening on July 26 are estimated at 58.2%, while the chances of a pause are at 37.7%:

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.

 

[Analytix]

ECB takes the mantle in policy tightening, opening door for Euro’s rise



The European Central Bank (ECB) managed to meet the market's hawkish expectations at yesterday's meeting. Like the Federal Reserve (Fed), the European regulator attempted to convey the message that interest rates will remain high for an extended period, opening the door for short-term yields to rise. However, whether central banks will stick to this narrative depends on incoming data.

Perhaps the main argument for the ECB to raise rates one more time before announcing a pause lies in the updated inflation and GDP forecasts:

The growth forecast for aggregate output has been revised down from 1.0% to 0.9% in 2023 and increased from 1.5% to 1.6% compared to the March meeting. At the same time, the ECB expects higher inflation in 2023 than before: 5.4% compared to the previous 5.3%. In 2024 and 2025, the inflation forecast has increased by 0.1% compared to March.

The need to respond to the intensified inflation challenge amid flagging growth prospects leads to a higher risk of a downturn priced in long-term bonds and a risk of a more aggressive stance from the central bank priced in short-term bonds. As a result, we witnessed a further inversion of the German bond yield curve yesterday, with the yield spread between the two-year and ten-year bonds narrowing by another 5 basis points, approaching the March 2023 low:

Overall, the ECB has taken the lead in terms of policy tightening ahead of the Fed, as the FOMC did not provide enough confidence at the meeting that the Fed was committed to a rate increase in July. At the same time, Christine Lagarde tried to convey the message that the ECB is confident that at least one more rate hike will be necessary. This is supported by the revised inflation forecasts.

From a technical perspective, the US dollar index chart indicates an increasing likelihood of a correction for the American currency next week, as the price has reached the lower boundary of the correctional corridor:

Expectations for the Fed have undergone a significant shift after the release of yesterday's data on export-import prices for May, as well as initial jobless claims. Export prices declined by 1.9% month-on-month (forecast 0%), and more significantly, import prices, which are important for consumer inflation, fell by 0.6% in a month (forecast -0.5%). Initial jobless claims increased by 262K (forecast 249K). It is worth noting that this indicator has been disappointing for several consecutive weeks.

The Bank of Japan once again disappointed the hawks today by leaving its policy unchanged and ignoring market expectations that the range of long-term bond yields would be expanded (in which case the central bank would allow for a stronger sell-off before intervening). The USDJPY pair rose from 140 to 141.35 on the central bank's decision before retracing. On the daily chart, this corresponded to a retest of the upper boundary of the ascending corridor:

In the absence of news from the Fed and the Bank of Japan, the only catalyst for a decline could be a correction in the US stock markets. If the price breaks the line, the next target will be the November 2022 high at the level of 142.50.

The key events of the following week will be the Bank of England's meeting and Powell's testimony in Congress.



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.

 

[Analytix]

Yen left adrift as Bank of Japan’s dovish position holds steady


The dollar is gradually recovering after major losses last week:

The plunge occurred on Thursday following the release of US import price data. In May, import prices declined by 0.6% for the month, allowing market participants to reassess the level of expected US inflation and consequently the likelihood of a July tightening by the Federal Reserve (Fed). Previously, during the FOMC meeting, Fed Chair Powell stated that the central bank would increasingly rely on incoming data to make decisions. Such statements are typically made when the central bank anticipates an approaching turning point in the business cycle, in this case, a definitive shift to lower inflation trends. In other cases, central banks often resort to implicit guarantees (forward guidance) that they may continue to lower or raise rates for some time. Approaching a turning point consequently increases market sensitivity to the incoming data points, which often go unnoticed. In this case, it was import prices and initial jobless claims, which once again exceeded expectations.

From a technical analysis perspective, the dollar index is trading within a downward corridor. Last week, during the decline, the price confirmed the lower boundary of this corridor (at the level of 102 on the DXY) and entered into a bullish correction on Monday. The magnitude of movements is insignificant, reflecting the fact that the major events that could have influenced market expectations occurred last week.

The analysis of the Bank of Japan meeting, which took place last Friday, is also noteworthy as it may have serious consequences for the yen. The market was not expecting a rate hike since the central bank continues to use a more powerful easing tool by controlling the yield of long-term government bonds. When it approaches a certain upper boundary (in this case, 0.5%), the Bank of Japan begins to buy bonds, thereby preventing the yield from rising further. Thus, the cost of long-term borrowing in the economy is maintained at a very low level given the current circumstances. It looks like this:

The central bank was expected to allow for wider yield movements (declare an upper boundary above 0.5%), but it did not even do that. This further widens the policy gap between the Bank of Japan and other central banks that are raising rates, and the Japanese yen weakened against the dollar even during its steep decline last week. On the USD/JPY technical chart, it can be seen that the price tested the upper boundary of the channel multiple times and broke out of it last week. It is worth noting the flag pattern (rise + consolidation) before the breakout, which suggests that the decline of the yen will likely continue. Some resistance is likely to emerge near the November 2022 high (at the level of 142.50):

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.

 

[Analytix]

Bank of England's Underestimated Inflation Forecasts Expose Insufficient Policy Tightening


The surprise in UK consumer inflation for May was incredibly strong, raising concerns that the Bank of England's may go into overdrive with the policy tightening. GBPUSD initially tried to gain strength, but it quickly became clear that additional tightening measures could hurt UK’s growth prospects, resulting in the Pound sell-off.

In May, UK consumer inflation reached 8.7%, surpassing the forecast of 8.4% (previously 8.7%). More importantly, core inflation continued to accelerate, hitting 7.1% in July, surpassing the projected 6.8% (previously 6.8%). This marks the second consecutive month of core inflation acceleration, jumping from 6.2% to 6.8% in April. Inflation in the services sector, known for its less volatile trends, exceeded the central bank's forecast by 0.3%, significantly increasing the pressure on the Bank of England. If the bank's response is perceived as too lenient, concerns may arise about their control over the situation. The market not only dismissed doubts about a 25 basis point rate hike at tomorrow's meeting but also factored in a potential 50 basis point increase. Market participants may also expect the central bank to forecast a prolonged period of high interest rates.

From a technical analysis perspective, GBPUSD is likely to continue its decline, with sellers eyeing the 1.258-1.262 range. This area is significant as it intersects an ascending trendline and a former resistance line that could now act as support:

The decline in the GBPUSD pair may also be influenced by a stronger dollar. Market participants are increasingly betting on the dollar rebound ahead of Powell's two-day testimony in Congress, starting today. Based on comments from Federal Reserve officials last week, Powell might take this opportunity to adjust market expectations, specifically addressing unwarranted expectations of rate cuts this year and emphasizing that the fight against inflation is far from over. Furthermore, the recent update to the Dot Plot indicated that officials anticipate two more rate hikes. However, the adjustment of derivative contracts sensitive to interest rates, particularly overnight interest rate swaps, did not reflect these expectations. The implied terminal rate is only 24 basis points higher than the current rate, which is well below two 25 basis point increases. This circumstance increases the likelihood of Powell engaging in hawkish verbal intervention today.

A crucial factor for a potential dollar rally will be breaking out of the bearish channel and establishing a foothold above the upper boundary, corresponding to a breakthrough of the 102.75 level on the dollar index.

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.

 

[Analytix]

The flow of US data dashes hopes of a pause in the Federal Reserve's tightening



Gold investors appear to have become weary of waiting for low interest rates (as central banks show no indication of halting their current tightening course), developments in the US banking stress narrative or geopolitical tensions that would ultimately validate their optimistic outlook for gold's growth potential. On Wednesday, gold accelerated its decline, and the test of the $1900 per troy ounce level loomed on the horizon:

In early May, the price of gold rebounded from its historical peak, forming a double top. In mid-June, after a tense struggle between sellers and buyers, it exited the medium-term ascending channel (white parallel lines). Currently, a short-term bearish corridor is taking shape (red lines). The chart also reveals a broader ascending channel (orange parallel lines). Its lower boundary, intersecting with the lower boundary of the short-term bearish channel, which corresponds to approximately the $1880 per troy ounce area, may form an interesting support zone where the price could reverse and move upward again. Clearly, one of the three drivers mentioned earlier must come into play: stress in the banking sector due to growing interest rate disparity between banks’ assets and liabilities, signals of easing core inflation, or a new wave of geopolitical tensions.

Yesterday's comments from ECB officials in Sintra showed that hoping for soft rhetoric today from the heads of the US, EU, and Japanese central banks is unlikely. The wording contained a very clear hint at a rate hike: signals of slowing core inflation in the EU are unconvincing, so a pause in July is unlikely. Based on this, one can assume that Lagarde, Powell, and the head of the Bank of Japan, Kuroda, will develop this idea today since core inflation is indeed currently holding at a relatively high level and receding slowly:

Incoming data from the US effectively quells the market's concerns that central banks are making policy mistakes. Durable goods orders in the US (a strong indicator of household income expectations) rose by 1.7% in the month, surpassing the forecast of -1%. Consumer confidence was directly confirmed by the Conference Board's index, which reached 109.7 points in June, surpassing the forecast of 104 points. Concerns about inflation were amplified by real estate market data: the price index increased by 0.7% in the month, exceeding the forecast of 0.3%. Additionally, API data showed strong demand for fuel as crude oil inventories declined by 2.4 million barrels, compared to a forecast of 1.467 million.

The dollar has turned higher against major currencies ahead of Powell's speech in Sintra. On the technical chart, it can be seen that the dollar index exited the bearish channel, rebounded after reaching its upper boundary, and continued to rise. The medium-term resistance is located in the range of 103.50-103.70, where the corresponding trendline was previously formed by the price:

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.