Daily Market Analysis & Trading Ideas

[Analytix]

USD benefits a surge in risk-off, bonds point to a possible Fed overreaction

Asian and European markets are in the red on Monday with the weakness of US equities on past Friday being key catalyst of downward momentum. Investors increased demand for cash amid growing risk-off mood helping USD to stand out among G10 peers. Interestingly, 10-year bond yields extended decline after hitting 1.90% peak in the last week as market participants appear to be pricing in an excessive and actually belated Fed response to inflation, which could lead to a slowdown in the economy in inflation in the long term. The yield decline factor has a negative effect on the dollar. Sovereign debt of other advanced economies is also in demand today, which, coupled with the decline in risk assets, is a signal that economic growth forecasts may be being revised lower by the market.
In turn, short-term US bond yield resists decline reflecting expectations of an aggressive Fed tightening move at the upcoming meeting. The spread between 10-year and 2-year bonds is spiraling down, which often constitutes expectations of economic stagnation or a policy error by the Fed:

Escalating tensions between Russia and NATO is another source of bearish concerns. Oil shows uncharacteristic resistance to risk-off, remaining at a multi-year peak due to fears that sanctions pressure on Russia will exacerbate present supply issues in the energy market. Accordingly, any signs of a de-escalation of tension may open the way down for oil as the risk-off factor can be countered only by the factor of OPEC persisting short-term undersupply, which, in principle, have been priced in by the market. The ruble is the worst in the EM currency sector, braces for breakout of 79 mark, the highest level since 2020.
Regarding the Fed meeting, the key point will be the weight of the balance sheet offloading in the normalization of policy. If the Fed puts more weight on QT, the forecast of four rate hikes this year could be in jeopardy, leading to a rollback of expectations, taking away support from USD.
EU and UK Services and Manufacturing PMI data showed that the impact of the Omicron outbreak on economic activity was moderate, with price pressures building again in the services sector. The Bank of England will hold a meeting on the fourth of February and the chances of a rate hike are growing especially in light of inflation signals.
The Bank of Canada meeting will take place on Wednesday and we should expect a 25 bp rate hike thanks to progress in employment and clear signs that inflation needs to be contained. The case of USDCAD revisiting 1.25 could mean the risk of breaking the key trend line and moving to a protracted downward 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]

EURUSD aims at 1.10 as the ECB will likely disappoint again next week



There was a sign of relief on geopolitical front, welcomed by asset markets, after the Russian Foreign Ministry said that a war with Ukraine was “unthinkable”, hinting that diplomatic resolution of the conflict may be in cards. The market focus today is on a portion of US price and employment data, namely PCE and employment cost indexes, which should help to calibrate better the chances of the Fed rate hike in March by 50 bp.

The dollar broke yesterday to a new high on the back of quickening divergence of the Fed’s policy with its major peers and Powell’s signal that the economy should be able to digest the rapid pace of rate hikes. Powell’s remark, that there is enough room to raise rates without the risk of disrupting the recovery of the labor market, thrown at a press conference, signaled that the Fed could go all out with the terminal interest rate being higher than expected in the end of tightening cycle. The US yield curve is flattening, which is the classic bond market fear that the Fed's policy will choke growth, which in turn leads to conclusion that inflation premium embedded in long-term yield becomes excessive and should be corrected lower.

Futures markets priced in 31 bp rate hike in March which means the dollar still has room to rise if incoming data points to strong economic activity early in the year warranting more aggressive Fed move. At the same time, ceteris paribus, weak US data in February may shift the market consensus back towards 25 bp, causing USD to fall out of favor and pull back a bit.

Q4 Labor Cost Growth in US is expected to be at 1.2%, despite a rather strong growth of 1.3% in the third quarter of 2021. The dollar is likely to react positively to higher-than-expected print, as wage dynamics are now under close attention of central banks due to running imbalances in supply and demand of labor which work as a good predictor of how long high inflation will persist and will there be a second and even third-round inflation effects.

Currencies that depend on the cycle and correlated with risk assets are likely to be able to go into an upward correction against the dollar next week, which cannot be said, for example, about EUR or JPY. German GDP data disappointed today (1.4% vs. 1.8% forecast), which was another reminder that the ECB is unlikely to rush to catch up with the Fed at the upcoming meeting. EURUSD may be looking for support somewhere near 1.10:

Looking at the second group of currencies, there is an interesting opportunity to buy the dip in AUDUSD after a strong fall in the area of 0.69-0.6950 before the RBA meeting next week. A set of strong Australian inflation data could form a solid foundation for a hawkish CB decision next week:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Analytix]

Hawkish BoE and ECB put greenback under great pressure as policy gap with the Fed narrows

Dollar reversed gains made in the first half of Thursday session with the DXY shedding nearly half a percentage point after EU and UK central banks signaled that they would be catching up with the Fed in terms of policy tightening. The Bank of England raised the rate to 0.5%, however, the fact that 4 out of 9 officials voted for an increase to 0.75% makes it clear that the BoE has not finished the tightening cycle and if inflation persists, then the markets should be ready to price in another rate hike on one of the upcoming meetings, in March or maybe in May. In addition, the BoE has completed QE program and will gradually move to the sale of assets from the balance sheet.

The limit of the current cycle of raising rates by the Bank of England should be the level of 1%. For now, policymakers have said they will "consider" actively selling government bonds to speed up the process of reducing their balance sheet. Needless to say, this is uncharted territory for any mature central bank and could prove to be much more of a challenge than simply stopping reinvestment, especially if the Bank finds itself selling during a market turmoil.

In case of weak NFP print tomorrow, which may somewhat soften expectations regarding the Fed's March rate hike, GBPUSD has the opportunity to continue moving within the uptrend and test the level of 1.38 as the BoE’s policy gap with the Fed apparently narrows:

The ECB announcement contained no surprises, but Lagarde's hawkish comments allowed the Euro to challenge 1.14, the highest level since mid-January. Weak labor data tomorrow will likely give a green light for EURUSD to test the horizontal resistance at 1.1470:

 

[Analytix]

Dollar is back on growth track thanks to hawkish NFP, possible upside surprise in January CPI

The surprisingly strong NFP report for January markedly eased pressure on the dollar as it reminded that the Fed is likely to lead a hawkish policy reassessment by the central banks of major economies. After release of the report, the two-year US bond yield surged by 9 bp to 1.3%, indicating that the report made a strong impression on the market, in particular due to low expectations after gloomy ADP print:

The strong labor market report also lifted the chances of a 50bp rate hike by the Fed from 8.5% to 32.7%:

Speaking about which currencies are more vulnerable to declines against the dollar than the rest in the current central bank tightening environment, it’s reasonable to focus on JPY and CHF. Central banks here are the least likely to react to inflation-related developments due to the long period of deflation and the fear of reacting too soon, breaking off the desired trend. The euro suddenly gained more resilience as the ECB took a big step towards tightening policy last week, after which short-term rates shot up (yield on 2-year German Bunds from 0.05% to 0.25%) due to which demand for cash rose. Over the weekend, the comments of the ECB official Knot turned out to be interesting, as they can shed light on the fate of EURUSD in the medium term. He said that it is possible to see ECB rate hike by 25 bp in October followed by increment hikes of 25 bp. The underlying market expectation after the ECB meeting is now the outcome, where the central bank will be raising rates by 10 bp starting from July. In addition, Knot said that inflation in the Eurozone is mainly generated by fuel prices, while in the US it is the result of rising consumption; it follows that the tightening cycle in the US may be more pronounced than in Europe. Therefore, we can assume that the breakdown of EURUSD towards 1.15 most likely will fizzle out soon and the price may soon look for reversal points. Sell-off in USD pairs, including EURUSD, may resume this week, in particular after the release of CPI in the US for January. Strong growth should increase the chances of a 50 bp Fed rate hike in March, which, in fact, is now the main potential driver for the recovery of the dollar. EURUSD is likely to test support at 1.1380 ahead of the CPI report, as the chances of a positive surprise in the data are high, especially in light of January's wage growth picking up to 0.7%, as shown in the NFP report.


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 CPI will likely surprise on the upside due to labor market imbalances


On Wednesday, sellers in the sovereign debt markets take profits before release of the key inflation data point for the market (US CPI), yields pulled back from key resistance levels (2% on 10-year Treasuries, 0.25% on German Bunds). Another driver of the rally could be acknowledgment, that there was an overreaction to the ECB and Fed meetings and actual pace of policy tightening could be slower. At the same time, demand for risk appears to be on the mend, European indices and futures for US indices rose, yield search puts constraint on early dollar rally, DXY continues to consolidate around 95.50 ahead of CPI print tomorrow:

Tomorrow's US CPI for January will decide the fate of the Fed's March rate hike by 50 bp (either make it a baseline scenario, or lower the chances). The report will be critical to answering the question of whether the Treasury sell-off continues and whether the 10-year rate goes beyond 2%, which could trigger a breakout move, as there was initial test of 2% key resistance zone yesterday.

Even with consensus of 7.3% in headline inflation and 5.9% in core inflation, there is some room for a surprise on the upside, primarily due to strong wage growth due to ongoing labor market imbalances (0.7% MoM in January vs. 0.5% expected). The jobs quit rate in the United States remains at an all-time high together with a significant increase in wages, they fell into a positive feedback loop - the negotiating power is now on the side of workers which is quite unusual:

Today, representatives of the Fed Bowman and Mester will have their say, the focus is on assessing the persistence of pro-inflationary factors in the economy. Fed rate hike by 25 bp already priced in, the chance of 50 bp outcome is approximately 25%. The ECB releases winter forecasts for growth and inflation today, markets are focused on inflation estimates in 2023, since the ECB is expected lift-off the rate next year. The euro is likely to react positively to the report if the inflation estimate will be above 2%. Also, today there will be a QA session with ECB official Schnabel, who was one of the first to start sounding the alarm about inflation and will probably try to draw attention to this issue again.

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]

Despite major escalation markets are still reluctant to price in major spillover effects from Ukraine conflict

As geopolitical tensions increased sharply on Monday, policy tightening cycles of central banks and inflation challenges have been pushed deeper on the sidelines. The focus remains entirely on military operations in Ukraine, as well as the sanctions war between the West and Russia. The third package of EU sanctions, including financial, transport, technological, export and other restrictions, caused panic in the Russian currency market on Monday, which led to collapse of the ruble by more than 20% in the first two hours of the trading session. The Russian Central Bank raised interest rate to 20%, effectively limiting speculative pressure on the currency, carried out currency interventions for $1 billion, temporarily banned brokers from executing orders to sell securities from foreign investors, which caused the latter to panic. ADRs of Russian companies traded on the London Stock Exchange plunged 50-60%. Russian currency devaluation was apparently brought under control later in the session, at least partially. The stock market section of the Moscow Exchange is closed today.

Representatives of the Russian Federation and Ukraine sat down at the negotiating table in Belarus, but the chances of a peace agreement that would suit both sides are small. The Ukrainian authorities probably believe that the growing support of the West, primarily in the form of arms supplies, sanctions pressure, as well as reception of refugees, has significantly improved their negotiating position (than, for example, at the beginning of last week), due to the fact that Moscow receives a signal that Kyiv may be ready for a protracted conflict, while at the same time the original goals of the Russian intervention, steep price of the military campaign (primarily large economic costs), makes serious concessions for Russia unlikely.

However, de-risking in global asset markets, despite the risks of an even more escalation, remains quite contained. Greenback rose as US investors flew European asset markets and safe heaven demand increased in general. European stock indices traded moderately in red. Sovereign debt yields rebounded after falling early in the session. This suggests that there is no panic that the local risk will become a trigger for global recession, at least for now:

Gold posted moderate gains as well, which once again underscores the fact that investors are in no hurry to take Ukraine conflict beyond the scope of local risk:

Oil quotes showed mixed performance, financial sanctions against the Russian Federation have led to the fact that the price differential between Russian Urals with world oil benchmarks has widened, which indicates less market appetite for Russian grade of oil. An important event for the market will be OPEC+ meeting on March 2, where output policy for April will be discussed. The key uncertainty is whether OPEC+ will increase production faster, trying to avail of higher prices, or stick to the schedule. For Russia, it should be tempting to continue pushing oil prices up, urging OPEC to gradually hike output, as this will in some way act as a response to Western sanctions in the form of higher risks of cost-push inflation for Western economies. Therefore, the risks for oil prices, without taking into account possible de-escalation of the conflict in Ukraine, appears to be skewed towards further rally.


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

 

[Analytix]

Market Watch March 7th: All eyes on commodity markets


FX developments are now entirely subject to the buying frenzy in commodity markets as severe disruptions in supply chains become increasingly evident. Prices for certain commodities are updating highs at an unprecedented pace, rumors about embargo of Russian exports and threat of stagflation in Europe are becoming key trading themes in major asset markets. In the current juncture, pressure on European currencies and currencies of emerging markets is unlikely to ease soon.


Dollar: risk aversion adds hefty premium

The dollar continues to outperform the G10 currencies as flight from risk intensifies. Option premiums in FX surged while sell-off in European equities gathered pace. US statements that embargo could be imposed on Russian oil exports (which is about 5 million b/d) led to a surge in oil to $139 and ruble depreciation to 140 per USD.

Other signs of stress in the market include continued widening of the FRA-OIS spread (an indicator of credit risk in the interbank market). Despite the fact that the Fed has a sufficient set of tools to provide liquidity and a generally high level of liquidity in banks after the pandemic, high uncertainty forces banks to cut lending. More information on this issue will appear on Wednesday, when data on the demand for 7-day USD swap lines from the Fed will be released. Last week, the ECB's auction on 7-day USD swap lines indicated rather high demand - $272.5 million from European banks.

The cutoff of 7 Russian banks from SWIFT on March 12th could also hide many black swan risks. The freezing of Russian assets is already affecting European fixed income market - the German Finance Ministry was forced to issue additional bonds maturing in 2024, as some of them were included in the frozen Russian assets. At the same time, ETFs to emerging markets are now facing capital outflows and, due to the fact that exit from Russian assets is not available, other emerging markets are under pressure. The most vulnerable among them are Brazil, Mexico and Poland.

Euro: Conflict in Ukraine causes more pain

EURUSD continues to decline against the backdrop of a lack of prospects for an early resolution of the conflict in Europe, and so far, the balance of risks is skewed towards further decline. This is also indicated by huge demand for insurance against the fall of EURUSD in options, even exceeding the demand that was at the beginning of the pandemic in 2020. Some resistance to the current decline in EURUSD can be expected at 1.0760-1.0770, stronger at 1.0640, this is the low of March 2020:

Pound: better than euro, but not very good either

At the same time, the pressure on the pound is less strong, as a high percentage of extractive enterprises included in the FTSE 100 index and which are now doing better, reduces capital outflows. In addition, the Bank of England looks more determined to respond by raising interest rate to fight excessive GBP decline. From the technical point of view, EURGBP has broken through the important support level of 0.8270, which in itself is a signal for further downside.

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]

USD poised to renew highs on China Covid issues, FOMC expectations


The dollar has got another growth driver. The PBOC unexpectedly lowered reference rate of CNY/USD, which may indicate its willingness to weaken yuan against US currency. This is usually seen as downside factor for Asian currencies which ultimately may also support USD demand.

Markets’ risk-on/risk-off swings continue to depend on the progress of peace talks between Ukraine and the Russian Federation as this determines expectations of sustainability of current trend in commodity inflation which hinders growth of a large number of companies, especially in those countries that are dependent on commodities imports. There is also some attention to the situation in China, where the outbreak of covid forced authorities to reinstate covid restrictions in large industrial and commercial centers - Shanghai and Shenzhen. This bodes ill for production and could create ripple waves in supply chains, which also have implications for inflation. China, judging by their stance, are not much willing to deviate from the policy of “zero covid cases”.

The role of renminbi in global FX have increased recently as since the start of the Russian special operation in Ukraine, CNY/USD has risen by several percent, which could look like the yuan is taking on part of the task of being a safe haven currency, like the dollar. However, the PBOC’s actions show that it may be willing to boost activity through exports growth and sees weakening of the yuan as a solution. USDCNY came out of a tight range gaining 0.7% in a few days:

Coupled with covid measures, this maybe be regarded as a signal of some slack in China economy or at least concerns about a slack, which may lend more heft to the current story of safe heaven USD.

If this interpretation of the yuan's weakness is correct, Asian currencies, as well as ZAR and BRL, commodity currencies from the EM sector, could come under pressure as well.

In this week, market movements will be also determined by the expectations regarding upcoming FOMC meeting, which will be held on Wednesday. The Fed is apparently forced to deliver a vigorous response to inflation shock, especially in the very sensitive (both politically and economically) spending item both US households and government – gas. Barring significant de-escalation in Ukraine (which could quickly unwind a large part of geopolitical premium in the dollar), USD looks poised to extend rally past recent highs.

In terms of technical analysis, USD overbought conditions have eased after the currency index soared to almost 99.50 in a very short period of time (two weeks), pulled back, and retested the resistance zone. Now there is a correction as part of the zone retest, there is no more flight into the USD based on surge of market risk-aversion, however rally looks persistent:

Also, as it became clear from the last meeting of the ECB, the potential of the US Central Bank and the ECB to respond to inflation by tightening policies is now significantly different. The ECB gave a signal that it is extremely constrained in actions, since other indicators of the economy and the degree of involvement in the trade war with the Russian Federation do not yet allow moving the rate, while the US economy, at least judging by the trend in employment, is in much better shape for these actions. Hence the formation of corresponding expectations for 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.

 

[Analytix]

Greenback unwinds safe-haven premium, China Covid efforts in focus

Economic news from China today beat expectations in a positive way, especially surprising was the growth of retail sales as market set quite low expectations on the figure. Restrictions on mobility inside the country during the Lunar New Year, which were supposed to contain growth in retail consumption and social distancing measures introduced to combat Covid outbreak, unexpectedly had less effect on retail consumption. Positive news should help the PBOC to slow down or pause easing of monetary policy.
Retail sales grew by 6.7% in February against the forecast of 3%. Industrial production rose by 7.5%, almost doubling the forecast. Investments in fixed assets more than doubled the forecast and amounted to 12.5%. The yuan strengthened slightly against the dollar.

Global markets seem to be pricing in reduced level of risks of further escalation of the Ukraine conflict, oil has collapsed (down by 8% on the main benchmarks), gold declined 1.33%. Over the week, gold prices fell by 6%, oil by 23%.

The geopolitical premium in dollar is correspondingly reduced, EUR and GBP win back losses. Looking ahead to the end of the week, the main focus is tomorrow's Fed meeting. A 25 bp rate move seems to be warranted, shifts in expectations will primarily depend on hints about May decision (25 or 50 bp rate hike).

There is some positive momentum in the Russian ruble, however, due to capital controls and trade blockades, even a normally liquid market such as the foreign exchange market is now extremely illiquid in Russia. The market is trying to take into account the optimism before the upcoming talks between Ukraine and Russia, which are expected to take place today.

The leading indicator of risk aversion/risk-taking right now may be evolution of the covid situation in China. Major cities such as Shanghai and Shenzhen are experiencing a partial lockdown. It should be noted that the outbreak occurred in the northern part of China, where more heavy industry is concentrated. The measures introduced lead to suspension of production and shipment of goods. Attention is also drawn to the news about the new strain VA.2, which, according to preliminary data, is more severe than Omicron. Examples from the recent past show that when news about a new strain reaches critical mass (detection in several countries), markets lose their temper, so to speak, and go into risk-off.
This is how the dynamics of reported cases of Covid in China looks now:

The release of PPI in the US is scheduled for today, which will provide more information about price pressures in production chains and may also slightly correct expectations for tomorrow's Fed meeting. The indicator is expected to print at 0.9%. Later, ECB President Christine Lagarde will speak, who may give more information about how the ECB is going to deal with the consequences of the impact of trade sanctions on the Russian Federation.


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]

EURUSD forms a triangle pattern and downside breakout is likely


Markets are expecting a 25bp rate hike from the Fed today and indications in Dot Plot for an additional rate increase of 90-100 bp this year. Forecasts of a higher terminal rate this year should be a positive surprise for the dollar. The degree of concern about the conflict in Ukraine and its economic implications is also a very important element of today's Fed communication, since the level of investor confidence in the Fed forecasts will depend on this. Markets will also pay much attention today to the release of Canada inflation report for February, which will likely impact BoC’s decision at the upcoming meeting.

Statements by Ukrainian and Russian officials characterizing the progress of the negotiations point to a de-escalation, which is causing a pullback of recent movements in gold, oil, USD, as well as sovereign debt yields. One of the clearest examples was the statement by Ukrainian President Zelensky that the country would not be able to join NATO. The dollar, which has been fueled by geopolitical tensions all this time, is retreating, European currencies have accordingly acquired a growth driver. The Chinese Central Bank unexpectedly interrupted weakening of the yuan, which has been propping up UD demand, in addition, the announcement of Saudi Arabia that it is considering the possibility of accepting payment for oil supplies to China in yuan was unpleasant news for the US currency. After all, the long-term demand for the dollar is based, among other things, on the concept of the so-called "petrodollars".

Markets have little doubt that the Fed will raise rates by 25 bp today – chances of an increase by 50 bp. estimated at 10%. Technical policy adjustments such as reverse repo and banks' excess reserves rate changes will also be scrutinized by investors.
The main market reaction will depend on the published economic forecasts, as well as Dot Plot - the aggregate opinion of officials about how the rate will change this year, in the medium and long term.

The base case is an indication in Dot Plot that the interest rate will be increased by another 90 bp this year. However, the combination of a higher inflation outlook and lower GDP growth (i.e., stagflationary outlook) may suggest that the Fed will be limited in actively raising rates, and in this case the risk of a negative reaction to the dollar will be high.

However, in the medium term, the chances that the Fed meeting will be more positive for real rate growth in the US than the last ECB meeting for real rate growth in the EU are higher. Restoring trade links and addressing disruptions in EU supply chains is a medium-term factor that will have a negative impact on the EU economy, curb growth, fuel resilience of inflation and its broad impact. The US is now less exposed to these risks, which leads to a more favorable forecast for real rate growth.

EURUSD found a balance near the level of 1.10 ahead of the Fed meeting, the pair has been forming a characteristic triangle for a week, which usually precedes a breakout movement. If the Fed does take a decisive step forward today, investors will most likely be inclined to search yield in the US financial market for some time, which will put pressure on EURUSD. Based on these considerations, a downward exit from the triangle is a more likely scenario:

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]

Breakout in USDJPY could signal new leg of the bullish rally with 7-year high as target



Powell's speech yesterday definitely impressed investors as the Fed Chair took the opportunity to communicate a possibility of faster rate hikes which was interpreted as the policy bias of the Fed getting more hawkish. Markets were quick to price in 50 bp hike on May as a baseline scenario, the odds of the outcome rose from 50% to 60%:

One of the Fed officials, James Bullard, said yesterday that it is appropriate to hike interest rate to 3% before the end of the year, market expectations center around 2.7%. New details from the Fed exacerbated US yield curve inversion – short-term Treasury yield rose so much that the spread between 10-year and 2-year bonds narrowed to 0.17%, reflecting increasing market concerns about the Fed’s policy error:

High oil prices are fueling speculations that the global economy will soon slide into recession. It is appropriate to recall the 80s when the then head of the Fed, Volcker, faced dilemma similar to Powell’s - an inflation shock due to high oil prices and the need to tighten policy. Then the rate was raised to 15%, which turned out to be excessive and plunged the US economy into recession. The dollar then rose significantly. Now the Fed has also set a course for tightening, and with each new statement the bar is getting higher.

The combination of high oil prices and increasingly hawkish Fed policy stance is a strong precondition for weakening of the Japanese yen. Today we see a significant rally in USDJPY by almost 1 percent. The status quo of the Bank of Japan increases risks of further collapse of the yen, it is quite possible that the breakout of 118.5 on USDJPY (the upper limit of the medium-term trend) and then 120, an important resistance level, should bolster speculations about a rally towards the 7-year high at 125:

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]

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

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

Producer price inflation also hit a new high of 14.7%, setting the stage for high consumer inflation next month.
The dollar resumed advance against the background of an increasing number of signals that the Fed will tighten monetary policy much faster than the central banks of other developed countries. Following the speech by Powell and a number of other top managers of the Fed on Monday and Tuesday, there was a strong reassessment of expectations for the next two Fed meetings. Markets now expect the rate to be at least 75 bp higher after two next meetings, the probability that interest rate will be 100 bp higher estimated at about 35%. This means that markets are quite seriously considering the scenario that the Fed will raise rates by 50 bp for two meetings in a row.
Another powerful USD driver are expectations for the Fed's terminal rate (the rate level at which the Fed will complete tightening cycle). Now it is at the level of 2.75%, but may soon reach 3%. It is clear that the vector of markets’ interest rate expectations suggests more near-term USD gains are ahead with the biggest advance to be seen against currencies where central banks persist with low rates, as well as against European currencies, which continue to be pressured by uncertainty around the Ukraine conflict and its economic consequences.
With the equilibrium in sovereign debt markets, USDJPY has also stabilized, however, the pair is apparently bracing for a breakout of 121. Also, pressure on the yen and European currencies is exerted by a strong increase in oil prices, which creates a dilemma for the central banks of these countries – slowing growth potential and high inflation which greatly limits ability of monetary policy to affect output. Attempting to contain inflation by raising rate, the central bank only stifles growth.
EURUSD dived below 1.10 again forming double bottom at 1.0950, suggesting bearish breakout may be in cards. In case of a leg lower, retest of horizontal support at 1.08 looks highly likely in the near term:

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

 

[Jamie999]

Great work man. Thanks. What version control did you use?

 

[Analytix]

Dollar renews rally ahead of US payrolls release, USDJPY targets 125



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

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

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

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

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

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

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

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

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

 

[Analytix]

Great work man. Thanks. What version control did you use?

What do you mean?

 

[Analytix]

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

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

Yesterday SPX added 1.23% in spite of moderately negative background in geopolitics and persistent inflation challenges. European markets do not share the optimism of US indices today - main equity indices bear moderate losses within 1.5%. There is conflicting information on the de-escalation of the conflict in Ukraine: nodding its head initially that, yes, the situation is moving towards a truce, the West later changed its stance and began to interpret the “partial” withdrawal of Russian troops from Kyiv and Chernigov as another maneuver to buy time. Clearly, the surge in risk appetite seen in recent days could be very volatile.
The dollar, within the continuing negative correlation with the US stock market, lost another half a percent today. The situation resembles a long squeeze against the background of the emergence of a clearly-defined catalyst that is easier to interpret by majority of the market (“soon end of the war”) and monetary policy divergence factor is likely to come back into spotlight soon.

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

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

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

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Analytix]

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

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

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

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

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

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

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



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

 

[Analytix]

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

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

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

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

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

 

[Analytix]

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


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

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

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

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

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

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


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

 

[Analytix]

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


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

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

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

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

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

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

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