It may be quieter on the economic calendar this week, but the focus turns back to inflation again this week. The US CPI inflation looms large. Federal Reserve speakers continue to make hawkish statements as the Fed tries to dampen the inflationary implications of its dovish FOMC decision a couple of weeks ago. Inflation signals in the prelim Michigan Sentiment will also be watched. Inflation is also the focus in several other major economies, along with some LatAm countries too. The question for UK GDP is whether the UK economy is already posting negative growth even before the Bank of England’s expected deterioration into recession.
- North America – US CPI dominates along with prelim Michigan Sentiment
- Europe – UK Q2 GDP and Eurozone Industrial Production; German final inflation
- Asia – Chinese CPI on an otherwise quiet week
- LatAm – Mexican Central Bank interest rates with inflation for Chile, Mexico and Brazil.
With Fed speakers intent on pulling expectations of further Fed tightening in a hawkish direction, the big question is whether this will begin to drive yields higher again. In turn, would this then pull the USD also higher? The initial assessment is that this is not happening yet.
Reaction to the US CPI data is likely to define the week. Recent months have seen upside surprises, so another one this time could help to generate USD support again.
The medium-term trends are still positive on the Dollar Index but the corrective trend since the Fed meeting is still in play. Subsequently, we remain cautious of USD positioning
There is nothing on the calendar to bother Canadian dollar traders this week. However, the falling oil price is starting to weigh on CAD. Further moves lower in oil will add to the growing underperformance.
- USD/CAD – has recovered well from 1.2765 support. A decisive move above 1.2890 starts to build a new recovery trend. Resistance at 1.2945 would be the first important barrier.
Precious metals continue their recovery, with the near-term corrective USD helping. If inflation expectations continue to rise higher than nominal bond yields, this will be negative for “real” yields (bond yields minus inflation). This would help to sustain the rally in gold. Oil is suffering from the continued recession signals and the negative impact on demand.
- Brent Crude Oil – the outlook is turning increasingly corrective having broken decisively below $98/$100. Rallies now into $100/$102.50 may now struggle before further downside towards $95/$96.
- Gold – the recovery is building well with weakness being bought into. A test of $1805 could be seen, with an upside break opening $1845/$1856. Support at $1945/$1954 is now key.
- Silver – The resistance between $20.45/$20.60 is key this week and needs to be overcome to open sustainable recovery. Support between $19.50/$19.80 needs to hold.
Earnings season continues, with the proportion of companies beating estimates much lower than normal for both revenue and earnings. If both bond yields and the USD begin to turn decisively higher again, this could start to weigh on the Wall Street rally.
- S&P 500 futures – breaking resistance between 4170/4200 would be the next important step in the recovery. We still see weakness as a chance to buy, looking for the next higher low between 4015/4080.
- NASDAQ 100 futures – the breakout above 12945 was a key bullish breakout to open for further recovery. We look to use any near-term weakness as a chance to buy. Good support this week between 12695/12945.
- Dow futures – continue to use near-term weakness to be a chance to buy for continued recovery. Support between 31660/32200 remains strong and we look for a test of resistance at 33430 in due course.
The core/periphery Eurozone spreads have narrowed slightly and if this continues it will help to support EUR. However, there is no tier-one Eurozone data to drive the EUR this week, so other currencies in the crosses may be the driving force of EUR pairs this week.
- EUR/USD – will be looking for a decisive breakout of a two-week, 200 pip range between 1.0095/1.0295. A downside break opens parity again, whilst an upside break opens a test of $1.0350/1.0400.
Despite the +0.5% rate hike from the Bank of England, markets have been spooked by the projection of higher rates in the face of a prolonged recession. These two positions are unsustainable; it is likely that markets will reflect the BoE being unable to continue to hike strongly. GBP may begin to underperform again as a result.
- GBP/USD is breaking the recovery trend and pressure could mount on the support at 1.2060. A sustained downside break would be bearish for a test of 1.1890. Resistance at 1.2295/1.2330 is strengthening.
The high energy (and raw materials) exposure of the FTSE 100 is leading to underperformance. If the USD continues to correct, this will add to the underperformance. DAX has a higher growth exposure, so will rely on a positive risk appetite to drag the index higher.
- DAX – remains in its recovery uptrend with weakness being used as a chance to buy. Support between 13440/13565 holding will help to sustain pressure on resistance at 13735.
- FTSE 100 – may have lost the recovery momentum, but will look to hold above the 7370 breakout support. The importance of support at 7310 continues to grow. A break above resistance at 7490 re-opens upside potential.
Spreads over the Japanese Government Bond yield continue to have a significant bearing on the outlook for JPY. As spreads have stopped tightening, this hints at a more neutral/choppy phase of trading for JPY.
- USD/JPY – has stopped strengthening and the outlook is more uncertain near term. Resistance around 134.50 will be a gauge, whilst there is support now between 130.40/131.50.
- AUD/JPY – the six-month uptrend has been broken as the JPY has regained some lost ground. There is a slight corrective bias forming, with a reaction to support around 91.40/92.00 now a gauge.
The RBA has said that it will do what is necessary to bring inflation back into the 2% to 3% band. This may help to subdue consumer inflation expectations. However, with no “pre-set path” of hikes, the AUD has just lost some of its recovery momentum recently.
- AUD/USD – has tailed off from 0.7045 and is now potentially building a trading range above 0.6875 support. A break of this range will be the next important near to medium-term move.
There is no NZ data this week, with moves likely to mirror the AUD.
- NZD/USD – has tailed off to breach the recovery uptrend. Leaving resistance at 0.6350 the outlook is becoming less decisive. Support at 0.6190/0.6210 will be important now.
Rising inflation has been the key driver of higher rates. However, inflation is showing signs of peaking and this is expected to be shown again in the inflation data this week. The central bank has said that +25bps hikes (rather than the +50bps moves) could be necessary.
- USD/BRL – rebounded from support around 5.1800 but finding resistance around 5.3600 in the band between 5.3100/5.4000 suggests that a move to the downside is growing more likely now.
With inflation still rising the Mexican Central Bank is looking to get ahead of the game with a 75bps hike. This would take interest rates above inflation.
- USD/MXN – the outlook has been more choppy in recent weeks. Technical indicators point to a continued run of uncertainty. A break below 20.200/20.310 support opens the downside. Resistance is now at 20.820/21.050.
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