What we are looking for
- USD mixed: The corrective momentum just eased back yesterday and is looking more mixed today.
- EUR gaining: Positive economic news as gas supplies into Europe from Russia resume. The ECB meeting later will drive volatility.
- Indices looking more mixed: Wall Street was positive into the close on a bounce in tech stocks, but the recovery is looking more uncertain now. European markets are also mixed this morning.
- Data trading: There will be lots of volatility around EUR today with the ECB set to hike rates. Also, there will be a key reaction to the details of the anti-fragmentation tool. Weekly jobless claims could be a USD driver and a potential dent to any risk recovery if claims continue to rise.
There has been a boost for European economic sentiment this morning as the gas flows from Russia have resumed through the Nord Stream 1 pipeline. Although there are no guarantees that Russia will not continue to use the threat of cutting gas supplies as a geopolitical weapon in the future, for now, this is a positive for EUR. Broad sentiment is looking more mixed though as the USD correction of the past few days has begun to look more uncertain. This is also coming as a recovery on indices is trading around important resistance levels. This feels like an important moment in the near to medium-term outlook for markets.
The ECB meeting will be on traders’ minds. The pace of rate hikes will be a big question that President Lagarde will be urged to address. Money markets are pricing around +170 basis points of hikes to the end of the year and with just four meetings left, the race is on. Subsequently, the question is whether it is +25bps or +50bps today. Furthermore, reaction on Eurozone bond yield spreads will be an important gauge as details of the anti-fragmentation tools are laid out. Italian yields are already rising on political risk and the Bund/BTP spread on the 10yr is over 230bps today. A widening of this spread would put negative pressure on EUR.
The ECB dominates the economic calendar today. As of this month, the European Central Bank monetary policy decision will be slightly later by half an hour at 1315BST. This is also expected to be the first rate hike in over ten years. Consensus is narrowly at +25 basis points across the rates corridor. Also, watch out for details of the anti-fragmentation tool to control core/peripheral bond yield spreads. US Weekly Jobless Claims are increasingly being watched as claims have increased in recent weeks. The levels are expected to improve very slightly this week which would ease these concerns. The Philly Fed Manufacturing survey is expected to improve slightly and could be back around zero.
Market sentiment looking broadly mixed: Despite positive news for the Eurozone regarding gas flows helping EUR, there are hints of the USD starting to regain strength again. European indices are mixed, with US futures fluctuating.
Treasury yields starting to move higher again: The US 10-year yield is picking up slightly this morning and is around a one-week high. The 2-year yield is more steady but also is starting to track higher in recent days.
The Bank of Japan leaves policy unchanged: No surprises from the BoJ, with rates at -0.10% and the yield curve control keeping the 10year target at around 0%. It will also take further easing steps “without hesitation”. The Real GDP forecast for 2022 has been reduced but has been increased for 2023 and 2024. CPI inflation forecasts have been increased through to 2024.
Gas flows through Nord Stream 1 resume: Flows from Russia into Europe have resumed after the period of maintenance. This may only be back to around the 40% that was before the outage. For now, though, this will be seen as a relief for the Eurozone economy and EUR.
Italian political turmoil continues: After the government’s coalition parties refused to take part in a confidence vote, Prime Minister Draghi cannot move forward in the formation of a new government. Draghi is expected to resign. The President will then need to dissolve parliament and call another election, possibly in September or October. This political risk comes at a difficult time for the ECB and Eurozone economy and will put downward pressure on EUR.
Cryptocurrencies stalling in their recovery: Just as the recovery in equities is looking less assured, crypto is also off the top of recent recoveries. Bitcoin consolidated yesterday and is down slightly by just over -1% today, back under $23,000.
- European Central Bank monetary policy (1315BST) – A +25bps rate hike is expected to bring the deposit rate to -0.25% (from -0.50%) and the main refinancing rate to +0.25% (from 0.0%)
- US Weekly Jobless Claims (1330BST) – Claims are expected to drop slightly to 240,000 (from 244,000)
- Philly Fed Manufacturing (1330BST) – The survey is forecast to improve slightly to zero in July (from -3.3 in June)
Major markets outlook
Broad outlook: There are hints that the recent USD correction may be about to reverse again, whilst the recovery in indices is also stalling. Commodities are falling over again.
Forex: USD is performing better against all majors other than the EUR.
- EUR/USD has rallied to hit 1.0270 twice in the past couple of sessions but has pulled back. This is now resistance under 1.0350. The market is trading higher again this morning, but the concern will be that unless there is a decisive gain on the back of the ECB the threat of USD strength taking hold once more to drag the market lower. We back the near-term recovery but are mindful that this is still likely to be just a near-term move. Below support at 1.0120 would re-engage the selling pressure.
- GBP/USD has made several attempts towards a test of the 1.2055 in recent days but pulled back on each occasion. At the third time trying, yesterday’s decline into the close to end the day with a negative candle and the market is falling again today. A move below initial support at 1.1925 would put the pressure on the downside once more. The importance of resistance at 1.2055 is growing.
- AUD/USD has failed to close above the resistance at 0.6895 the recovery towards the three-month downtrend is being questioned. As the market ticks lower early today, the reaction to a bull failure will be key. A move back under 0.6830 old support would suggest the sellers are back in control and suggest the bear trend resuming. Initial resistance is now at 0.6930.
Commodities: Precious metals are breaking down again, with oil failing around key resistance.
- Gold has struggled to generate recovery momentum in recent days and with the USD strength resuming, there has been another downside break. Back below $1697 has re-opened the key 2021 low of $1676 once more. Momentum remains deeply negative even though the RSI remains stretched in the low 20s. Near-term overhead supply is now in place at around $1697/$1723.
- Silver has also fallen over as any hints of recovery are being snuffed out. A failure at $19.09 and subsequent overnight declines leave a retest of the low at $18.14 as likely. This move has also bolstered the importance of resistance between $18.90/$19.48 as a barrier to a continuation of a technical rally. Momentum has deteriorated and the RSI is back below 30 again. Below $18.14 the next support is around $17.33.
- Brent Crude oil looks to be falling over again as the resistance band between $107.65/$109.65 has held firm. Turning back from $108.70, this near-term technical looks to be another chance to sell. The RSI momentum is suggesting this as a rebound has failed just under 50. A breach of support at $104.65 could induce the move back towards $98/$100 again.
Indices: Wall Street recovery is still intact, but has shown signs of faltering in the past 24 hours.
- S&P 500 futures have close above the important near to medium-term resistance band of 3875/3950. This move has also broken a four-month downtrend and the RSI moving above 55 confirms the improvement. Futures are looking less assured this morning, the bulls will now look to form a higher low in the 3875/3950 band which is now a basis of support. If so, then a move towards the next band of resistance 4070/4200 can be eyed. Initial resistance is at 3977 whilst support is forming between 3910/3922.
- German DAX has seen the recovery just beginning to falter slightly around the resistance between 13,375/13,430. This is the first big test of the recovery. Can the DAX attract buyers into weakness? There is an initial support area of around 13,000/13,115 that needs to hold as a basis of support to sustain recovery momentum. Above 13,440 would open the way again towards 13,650.
- FTSE 100 has fallen over around the resistance between 7300/7370. This re-affirms what is now a choppy six-week trading range. This is reflected in the RSI on both the daily and 4-hour charts which are neutral at around 50. There is mid-range support around 7180/7230 now.
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