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Markets

Core bond yields yesterday sought to recover some of the heavy losses incurred on Thursday and Friday last week. With (small) success initially, especially in the US. European bond yields were helped by comments from ECB’s Kazaks and Visco respectively advocating and not ruling out another 50 bps rate hike in September. But then news hit markets that Russia is taking another turbine essential for gas flows to Europe offline for maintenance. This will cut supply from an already reduced 40% to just 20%.

German yields swapped all gains to the tune of 5 bps for losses. The curve steepened by dropping 4.3 bps at the front and 0.6 bps at the very long end. US yields retained about half of earlier gains, adding between 3.8 and 5.1 bps across the curve even as two more regional manufacturing activity gauges either turned or became more negative.

Gas prices surged 10%. Oil prices added almost 2% with tight physical supplies, particularly in Europe, outweighing recession fears. Stock markets dropped on the news but largely recovered later on. Europe finished with small gains of about 0.2%. Wall Street closed mixed with the Nasdaq underperforming (-0.43%).

The euro and the dollar were both trading without clear direction. It kept EUR/USD balanced just north of 1.02. The Japanese yen slid half a percent against both. The British pound was among the better bid with EUR/GBP falling through 0.85 yesterday and continues to be one of the better performers in quiet Asian dealings this morning. The dollar is marginally on offer.

Asian-Pacific stocks in many cases overcame opening weakness following retail bellwether Wallmart’s profit warning after US closing hours yesterday. Hong Kong outperforms. In other news on the autonomous region, the aggregate balance – a measure of interbank liquidity – halved in recent weeks. This is the result of the Hong Kong Monetary Authority heavily intervening in FX markets (buying HKD from commercial banks, selling USD) to protect the dollar peg. USD/HKD has been trading near the upper bound of the 7.75-7.85 range since May.

At the current rate, liquidity may be depleted as soon as the end of next month. More major companies including McDonalds, 3M and Coca-Cola are publishing earnings today and economic data includes the Conference Board consumer confidence for July and some US housing data. Barring significant surprises, they probably won’t influence trading materially ahead of tomorrow’s Fed policy meeting.

Core bonds traders are sidelined. With US money markets having fully discounted the flagged back-to-back 75 bps hike, we expect low-volume, directionless trading as investors look for clues what the Fed’s next move is going to be. There may be room for some further dollar consolidation but we see very few reasons for its resilience to be undermined any time soon, especially against the euro.

News Headlines

Economic growth in Korea unexpectedly accelerated in Q2 to 0.7% Q/Q from 0.6% in Q1. Activity was 2.9% higher compared to the same period last year. The strong performance was driven by a 3% rise in private consumption as consumer spending picked up more than expected after the lockdowns. Government spending (1.1%) and construction investment (0.6%) also added to growth. The strong domestic performance was partially offset by a 3.1.% decline in exports. Imports eased 0.8%. The data allows the Bank of Korea to continue its tightening cycle. Inflation printed at 6.0% in June. The BoK earlier this month raised its policy rate by 50 bps to 2.25%. The next BoK policy meeting is scheduled on August 25.

According to Czech TV, Finance Minister Zbynek Stanjura proposed to raise the 2022 budget deficit target to CZK 326.9 bn. The initial deficit was put at CZK 280 bn. Higher spending, amongst others, will be used to address the impact of the war in Ukraine and to facilitate further measures to ease the impact of higher energy prices. The budget deficit also widens due to higher pension costs. At the same time the deficit will be mitigated by higher tax revenues due to higher inflation. The Czech budget deficit hit a record high CZK 420 bn least year (5.9%). The finalization of the amended budget is expected to be debated by the cabinet on Wednesday. The Finance Minister recently indicated that he still intends to reduce the 2023 deficit to CZK 280 bn, the level that was initially planned for this year.

As expected, markets were quiet overnight ahead of a deluge of tier-1 earnings, data, and the US FOMC policy decision over the rest of the week. Equity, currency, oil, and precious metals markets were content to range trade, with only Bitcoin showing some life, falling by nearly 6.0%. Bloomberg is reporting that it looks like Coinbase is in trouble with the US SEC over what is a security and what isn’t. Draining the crypto-swamp is going to be a drawn-out process. Oil is rising higher this morning in Asia as energy markets, once again, get caught out by a Russian whipsaw choke hold.

There have been a couple of developments overnight that appear to be weighing on Asia today. Gazprom cut natural gas flows through Nord Stream 1 to around 20% of capacity, citing the usual “technical issues.” That follows the cruise missile attack on Odesa at the weekend, shortly after signing a Turkish-brokered deal with Ukraine to allow the resumption of grain exports. Markets continue to place hope on what Russia says, rather than what it does, when they should be approaching it from the opposite direction. Dutch natural gas prices moved nearly 10.0% higher, but European equities were remarkably resilient; despite a weak German IFO number, I can’t see that lasting.

Late in the US session, retail stalwart Walmart produced a very unimpressive set of results alongside a grim outlook for the rest of the year. Walmart blamed food and energy inflation, reducing consumers' discretionary spending power, and I can’t argue with that. Today sees Alphabet and Microsoft also announcing earnings, and although there is a lot of nerves around the digital advertising space, I suspect it will be Meta’s results tomorrow that really set the tone. As Meta found out earlier in the year, stock markets are a harsh mistress now if the pandemic-derived growth fantasies can’t be maintained. The same fate surely awaits all three, and Apple this week is that the fairy-tale hits a brick wall. Either way, we are unlikely to see a Wall Street session this week as quiet as the one overnight.

Meanwhile, in China, the announcement of a $44 billion fund by the government to support beleaguered property developers had zero impact on Chinese equity markets yesterday. That could be because China will need to stump up a lot more than $44 billion worth of Yuan to stop the rot. Evergrande, the big distressed-debt kahuna of the space, is approaching an end of July deadline to progress on restructuring its offshore debts. The CEO has been replaced this week, a victim of creative accounting by the group uncovered earlier this year. It looks like the end of July deadline will be a bit of a sea anchor for China equities this week.

Yesterday, Singapore’s inflation data surprised to the upside on both the core and headline readings. We can safely assume that the MAS will be sharpening their pencils for another tightening of monetary policy at their scheduled October meeting, although October seems like a long way away right now.

One bright spot today was South Korean Adv Q2 GDP, which rose by 0.70%, with forecasts expecting a retreat to 0.40%. Strong consumer consumption as covid restrictions eased, were behind the gain. Unfortunately, April-June 2022 is also an age away now, and the picture may have darkened since. I am expecting minimal impact from the data on either the Won or the Kospi.

The Thailand Balance of Trade and Singapore Industrial Production will be of only marginal interest today. Europe’s calendar is empty except for the Hungarian Central Bank policy decision; markets expect a 0.75% hike to 10.0%. The US calendar is rather more substantial, featuring Case-Shiller House Price Index, New Home Sales, CB Consumer Confidence and Richmond Fed Manufacturing and Services Indexes. In the present environment, with the recession word on everyone’s lips, you’d have to say all that data has downside risks.

The US Government is apparently trying to change the definition of a recession from two consecutive quarters of negative growth. Like governments everywhere, they are in a damage-control mood as inflation soars, making their populaces angry. In many cases, most of that blame should be laid at the feet of Russia and their respective central banks. Bulging with PhDs in economics, they all missed the transitory versus entrenched inflation trade, and now here we are.

Governments get the blame, of course, especially in democracies. The White House’s responses of late, as mid-terms loom, are starting to look desperate and are lacking dignity. Still, US commodity prices have fallen this month, gasoline consumption and pump prices have fallen sharply, and the US-centric WTI complex is looking much more wobbly than Brent crude. They say the best cure for high prices is high prices; perhaps the Democrats will get some good news before the mid-terms, although if job losses have started in earnest, it may still be for nought.

Anyway, I digress. Today’s session in Asia is likely to be erring to the soft side as recession fears mount in the US after Walmart’s results. Europe will be dominated by gas, the US by big tech earnings with a smattering of data. I had said previously that the bear market rally will have its moment of truth at the FOMC, but judgement day could arrive a little earlier. I am still not game to pick how this week finishes and will happily watch the circus from the upper-tier seats.

One last thing, and I know I must be boring readers now, but it’s important, and it's China. Reuters has reported overnight that authorities had ordered 100 large firms in Shenzhen into closed loop systems to counter covid and keep the factories going. Once again, covid-zero means covid-zero, not covid-zero once and done. If push comes to shove, I have no doubt that China will engage in large-scale lockdowns once again if it can’t get on top of its covid outbreaks. Bottom fish China if you wish, and if you have a long-term view, why not? But be prepared for an exciting ride along the way, as the light at the end of the 2022 tunnel could be the train coming the other way: possibly carrying officials to an Evergrande creditors meeting.

Asian equity markets are slightly softer after Walmart results

US markets had a mixed session overnight, with the S&P 500 and Dow Jones booking small gains while the Nasdaq fell. Overall, the picture was of continued range-trading, and investors positioning themselves for the earnings run this week, as well as the FOMC. In the Nasdaq’s case, it looked like some trimming of positions ahead of the big-tech earnings releases starting today. The S&P 500 edged 0.10% higher, the Nasdaq fell by 0.43%, and the Dow Jones rose by 0.28%.

The Walmart results also saw Amazon and Target stocks get a beating by association and re-energised recession nerves. That sees US futures falling in Asia. S&P 500 futures are 0.35% lower, Nasdaq futures are down by 0.25%, and Dow futures have fallen by 0.45%. That sentiment has carried over into Asian markets today, which are also having a modestly mixed day, erring towards the downside.

Japan’s Nikkei 225 has fallen by 0.20%, while South Korea’s Kospi has risen by 0.35% after strong GDP data. In China, the Shanghai Composite has edged 0.05% lower, with the CSI 300 adding 0.15% and Hong Kong gaining 0.40%.

Singapore is 0.25% higher, but Taipei has slipped 0.50% lower, and Jakarta and Kuala Lumpur have fallen by 0.40%. Manila and Bangkok have edged 0.25% higher. In Australia, markets are treading water. The All Ordinaries is down 0.10%, with the ASX 200 unchanged.

It doesn’t look like the Asia session will be one to set the world on fire today, especially with a light data calendar. The natural gas situation in Europe means that European equities will struggle to replicate yesterday’s gains. US markets will come down to the Microsoft and Alphabet results with a dash of data for seasoning. I won’t even bother to speculate what the soup will taste like.

Currency markets range-trade overnight

Currency markets range-traded overnight, with very little to show in either the G-10, Asia FX, or EM space. The technical picture on the dollar index, however, is testing the bottom of its rising wedge, and it is shouting that the US Dollar correction lower still has legs. Overnight, the dollar index finished almost unchanged at 106.48 but has moved through the wedge support at 106.40 today, falling 0.18% to 106.29. A daily close under 106.40 signals more losses towards 1.0500 and 1.0350, and it could extend to the 102.50 long-term breakout point. Resistance is at 107.00, 107.30 and 108.00.

EUR/USD was flat at 1.0230 overnight, gaining 0.15% to 1.0237 in Asia. Russian gas woes could limit gains despite the technical picture being constructive. It has resistance at 1.0275, but only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0150 and 1.0100.

GBP/USD edged 0.35% higher to 1.2040 overnight, rising to 1.2065 in Asia. Sterling has support at 1.1900 and 1.1800, with resistance taken out at 1.2060 today, followed by 1.2200. A close above the 1.2060 wedge formation signals a larger rally to the 1.2400 regions, but it would take a sustained break above 1.2400 to call for a longer-term low by sterling.

With US yields moving sideways overnight, USD/JPY drifted 0.40% higher to 136.65 overnight, where it remains in Asia. A loss of 135.50 sets the scene for a larger downside correction, potentially reaching 132.00. Initial resistance is distant at 138.00, followed by 139.40. The US/Japan rate differential continues to hold USD/JPY in its thrall.

AUD/USD and NZD/USD rose modestly overnight to 0.6960 and 0.6265, where they remain in Asia. ​ They continue consolidating their respective topside wedge breakouts. Only a move back below either 0.6800 or 0.6150 changes the short-term bullish technical outlook. Like AUD and NZD, the Asian FX space was almost unchanged overnight and is in a holding pattern ahead of the main events for the week, starting with US tech earnings this evening.

Russia lifts oil prices

Russia has further reduced gas flows to Germany overnight, which is threatening to unwind oil’s move lower on Nord Stream 1 reopening. As that reality set in, Brent crude rose 1.20% to 104.85, and WTI gained 1.30% to $96.25 a barrel. In Asia, the Russian moves have also spooked local markets, sending prices sharply higher. Brent crude is 1.85% higher at $106.60, and WTI has leapt 1.80% higher to $98.00 a barrel.

Despite the price discount by WTI over Brent widening to near three-year highs, both contracts have futures curves that remain in deep backwardation, signalling that prompt physical supplies remain tight, even if US gasoline stocks are now rising sharply and refining margins are falling. Russia remains the wild card in the energy space, supporting prices, a situation unlikely to change anytime soon. Of the two contracts, WTI looks the more vulnerable, having the greater physical beta to US domestic energy consumption.

Brent crude is approaching significant technical resistance at $108.80, a sustained break of which signals a larger rally targeting $115.00 a barrel. Support is at $101.50 a barrel. WTI has resistance at $100.00, while it once again, bounced off its 200-day moving average (DMA) at $94.85 overnight. Until a sustained break of the 200-DMA occurs, significant topside squeezes by WTI remain entirely possible.

Gold trades sideways

Gold finished 0.45% lower at $1720.00 overnight, edging 0.20% higher to $1723.25 an ounce in another aimless Asian session. The charts continue to suggest that while gold is trying to form a medium-term low, its price action remains underwhelming, and we will have to wait until we get into the meat of the week's calendar to see if this scenario plays out.

Gold needs to overcome heavy resistance at the $1745.00 an ounce triple top before the gold bugs can really start to get excited. ​ It has support at $1680.00, and then the longer-term support around $1675.00 an ounce zone. A sustained failure of $1675.00 will signal a much deeper move lower targeting the $1450.00 to $1500.00 an ounce regions.

Daily Pivots: (S1) 0.6903; (P) 0.6934; (R1) 0.6988; More...

AUD/USD's rebound from 0.6680 resumed after brief retreat and intraday bias is back on the upside. Sustained trading above 55 day EMA (now at 0.6967) will pave the way to 0.7282 resistance next. Nevertheless, break of 0.6877 will turn bias back to the downside for retesting 0.6680 low.

In the bigger picture, price actions from 0.8006 (2021 high) could still be a corrective pattern to rise from 0.5506 (2020 low). But current downside acceleration, as seen in weekly MACD), is raising the chance that it's a bearish impulsive move. In either case, outlook will remain bearish as long as 0.7282 resistance holds. Next target is 61.8% retracement of 0.5506 to 0.8006 at 0.6461.

Markets continue to be very quiet in Asian session today. Investors are clearly holding their bets ahead of tomorrow's FOMC rate hike. Dollar is a softer one together with Yen and Swiss Franc. On the other hand, Canadian Dollar is firmer together with Aussie. Euro and Sterling are mixed. Generally speaking, most major pairs and crosses are still stuck inside last week's range.

Technically, some attention remains on whether Sterling could build up more upside momentum. Levels to watch include 0.8456 minor support in EUR/GBP and 165.13 minor resistance in GBP/JPY. Additionally, 1.1774 minor resistance in GBP/CHF would be used as a gauge to determine buying in the Pound. Break there will complete a double bottom pattern, and set the stage for a stronger near term rebound at least.

In Asia, at the time of writing, Nikkei is down -0.22%. Hong Kong HSI is up 1.43%. China Shanghai SSE is up 0.60%. Singapore Strait Times is up 0.25%. Japan 10-year JGB yield is up 0.0077 at 0.214. Overnight, DOW rose 0.28%. S&P 500 rose 0.13%. NASDAQ dropped -0.43%. 10-year yield rose 0.037 to 2.820.

BoJ minutes: Board members spoke of importance of wage increases

In the minutes of June meeting, BoJ board said price rises have been broadening. But massive support is still needed for the economy while uncertainty surrounding the outlook was "extremely high".

"Many members spoke about the importance of wage increases from the perspective of achieving the BoJ's price target in a sustained and stable fashion."

"Japan must create a resilient economy at which consumption continues to rise even when companies raise prices," one board member said.

"The BOJ must maintain monetary easing until wage hikes become a trend, and help Japan achieve the bank's price target sustainably and stably," another member said.

Bitcoin and Ethereum stay bearish as rebound lost momentum

Bitcoin dips notably this week, following overall risk sentiment. Overall outlook stays bearish, with price actions from 17575 low displaying clear corrective structure. Upside of the recovery was also capped below 25083 support turned resistance. Rejection by 55 day EMA is also another bearish sign. On resumption, next target is 61.8% projection of 32368 to 17575 from 24264 at 15121.

Ethereum's corresponding rebound from 878.50 low was relatively stronger, as it's support by medium term calling channel line. Yet, upside was also limited below 1674.60 support turned resistance. Thus, outlook is staying bearish for now. Break of 1316.80 minor support should resume larger down trend through 878.50 low.

On the data front

Japan corporate price index rose 2.0% yoy in June, matched expectation. Later in the day, US will release consumer confidence, house price index and new home sales.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6903; (P) 0.6934; (R1) 0.6988; More...

AUD/USD's rebound from 0.6680 resumed after brief retreat and intraday bias is back on the upside. Sustained trading above 55 day EMA (now at 0.6967) will pave the way to 0.7282 resistance next. Nevertheless, break of 0.6877 will turn bias back to the downside for retesting 0.6680 low.

In the bigger picture, price actions from 0.8006 (2021 high) could still be a corrective pattern to rise from 0.5506 (2020 low). But current downside acceleration, as seen in weekly MACD), is raising the chance that it's a bearish impulsive move. In either case, outlook will remain bearish as long as 0.7282 resistance holds. Next target is 61.8% retracement of 0.5506 to 0.8006 at 0.6461.

Economic Indicators Update

Bitcoin dips notably this week, following overall risk sentiment. Overall outlook stays bearish, with price actions from 17575 low displaying clear corrective structure. Upside of the recovery was also capped below 25083 support turned resistance. Rejection by 55 day EMA is also another bearish sign. On resumption, next target is 61.8% projection of 32368 to 17575 from 24264 at 15121.

Ethereum's corresponding rebound from 878.50 low was relatively stronger, as it's support by medium term calling channel line. Yet, upside was also limited below 1674.60 support turned resistance. Thus, outlook is staying bearish for now. Break of 1316.80 minor support should resume larger down trend through 878.50 low.

In the minutes of June meeting, BoJ board said price rises have been broadening. But massive support is still needed for the economy while uncertainty surrounding the outlook was "extremely high".

"Many members spoke about the importance of wage increases from the perspective of achieving the BoJ's price target in a sustained and stable fashion."

"Japan must create a resilient economy at which consumption continues to rise even when companies raise prices," one board member said.

"The BOJ must maintain monetary easing until wage hikes become a trend, and help Japan achieve the bank's price target sustainably and stably," another member said.

DXY:

On the H4, with prices moving below the ichimoku indicator, we have a bearish bias that prices will drop to the 1st support at 105.642 in line with overlap support and 61.8% fibonacci retracement. Once there is downside confirmation of price breaking 1st support structure, we would expect bearish momentum to carry price to 2nd support at 103.554 in line with swing low support. Alternatively, price could rise to 1st resistance at 107.543 where the pullback resistance and 50% fibonacci retracement are.

Areas of consideration:

• H4 time frame, 1st resistance at 107.543
• H4 time frame, 1st support at 105.642

XAU/USD (GOLD):

On the H4, with price moving within a descending channel and RSI moving in a descending trendline, we have a bearish bias that price will drop from 1st resistance at 1724.44 where the pullback resistance is to 1st support at 1679.28 in line with 100% fibonacci projection and swing low support on the daily timeframe. Alternatively, price could break 1st resistance and rise to 2nd resistance at 1739.61 where the 38.2% fibonacci retracement and swing high resistance are.

Areas of consideration:

• H4 time frame, 1st Resistance at 1724.44
• H4 time frame, 1st Support at 1679.28

GBP/USD:

On the H4, with prices moving within an ascending channel and above the ichimoku indicator, we have a bullish bias that price will rise to the 1st resistance at 1.21594 where the pullback resistance, 127.2% fibonacci extension and 61.8% fibonacci retracement are from the 1st support at 1.20566 where the pullback support is. Alternatively, price could break 1st support and drop to 2nd support at 1.19320 where the pullback support is.

Areas of consideration:

• H4 1st resistance at 1.21594
• H4 1st support at 1.20566

USD/CHF:

On the H4, with price moving along the descending channel, we have a bearish bias that price might drop from our 1st resistance at 0.96649, which is in line with overlap resistance to the 1st support at 0.95776, which is in line with 78.6% fibonacci retracement, if the price keep going down, it may drop to our 2nd support at 0.94952, which is in line with the swing low. Alternatively, price may break 1st resistance and head for 2nd resistance at 0.97435 where the 50% fibonacci retracement is.

Areas of consideration

• 1st resistance level at 0.96649
• 1st support level at 0.95776

EUR/USD :

On the H4, with price moving above the ichimoku cloud and breaking out of the descending trend channel, we have a bullish bias that price will continue to rise from the 1st support at 1.01904 at the overlap support. If price breaks above the intermediary resistance at 1.02698 in line with the 50% fibonacci retracement, we have upside confirmation that price will continue to rise to the 1st resistance at 1.03570 at the pullback resistance in line with the 61.8% fibonacci retracement. Alternatively, price may break the support structure at the 1st support and drop to the 2nd support at 1.01213 at the overlap support.

Areas of consideration :

• H4 1st resistance at 1.03570
• H4 1st support at 1.01904

USD/JPY:

On the H4, with price broken out of the ascending trendline and moving below the ichimoku indicator, we have a bearish bias that price will rise and drop from our 1st resistance at 136.661 where the overlap resistance and 78.6% fibonacci projection are to the 1st support at 134.781 where the swing low support, 61.8% fibonacci projection, 161.8% fibonacci extension and 61.8% fibonacci retracement are. Alternatively, price could break 1st resistance structure and head for 2nd resistance at 137.792 where the pullback resistance and 61.8% fibonacci retracement are.

Areas of consideration:

• H4 time frame, 1st resistance at 136.661
• H4 time frame, 1st support at 134.781

AUD/USD:

On the H4, with price moving above the ichimoku cloud and breaking out of the descending trend channel and moving in an ascending support, we have a bullish bias that price will rise from the 1st resistance at 0.69838 at the overlap resistance in line with the 78.6% fibonacci retracement to the 2nd resistance at 0.70663 at the swing high. Alternatively, price may reverse off 1st resistance and drop to the 1st support at 0.68021 at the overlap support.

Areas of consideration

• H4 1st resistance at 0.69838
• H4 1st support at 0.68021

NZD/USD:

On the H4, with price breaking the descending trend channel, short term ascending support and moving above the ichimoku cloud, we have a bullish bias that price will rise from the 1st support at 0.62177 at the overlap support. If price breaks the intermediary resistance at 0.62707 at the swing high in line with the 61.8% fibonacci retracement and 100% fibonacci projection, we will have upside confirmation that price will rise to the 1st resistance at 0.63269 at the swing high in line with the 78.6% fibonacci retracement. Alternatively, price may break the support structure at the 1st support and drop to the 2nd support at 0.61419 at the pullback support.

Areas of consideration:

• H4 time frame, 1st support at 0.62177
• H4 time frame, 1st resistance at 0.63269

USD/CAD:

On the H4, with the price breaking the ascending channel, we have a bearish bias that the price may drop from our 1st support at 1.28239, which is in line with swing lows to our 2nd support at 1.27578, which is in line with the 161.8% fibonacci extension. Alternatively, the price may rise to the 1st resistance at 1.29509, which is in line with the overlap resistance.

Areas of consideration:

• H4 time frame, 1st support at 1.28239
• H4 time frame, 2nd support at 1.27578

OIL:

On the H4, with price moving along the bearish channel, we have a bearish bias that price might drop from our 1st resistance at 106.178, which is in line with the close swing high price to our 1st support at 102.304, which is in line with 50% fibonacci retracement. Alternatively, as the price is almost at the upper bound of the channel, the price may rise to 2nd resistance at 108.527, which is in line with overlap resistance.

Areas of consideration:

• H4 time frame, 1st support of 102.304
• H4 time frame, 2nd support of 108.527

Dow Jones Industrial Average:

On the H4, with price moving with a bearish channel and having a bullish break, we have a bullish bias that price might rise from our 1st resistance at 32227, which is in line with the swing highs to our 2nd resistance at 32767, which is in line with overlap resistance. Alternatively, price may reverse off the 1st resistance and drop to the 1st support at 31529, which is in line with the overlap support and 38.2% fibonacci retracement, if the price keeps going down, it may drop to our 2nd support at 30978, which is in line with 61.8% fibonacci retracement.

Areas of consideration:

• H4 time frame, 1st resistance of 32227
• H4 time frame, 2nd resistance at 32767

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The Federal Reserve is almost certain to raise interest rates for a fourth time on Wednesday when it announces its decision at 18:00 GMT. A 75 basis-point hike is the likely scenario, but several investors are bracing for a possible bigger 100-bps increase, having been wrongfooted by central banks one too many times lately. Even if the Fed steers clear of surprises this time, Chair Jerome Powell’s press briefing 30 minutes later will be scanned for hints as to what to expect in September. In the meantime, the US dollar is trading a little on the soft side, though showing no sign yet it is ready to hand over its crown as FX king.

Rates seen peaking earlier and lower

Rate hike speculation has been in overdrive since June as traders are one minute ratcheting up expectations about how high the Fed funds rate will reach to scaling back their bets the next. But after constant readjustments over the past few weeks and still plenty of uncertainties surrounding the economic outlook, investors are growing more certain about where they perceive rates at year-end, as interest rate futures for December appear to be settling just below 3.5%.

More importantly, markets increasingly see rates peaking in December versus in spring 2023 not that long ago. The forecasts of an earlier peak are partly due to the Fed frontloading its rate hikes more aggressively than anticipated and partly on the back of signs that inflation may finally be topping out. Both market- and consumer-based inflation expectations have receded substantially from recent highs, mirroring the pullback in commodity prices.

Although it’s too soon to assume that this trend will continue, or at the very least not reverse, when also factoring in the slower gear that the US economy is shifting into, markets are optimistic the Fed will be in a position to pause after December and begin cutting rates by the middle of 2023.

Will the Fed discuss a 100-bps rate increase?

Under this purview, the size of the rate hike in July and the next meeting in September might be considered inconsequential. However, with the Fed and other central banks being more data dependent than ever and no longer committing themselves to a precise forward guidance, investors will want to read as much as they can from the statement and Powell’s remarks, particularly as there will be no new dot plot chart this meeting.

While a 100-bps increase cannot be ruled out in July, and markets have assigned about a 10% probability of this, two of the Fed’s most hawkish policymakers played down the need to go for a bigger hike. Nonetheless, the option of a full percentage point increase might still be discussed at the meeting, something that may startle investors, especially following the latest PMI data.

US economy might be slowing faster than predicted

The services sector shrank in July for the first time in two years according to S&P Global’s flash PMI estimates, although, there was a silver lining in that price growth also appeared to be moderating. There will be a raft of other data this week that may well heighten fears of a sharp slowdown, or even a recession, the highlight of which will be Thursday’s GDP numbers.

After the surprise contraction in the first quarter, GDP is projected to have expanded by a paltry 0.4% annualized rate in the three months to June. The puny growth means that it won’t take a big downside surprise to turn the figure negative, hence, it’s possible that the US economy may already be in a technical recession.

Just as significant will be Friday’s PCE inflation and consumption figures for June. Personal consumption is expected to have jumped by a solid 0.9% m/m in June, while the alternative measure of inflation – the core PCE price index, which is preferred by the Fed, is forecast to have held steady at 4.7%.

Powell’s comments could shore up the dollar

In all probability, Powell will dismiss any weaknesses in the data as temporary and indicate he wants to see stronger evidence that inflationary pressures have started to abate substantially before considering toning down his very hawkish rhetoric. That’s why it may be too soon for investors to expect any hints of a policy shift from the Fed or Powell in July.

If that turns out to be the case, the dollar may seek a rerun towards the 140 level against the yen. Its last attempt was blocked at 139.40 by the 261.8% Fibonacci extension of the May downleg. A successful break above 140 would turn the spotlight to the 300% Fibonacci of 141.32.

However, if Powell does acknowledge rising downside risks to growth and even suggests that he sees inflation declining in the not too distant future, the dollar could pull back more meaningfully. The 135-yen level is likely to be the first port of call in a sharp selloff and should it fail to hold, the 50-day moving average, currently at 133.70 yen, could be targeted next.

From rate hikes to rate cuts

It’s debatable, though, how long and deep any pullback in the greenback would be from investors lowering their expectations of the Fed’s terminal rate. This is because recession risks are growing for all the major economies, so the United States is not an isolated case. In addition, as long as there is a heightened sense of uncertainty, the dollar will draw support from safe-haven demand. The more important question for the markets and bigger threat to the dollar will come later in the year when the attention switches to who will be the first to cut rates.

• EURCHF reversed from support area
• Likely to rise to resistance level 0.9940

EURCHF currency pair recently reversed up from the support zone located between the pivotal support 0.9820 (which stopped wave 3 in the middle of this month) and the lower daily Bollinger Band.

The upward reversal from this support area can form the daily candlesticks reversal pattern Bullish Engulfing.

EURCHF can be expected to rise further toward the next resistance level 0.9940 (top of the previous minor correction 4).