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Markets

After yesterday’s euphoria, markets returned to a guarded wait-and-see modus as the drivers for yesterday’s risk rebound still have to be validated. Even in case of a reopening of the Nord Stream 1 pipeline as scheduled, the amount of Russian gas deliveries remains highly uncertain. EU’s von der Leyen today still saw a full cut of Russian gas as likely. In addition, even with gas supply returning to ‘more comfortable’ levels, worries on European growth don’t disappear at once. In Italy, PM Draghi in its address before the Senate indicated he remains available to rebuild the government of national unity. For now it is still highly uncertain he will regain confidence of the major groups in Parliament he deems necessary to further execute the reform agenda. A vote is expected later this evening. The Italian 10-y spread vs Germany after Draghi’s speech narrowed 10+ bps, but now again trades 7 bps wider. Last but not least, validation on bold ECB action both with respect to restoring its anti-inflation credibility and on a credible anti-fragmentation tool will only come at tomorrow’s policy meeting. Yesterday’s ‘hints’ from familiar sources at least made it easier for the ECB to frontload policy normalization with a 50 bps hike without sparking too much upheaval on European interest rate markets. Still, the outcome remains highly binary in nature. Clear communication on the functioning of the new anti-fragmentation tool, probably is at least as important as the actual 25 or 50 bps hike. European interest rates reverse part of yesterday’s leap higher. German yields decline 3/5 bps across the curve. US yields also ease between 4/6 bps as the Fed reined in expectations for a 1.0% hike. European equities initially tried to extend yesterday rebound, but momentum dwindled. The EuroStoxx50 eases 0.6%. US indices are opening little changed/mixed.

On FX markets, the headlines of EU’s von der Leyen on persistent uncertainty with respect to Russian gas deliveries pushed EUR/USD (temporarily) to the 1.0175 area, but in volatile trading the pair soon rebounded back to the 1.023 area. The dollar failed to regain the 107 level in a sustainable way (106.75). The risk-off sentiment keeps the dollar and the yen in balance (USD/JPY 108.05). Sterling remains in the defensive even as June inflation printed at a 40-year high (9.4%), supporting the case for a 50 bps BoE rate hike. At 0.8525, EUR/GBP retains recent gains.

News Headlines

Belgian consumers turned less optimistic again in July. The indicator fell from -11 to -13, erasing part of a three-month rise to be back at levels seen in May. This month’s decline is mainly attributable to a deterioration of the outlook for the general economic situation. Despite this, household’s assessment of their personal financial situation improved slightly from -8 to -7.  Still it is the lowest since 1995 excluding the shock impact of Russia’s invasion earlier this year. Expectations for unemployment remained steady (12). Belgian consumers do foresee to save less in the coming year. Barring the month May, expectations to save eased to the lowest since early 2020.

Polish employment in June grew an expected 0.1% m/m to be up 2.2% Y/Y. Average gross wage growth rebounded from a decline in May to be up 2.4% m/m and 13% y/y. That fell a bit short of 2.8% and 13.3% expectations. Statistics Poland attributed the rise to payments of quarterly and yearly bonuses and retirement severance pays. It is also the result of a strong, tight labour market that has been increasingly fueling (domestic) inflation. Signs of price pressure easing are scarce still. Producer price inflation in June accelerated to a new 27-y high of 25.6% y/y (1.6% m/m). Persistent inflation and the war in Ukraine has weighed severely on consumer confidence. After falling to an all-time low in June (-43.8), confidence barely recovered in July (-41.7). Polish consumers assessed their personal finances to be only marginally better than the low seen last month while thinking that the economic situation was even worse than in June (new all-time low for the subseries). The situation 12 months ahead was judged almost as equally as bad as in June. The zloty traded volatile after the mixed bag of data was published all at once. The currency is underperforming regional peers nevertheless. EUR/PLN is currently trading at 4.77, up from 4.75.

A fresh set of statistics from the UK showed that inflation is still not slowing down. The rate of consumer price growth climbed to 9.4% y/y in June after they added 0.8% for the month, four times the long-term average monthly increase of 0.2%.

But, even more worryingly, the leading inflation indicators do not cease to surprise. The Producer Purchasing Price Index added 1.8% in June against expectations of 1.2%, to 24% y/y. Producer Output Price Index rose by 1.4% (expected 1.0%), to 16.5% YoY.

A separate publication noted an acceleration in house price growth from 11.9% YoY to 12.8% in May.

Earlier, Bank of England officials spoke about the need to accelerate policy tightening to fight inflation. Fresh reports indicate that the Monetary Policy Committee will assess the need to raise the rate by 50bp or more in the next two weeks, moving away from the measured 25bp step.

While accelerating monetary policy normalisation has the potential to support the pound, this is bullish news for the stock market and overall risk demand. The pound is sensitive to fluctuations in risk appetite, so do not expect it to make a sustained return to growth against the dollar without a stock’s bull market first.

Daily Pivots: (S1) 1.0142; (P) 1.0205; (R1) 1.0291; More...

With 1.0118 minor support intact, intraday bias in EUR/USD stays mildly on the upside for 1.0348 support turned resistance. Break there will target channel resistance at 1.0514. On the downside, below 1.0118 minor support will bring retest of 0.9951 low instead.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0773 resistance holds, in case of rebound.

Daily Pivots: (S1) 1.1933; (P) 1.1989; (R1) 1.2053; More...

Intraday bias in GBP/USD remains neutral and outlook is unchanged. Focus remains on 1.2055 minor resistance. Firm break there will confirm short term bottoming at 1.1759. Bias will be turned back to the upside for 1.2405 resistance next. On the downside, below 1.1759 will resume larger down trend to 100% projection of 1.2666 to 1.1932 from 1.2405 at 1.1671.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3065).

Daily Pivots: (S1) 0.9740; (P) 0.9765; (R1) 0.9799; More...

USD/CHF's fall form 0.9884 is still in progress and intraday bias remains on the downside. Such decline is seen as a falling leg of the consolidation from 1.0063. Sustained trading below 55 day EMA (now at 0.9681) will target 0.9493 support again. On the upside, above 0.9788 minor resistance will turn bias back to the upside for 0.9884 resistance.

In the bigger picture, medium term up trend from 0.8756 (2021 low) is still in progress. Next target is 1.0342 (2016 high). Sustained break there will resume long term up trend from 0.7065 (2011 low). This will remain the favored case as long as 0.9471 resistance turned support holds.

Daily Pivots: (S1) 137.59; (P) 137.99; (R1) 138.61; More...

USD/JPY is staying in consolidation from 139.37 and intraday bias remains neutral. Downside of retreat should be contained by 134.73 support. On the upside, break of 139.37 will resume larger up trend to 100% projection of 114.40 to 131.34 from 126.35 at 143.29.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Daily Pivots: (S1) 1.2829; (P) 1.2910; (R1) 1.2951; More...

USD/CAD recovers mildly but stays well below 1.2988 minor resistance. Intraday bias stays on the downside for 1.2818 support. Firm break there will bring deeper fall back to 1.2516 key support. On the upside, above 1.2988 minor resistance will turn bias back to the upside for retesting 1.3222 instead.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

Canadian Dollar softens mildly in early US session after consumer inflation data. While CPI hit another near four-decade high, the reading was far below market expectations. On the other hand, New Zealand and Australian Dollar remains generally firm. Dollar is recovering slightly but stays as the worst performer for the week so far, as it's near term correction. Overall all trading is relatively subdued and could wait until tomorrow's ECB rate decision to revive some volatility.

Technically, Euro is losing some upside momentum ahead of Dollar, Yen and Sterling. It's also looking vulnerable against Aussie. Break of 1.4759 support in EUR/AUD could prompt deeper selloff towards 1.4318 low. In this case, EUR/USD and EUR/GBP could also be dragged back to 0.9951 and 0.8401 support respectively.

In Europe, at the time of writing, FTSE is down -0.36%. DAX is down -0.81%. CAC is down -0.53%. Germany 10-year yield is down -0.052 at 1.226. Earlier in Asia, Nikkei rose 2.67%. Hong Kong HSI rose 1.11%. China Shanghai SSE rose 0.77%. Singapore Strait Times rose 1.68%. Japan 10-year JGB yield rose 0.0020 to 0.244.

Canada CPI accelerated to 8.1% yoy, 7 of 9 major components up 3% or more

Canada CPI accelerated from 7.7% yoy to 8.1% yoy in June, missing expectation of 8.8% yoy. Excluding gasoline, CPI accelerated from 6.3% yoy to 6.5% yoy. That's still the highest level since January 1983. Statistics Canada said the acceleration was mainly due to higher prices for gasoline, however, price increases remained broad-based with seven of eight major components rising by 3% or more.

CPI common rose from 4.5% yoy to 4.6% yoy, above expectation of 4.2% yoy. CPI median was unchanged at 4.9% yoy, below expectation of 5.1% yoy. CPI trimmed was unchanged at 5.5% yoy, below expectation of 5.6% yoy.

UK CPI rose to 9.4% yoy in Jun, goods up 12.7% yoy, services up 5.2% yoy

UK CPI accelerated from 9.1% yoy to 9.4% yoy in June, above expectation of 9.3% yoy. That's also the highest level since the series began in January 1991. Indicative model estimates that it's the highest since 1982, when it was 11%.

The CPI all goods index rose by 12.7% yoy, accelerated from 12.4%. CPI all services rose 5.2% yoy, accelerated from 4.9%. CPI core (excluding energy, food, alcohol, and tobacco) slowed from 5.9% yoy to 5.8% yoy, below expectation of 6.0% yoy.

Also published from the UK, PPI input was at 1.8% mom, 24.0% yoy, versus expectation of 0.9% mom, 23.5% yoy. CPI output was at 1.4% mom, 16.5% yoy, versus expectation of 2.0% mom, 16.8% yoy. CPI output core was at 0.8% mom, 15.2% yoy, versus expectation of 2.0% mom, 15.5% yoy.

RBA Lowe: Further increase in rates required over the month ahead

RBA Governor Philip Lowe said in a speech that the robust post-COVID recovery is "now behind us" given that inflation is high and labor market is very tight. RBA thus have withdrawn some emergency insurance and raised cash rate by 125bps over the past three meetings to 1.35%.

RBA "expects that further increase will be required over the months ahead", to "help establish a more sustainable balance between demand and supply in the Australian economy.

Australia Westpac leading index dropped to 0.40%, economic slowdown ahead

Australia Westpac leading index dropped from 0.56% to 0.40% in June, indicating economic slowdown later in the year, but momentum is still above trend in the near term.

Westpac currently expects growth to slow from 4% in 2022 to 2% in 2023, but that is highly dependent on the profile of RBA's tightening cycle.

Westpac expects RBA to opt for a fourth successive rate hike on August 2, and a third success time by 50bps. The current cycle is the first time cash rate has been lifted by 50bps or higher since 1990.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.2829; (P) 1.2910; (R1) 1.2951; More...

USD/CAD recovers mildly but stays well below 1.2988 minor resistance. Intraday bias stays on the downside for 1.2818 support. Firm break there will bring deeper fall back to 1.2516 key support. On the upside, above 1.2988 minor resistance will turn bias back to the upside for retesting 1.3222 instead.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

Economic Indicators Update

BTCUSD is struggling to maintain positive momentum on Wednesday as the week-long rally appears to have stumbled after getting caught between the 50-day moving average (MA) and the 161.8% Fibonacci extension of the January-March upleg at 23,505.65. The price earlier hit an intra-day peak of 23,940.99 – a one-month high. But the grind higher is slowing amid the heavy resistance region.

Still, the momentum indicators suggest there is scope for a further recovery, even though there is also the risk of a downside correction over the near-term horizon. The RSI continues to climb above 50 but has yet to reach the 70 overbought level, while the stochastics have already entered the overstretched territory. Both the %K and %D lines are pointing up and a bearish cross between the two is not imminent, suggesting that any negative correction would be several sessions away.

If the price is able to convincingly break above the 161.8% Fibonacci, the next major resistance point isn’t likely to be met until the 30,000 psychological level. Overcoming this hurdle too would clear the path for the 200-day MA just above 35,200.

However, if the upswing loses further steam and the price turns lower, there should be some support at the 200% Fibonacci, which corresponds with the 1½-year low of 17,592.78 set in June. If this trough is breached, the bears would probably next target the 223.6% Fibonacci of 14,060.59.

Overall, the short-term bias remains bullish for now even if there is some risk of a downside reversal. But in the bigger picture, BTCUSD would likely need to climb above 30,000 for the current bearish outlook to switch to a more neutral one.

Consumer price inflation increased to 8.1% year-on-year (y/y) in June, up from 7.7% in May.

Gas prices were a main driver, with prices rising 6.2% month-on-month (m/m). Statistics Canada noted that "gas prices largely followed crude oil prices, which peaked in the first week of June with higher global demand amid the easing of COVID-19 public health restrictions in China."

Car prices also contributed to the increase, rising 1.5% m/m, "as prices for new vehicles (+1.6%) and used vehicles (+1.3%) increased. Month over month, prices for new vehicles rose at a faster pace than the 0.1% increase in May, due, in part, to the higher availability of new model-year vehicles."

Shelter saw a deceleration in price growth, up 4.5% m/m annualized (down from 8.5% last month). Lower commissions from real estate transactions and homeowners' replacement cost contributed to this.

Seasonally adjusted, month-on-month prices were up 0.6% following a 1.1% gain in May. Excluding food and energy, the index was up 0.35%, slowing from 0.64% in May.

All three of the Bank of Canada's core inflation metrics held steady in June. CPI-trim rose 0.1 percentage points (pps) to 5.5%, CPI-common by 0.1 pps to 4.6%, and CPI-median was flat at 4.9%.

Key Implications

High inflation continues to be the biggest risk to the economic outlook. Though the rise in the yearly rate of inflation is going to grab headlines, there was a meaningful deceleration in the monthly numbers, with most categories showing less monthly price pressure. Looking forward, we hope to see a continued deceleration in the monthly numbers, as gas prices are set to be a significant downward force in the July print. Even still, this should keep the year-on-year numbers uncomfortably elevated through 2022.

The Bank of Canada (BoC) is set to continue hiking its policy rate at an aggressive clip when it meets again in September. Markets are expecting upwards of 75 basis points from the BoC at its next meeting and see the policy rate ending the year between 3.5% and 3.75%. This has the Canada 10-year maintaining its support around 3% and CAD holding in at 77 U.S. cents.