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In the Summer 2022 Economic Forecast, European Commission downgraded both 2022 and 2023 Eurozone GDP growth projections. Meanwhile, HICP inflation projections were upgraded for Eurozone in both years. .

Eurozone GDP growth forecasts:

• 2022 at 2.6% (downgraded from 2.7%).
• 2023 at 1.4% (downgraded from 2.3%).

Eurozone HICP inflation forecasts:

• 2022 at 7.6% (upgraded from 6.1%).
• 2023 at 4.0% (upgraded from 2.7%).

Valdis Dombrovskis, Executive Vice-President said: "Russia's war against Ukraine continues to cast a long shadow over Europe and our economy. We are facing challenges on multiple fronts from rising energy and food prices to a highly uncertain global outlook."

Paolo Gentiloni, Commissioner for Economy said: "Russia's unprovoked invasion of Ukraine continues to send shockwaves through the global economy. Moscow's actions are disrupting energy and grain supplies, pushing up prices and weakening confidence...

"In Europe, momentum from the reopening of our economies is set to prop up annual growth in 2022, but for 2023 we have markedly revised down our forecast. Record-high inflation is now expected to peak later this year and gradually decline in 2023...

"With the course of the war and the reliability of gas supplies unknown, this forecast is subject to high uncertainty and downside risks. To navigate these troubled waters, Europe must show leadership, with three words defining our policies: solidarity, sustainability and security."

Full release here.

US PPI for final demand rose 1.1% mom in July, above expectation of 0.8% mom. For the 12-month period, PPI accelerated to a record 11.6% yoy, above expectation of 10.% yoy. PPI less foods, energy, and trade services rose 0.3% mom, 6.4% yoy.

Full release here.

US initial jobless claims rose 9k to 244k in the week ending July 9, above expectation of 240k. Four-week moving average rose 3k to 236k.

Continuing claims dropped -41k to 1331k in the week ending July2. Four-week moving average of continuing claims rose 5k to 1340k.

Full release here.

The Canadian dollar has posted sharp losses on Wednesday. In the European session, USD/CAD is trading at 1.3132, up 1.18%.

BoC shocks with 100bp salvo

The Bank of Canada has been in an aggressive mode, but nobody was expecting the massive 100bp hike on Wednesday, the largest rate increase in 24 years. The markets had priced in a 75bp move, and the Canadian dollar responded with modest gains. The cash rate now stands at 2.5%.

The massive increase shows that the BoC is pulling out all the stops in order to curb hot inflation, which has hit 7.7%, a 39-year high. The BoC is well aware that over-tightening could tip the economy into a recession, but this is the price to pay to ensure that inflation does not become entrenched through wage gains and price increases. Consumers and businesses are expecting high inflation to persist, and this can become a self-fulfilling prophesy and lead to even higher inflation.

Along with the huge rate hike, the BoC had some grim news. The central bank raised its inflation forecast, which is expected to hit 8 per cent in the second and third quarters of this year. Growth is forecast to fall to 3.5% this year, down from 4.2% previously.

The Canadian dollar wasn’t able to hold onto yesterday’s gains and has dropped sharply today. Investors remain risk-averse after the US inflation report, as headline CPI jumped to 9.1% YoY, up from 8.8%. Core CPI dropped a notch from 6.0% to 5.9% but this didn’t ease the disappointment that the inflation peak remains as elusive as ever. The inflation report has dramatically elevated the likelihood of a massive 100bp, which according to the CME’s FedWatch stands at 84% – less than a week ago, the likelihood of a 100bp move was a mere 7%.

USD/CAD Technical

• USD/CAD has broken above resistance at 1.3068 and 1.3129. Above, there is resistance at 1.3199
• There is support at 1.2953 and 1.2822

Australian employment sparkles

It has been a week of the good and the bad/ugly from Australian releases. The employment report for June, released earlier today, improved from May and easily beat expectations. The economy created 88.4 thousand jobs, up from 60.6 thousand in May and well above the 30.0 thousand estimate.  The unemployment rate dropped to 3.5%, down sharply from 3.9% in May (3.8% exp.). This is good news for the RBA, which is relying on a robust labour market to bear the weight of an aggressive rate policy.

The RBA has raised the cash rate to 1.35%, with more hikes on the way. The relatively low cash rate hasn’t had much effect on soaring inflation, which surged to 5.1% in the first quarter. Australia releases Q2 inflation on July 27th, the same day as the Federal Reserve policy meeting. The RBA has said that inflation could top 7%, which would exacerbate the current cost of living crisis.

Higher inflation has taken a bite out of business and consumer confidence, which headed southward earlier in the week. Westpac Consumer Confidence index for July came in at -3.0%, its ninth decline in 10 months. As well, NAB Business Confidence for June slowed to 1, down from 6 in May. Consumers and companies don’t have much confidence in the economic outlook, and that can translate into decreased spending in a time of uncertainty, which would be bad news for the economy.

Inflation releases tend to grab the headlines, especially with inflation going up and up. However, the RBA is no less concerned with inflation expectations, as inflation will be even harder to curb if consumers and businesses expect inflation to continue to rise and rush to make purchases, thus exacerbating the pressure on prices. Earlier in the week, Melbourne Institute Inflation Expectations remained high at 6.3%, although this was an improvement from the previous reading of 6.7%.

AUD/USD Technical

• There is resistance at 0.6782 and 0.6839
• 0.6706 is a weak support line, followed by 0.6649

Yesterday’s US inflation data spurred market expectations that the Fed will raise rates by 100 points at the end of July, although about a month ago, Powell called a 75-point increase abnormal.

The revision in expectations for monetary policy of the US central bank again highlighted the contrast with Japanese monetary policy and triggered a new momentum of yen weakness.

The USDJPY is already up to 139.20 at the time of writing, the highest since September 1998. But even then, almost 24 years ago, it was a turbulence zone, where the pair spent less than three months, making a quick reversal in the backdrop of a flaring financial crisis in Russia. Even earlier, in 1990, the USDJPY spent about half a year above 140, but then the dip below was a recovery of the long-term downward trend.

Either way, the 140 area in USDJPY looks like a potential area of turbulence where more volatility is expected. In previous weeks we have heard more verbal interventions from the Bank of Japan and the Ministry of Finance, as well as their joint statement (a rare event).

The new lows in the yen this week and its more than 1.4% fall since the start of the day on Thursday make it necessary to keep events around the Japanese currency on the periphery of attention so as not to miss a possible spike in volatility in one direction or the other.

The yen’s weakening is a legitimate market trend linked to interest rate differential dynamics. But the speculation that the BoJ will not change policy by moving to higher interest rates and that the Ministry of Finance will not be burning through foreign currency for interventions is now embedded in the quotations.

It is to be expected that the market will push the yen down until the Japanese authorities resort to real action rather than words. And the scale of the latter has to be sufficient. It might be an active intervention on the forex market, abandonment of Quantitative and Qualitative Easing, a combination of both, or a public refusal to defend the exchange rate.

Either way, the coming weeks and possibly months will bring increased volatility in the yen, which market participants should be prepared for.

The Euro is hovering just above parity level for the third consecutive day, with this critical support being dented but bears were so far unable to break lower.

Limited upticks show that downside pressure is strong, though headwinds from parity manage to counter the pressure.

The single currency is at the lowest levels in two decades and overall picture is very negative, and its fate is mainly with the situation regarding the energy supplies.

The pair is down around 11% year-to-date and on track for further weakness in current economic and geopolitical conditions that may result in one of the biggest yearly drops in Euro’s history.

Higher than expected US inflation in June sparked speculations that the US Federal Reserve might act even more aggressively in its July policy meeting and opt for 1% rate hike, instead of widely expected 0.75% increase that additionally supports the dollar.

On the other side, the situation in European Union worsened further, according to the latest economic indicators, which signal that bloc’s economy is sliding into recession.

The core problem for the union is the energy supply and soaring prices of gas and oil that fuels inflation and the problem spills all over the economy.

The latest shut of gas supplies through Nordstream 1 pipeline, due to maintenance, undermined the Euro, with growing fears that shutdown may not be temporary, add to negative outlook, highlighting increased risk that the single currency may slump below parity and extend towards next target at 0.9607 (Sep 2002 low), with risk of deeper fall if the situation deteriorates on further rise of gas prices.

The European central bank is in difficult position, facing an important task to combat record-high inflation, which could worsen if the euro weakens further, but on the other side must be cautious as aggressive policy tightening could negatively affect the economic growth.

Res: 1.0070; 1.0121; 1.0180; 1.0221.
Sup: 1.0000; 0.9944; 0.9859; 0.9607.

Bitcoin rose 1.1% on Wednesday, ending the day around $19.7K, and was back above $20K on Thursday morning. Ethereum has added 4.3% to $1100 in the past 24 hours. Top altcoins are adding from a modest 0.1% (Dogecoin) to a more notable 3.7% (Solana).

Total crypto market capitalisation, according to ConMarketCap, rose 2.6% overnight to $896bn.

US inflation data came out stronger than expected yesterday, which triggered an impulsive wave of dollar appreciation and a sell-off in risky assets, sending Bitcoin briefly below $19K. However, it is essential to note that the first cryptocurrency found buyers quite quickly on the decline to these levels and has already more than recovered its losses. This is a notable moment, as crypto has often taken on the role of a leading indicator of market sentiment in recent months.

According to KuCoin, cryptocurrencies are popular in Saudi Arabia, with around 3 million residents investing in digital assets.

Bitcoin may continue to fall but will hit another all-time high in the next 24 months, according to CoinShares. At the same time, the rate is not expected to fall below $14,000.

The US Treasury Department has sought public comment on digital assets’ potential benefits and risks. According to President Biden’s executive order, the Treasury is to study the impact of cryptocurrencies on the financial system, economic growth, and national security.

The Bank for International Settlements (BIS) has called for central banks to create “bridges” between the various national digital currencies (CBDC) that would allow tokens to interact with each other.

AUDUSD hovered quietly near Wednesday’s closing price of 0.6757 during Thursday’s early European trading hours after negligibly rotating at the two-year low of 0.6710.

The penetrated support line drawn from the August 2021 low of 0.7105 is now acting as resistance around the same region, preventing any increases towards the 20-day simple moving average (SMA) at 0.6850. Even higher, the tentative descending trendline and the 50-day SMA around 0.6978 may also defend the negative trend in the market ahead of the 0.7070 high from June 16.

The technical oscillators are not displaying any bullish appetite either. The RSI keeps moving halfway below its 50 neutral mark while maintaining a flat trajectory, and the MACD is also consolidating its latest bearish wave marginally beneath its red signal line.

If the price retreats below the recent low of 0.6710, the 0.6665 zone, which was a key constraining zone during the August 2019 – May 2020 period, could immediately halt the decline. In case it gives way though, the focus will turn to the 0.6540 territory taken from spring 2020. This is also where the 161.8% Fibonacci extension of the 0.6828 – 0.7282 upleg resides. Another violation at this point could see a continuation towards the 0.6400 handle last seen in May 2020.

In brief, the short-term outlook for AUDUSD is still looking gloomy despite the latest pause in the sell-off. The 0.6710 – 0.6665 territory is now the next test for the bears, while the bulls will need to push harder to raise buying confidence above 0.6978. 

Overall, the more than a year negative trend is still well-established below 0.7282.

The USDJPY accelerated higher in Asia/early Europe on Thursday, gaining over 1% and hitting new 24-year high, lifted by expectations for another big rate hike by Fed, as well as increased safe-haven demand on growing fears of a recession.

Stronger than expected US inflation figures for June, released on Wednesday, showed inflation hit new highest level in four decades and added to bets for another big hike from the Fed.

Wide expectations for another 0.75% hike in July policy meeting later this month, have been boosted by fresh speculations that the US central bank may opt for even more aggressive approach and raise interest rate by 1%, as skyrocketing inflation is likely to rise further and harm the economy more.

Bullish technical studies on daily chart add to positive outlook, with bulls looking for a break of round-figure 139.00 barrier that would open way towards targets at 139.92/140.00 (Sep 1998 high/psychological).

Headwinds on approach to these levels can be expected as studies are overbought, with dips to offer better buying opportunities. Rising 10/20DMA’s offer solid supports (currently at 136.52/136.10) which should keep the downside protected.

Res: 139.26; 139.92; 140.00; 141.00.
Sup: 138.02; 137.75; 137.27; 136.52.