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ECB Vice President Luis de Guindo said the "the headwinds from high energy costs, the deterioration of terms of trade and the adverse impact of high inflation on disposable income pose elevated risks to our medium-term growth outlook."

"Elevated inflation will remain with us for some time," he added. "The risks surrounding inflation are on the upside."

"In the coming months, we will have to navigate this challenging combination of shocks which is reducing growth and pushing up inflation," he said.

The Reserve Bank of Australia is expected to raise interest rates by another 50 basis points when it concludes its meeting at 04:30 GMT Tuesday. Markets assign an 80% probability for such an action, so the aussie could enjoy some upside if the central bank executes. That said, any relief rally is unlikely to last long in an environment dominated by recession worries and cooling commodity prices. 

Chugging along

The Australian economy is in pretty good shape. Unemployment is at a five-decade low, participation is at a record high with more people working than ever before, and consumers are swimming in savings they’ve accumulated over the last couple of years.

Of course inflation is very hot already and with the jobs market so tight, the Reserve Bank is worried that inflationary pressures could become a persistent phenomenon as workers demand higher wages. Hence, it has slammed on the brakes, raising interest rates with urgency to cool demand and prevent this wage-price spiral from materializing.

While the situation looks good domestically, the risks for the Australian economy come from abroad. Australia’s entire business model relies on exporting commodities like metals abroad, usually to China. With the Chinese property sector in deep trouble and worldwide concerns about a recession growing stronger, the growth outlook has started to turn darker.

Single or double? 

The question for traders heading into this meeting is really the size of the rate increase - will the RBA stick to 50bps moves or will it get cold feet and deliver a smaller 25bps hike? Admittedly, the bigger move seems more sensible.

Risks surrounding economic growth might be on the rise but that hasn’t been reflected in the ‘hard’ data yet, which allows the central bank to keep going strong as it attempts to tame inflationary pressures. Since interest rates are still far below what policymakers consider ‘neutral’, the RBA would simply be removing stimulus, not choking the economy.

Market pricing currently suggests that a 25bps move is a done deal and there is an 80% chance for a 50bps hike. Thus, the aussie stands to gain if the central bank truly delivers a 50bps hike. In this case, aussie/dollar is likely to encounter initial resistance around the 0.6920 region.

FX market 

In the bigger picture, what happens with monetary policy is secondary to how the global environment. Recession worries are currently in the driver’s seat, simultaneously putting pressure on risk sentiment and commodity prices, both harmful for the Australian dollar. In this kind of regime, any relief rallies in the aussie are likely to remain shallow.

There is also the risk that market pricing around the RBA has gone too far. The central bank is currently expected to raise rates at every single meeting until early next year, but if growth begins to stall, that may no longer be feasible.

Overall, it’s just difficult to be optimistic about the aussie in this climate and the charts tell the same story, with aussie/dollar sinking to new post-pandemic lows lately. Further declines could see the pair challenge the 0.6850 zone initially.

Some positive catalyst is required to change this gloomy narrative, for example a ceasefire in Ukraine or China abandoning its harsh lockdown strategy - calming nerves around global growth. Until then, the trend remains negative.

Markets

A sigh of relief went through markets today as the first full trading week of July marked a stark difference to the volatile mood swings witnessed in June. The first part of that month was all about central banks raising the inflation alarm. The second part was all about markets sounding the recession alarm. A near empty eco calendar, a more balanced (rate) market positioning and the absence of US investors because of Independence Day all resulted in a calm opening session with bond, stock and FX markets creating some breathing space around key technical levels. The first German monthly trade deficit in three decades grabbed some headlines but did little to unnerve trading. Exports fell by 0.5% M/M (to €125.8bn) while imports rose by 2.7% M/M (to €126.7bn), creating a €1bn deficit. Imported energy inflation is the main culprit of this evolution. Simultaneously, the German export sector is under influence of (Chinese) Covid-lockdowns and restricted business with Russia. The deteriorating current account balance is a phenomenon visible in other EMU countries as well. Turning to the market performances, European stocks gain 0.5% to 1% with the likes of the EuroStoxx50 moving marginally away from the key 3400 support zone. German yields rise around 10 bps across the curve with the German 10-yr yield bouncing off 1.19%/1.16% support after last week’s test. 10-yr yield spreads vs Germany widen by up to 4 bps for Portugal and Italy. The (trade-weighted) dollar trades a tad weaker at 104.90 (from an 105.15 open) which is mirrored by EUR/USD’s marginal gains from 1.0425 to 1.0450. Sterling catches a break by the less volatile and more optimistic market environment with EUR/GBP testing the downside of the upward trend channel since mid-April at around 0.86. Later this week, we eye minutes from the previous Fed & ECB meetings, US non-manufacturing ISM and US payrolls.
 
News Headlines

The ECB will take further steps to incorporate climate change into its monetary policy operations. The tilt applies to its corporate bond purchases, its collateral framework, the disclosure requirements and risk management. The measures will be designed in full accordance with the primary objective of price stability. Amongst other steps, the Eurosystem aims to gradually decarbonize its corporate bond holdings by increasing the share of reinvestments towards issuers with a better climate performance. The ECB will also limit the share of assets with a high carbon footprint that can be pledged by individual counterparties and will consider climate risk when reviewing haircuts to corporate bonds used as collateral. Probably from 2026, the Eurosystem will only accept marketable assets and credit claims from companies and debtors that comply with the Corporate Sustainability Reporting Directive (CSRD) as collateral. To improve the external assessment of climate-related risks, the Eurosystem will urge rating agencies to be more transparent about how they incorporate climate risks into their ratings and to be more ambitious in their disclosure requirements on climate risks.

Even Swiss inflation continues to surprise on the upside. At 0.5% M/M and 3.4% Y/Y, inflation for the fifth consecutive month surpassed the 0%-2% SNB target, reaching the highest level in more than 29 years. Core inflation rose from,1.7% to 1.9% Y/Y. Transportation costs jumped 2.5% M/M. Leisure goods and Horeca also added to price rises. Prices for goods rose 0.8% M/M. Price increases for services remain more modest at 0.3%. The higher than expected inflation adds to expectations that the SNB will raise rates further after it unexpectedly raised the policy rate from -0.75% to -0.25% last month. The Swiss franc didn’t profit even as the SNB recently indicated that a strong currency helps to contain inflationary pressures. EUR/CHF returned back north of parity (1.004). On the other extreme of the inflation spectrum, Turkish inflation in June rose 4.95% M/M and 78.65% Y/Y (from 73.50%).The market still expected an even higher figure. Producer prices printed at 138% Y/Y, the fifth consecutive reading north of 100%. The CBTR kept the policy rate unchanged at 14% since December last year, leaving the real rate deeply negative. The Turkish lira today is losing modest ground with EUR/TRY rising from  17.50 to 17.60

Daily Pivots: (S1) 1.0366; (P) 1.0428 (R1) 1.0489; More...

Intraday bias in EUR/USD stays neutral for the moment. Further decline is expected as long as 1.0614 resistance holds. On the downside, sustained break of 1.0339/48 will resume larger down trend. Next target is long term projection level at 1.0090. On the upside, above 1.0614 will turn bias back to the upside for 1.0786 resistance instead.

In the bigger picture, focus stays on 1.0339 long term support (2017 low). Decisive break there will resume whole down trend from 1.6039 (2008 high). Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. However, firm break of 1.0805 support turned resistance will delay this bearish case, and bring stronger rebound first.

Daily Pivots: (S1) 1.1990; (P) 1.2087; (R1) 1.2197; More...

Intraday bias in GBP/USD remains neutral for the moment. Further fall is mildly in favor with 1.2187 minor resistance intact. Break of 1.1932 will resume larger down trend from 1.4248. However, on the upside, above 1.2187 minor resistance will turn bias back to the upside for 55 day EMA (now at 1.2467) instead.

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 1.31403).

Daily Pivots: (S1) 134.66; (P) 135.33; (R1) 135.90; More...

USD/JPY is staying in consolidation below 136.99 and intraday bias stays neutral first. Considering bearish divergence condition in 4 hour and daily MACD, a deeper correction could be imminent. On the downside, break of 134.25 support will confirm short term topping at 136.99. Intraday bias will be back on the downside for 131.34 support resistance turned support. Nevertheless, firm break of 136.99 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) 0.9543; (P) 0.9593; (R1) 0.9644; More...

Intraday bias in USD/CHF stays neutral and outlook is unchanged. Price actions from 1.0063 are still seen as a consolidation pattern. On the upside, break of 0.9731 resistance will argue that such consolidation has completed and bring stronger rally back to retest 1.0063 high. However, another fall below 0.9493 will dampen this view and target 0.9459 resistance turned support.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Australian Dollar recovers broadly today, following recovery in European markets. Meanwhile, traders are also preparing for tomorrow's RBA rate hike. New Zealand Dollar is also mildly firmer. On other hand, Yen is turning softer with Swiss Franc and Dollar. Euro and Sterling are mixed for now. Overall, trading is subdued with US on holiday.

Technically, for Aussie, eyes will be on 0.6918 minor resistance in AUD/USD and 1.5059 minor support in EUR/AUD. Break of these levels will but a sign of short term bottoming in Aussie. In that case, stronger rebound would likely be seen broadly. Reactions to tomorrow's RBA will be the key to the move.

In Europe, at the time of writing, FTSE is up 1.22%. DAX is up 0.24%. CAC is up 0.85%. Germany 10-year yield is up 0.1081 at 1.341. Earlier in Asia, Nikkei rose 0.84%. Hong Kong HSI dropped -0.13%. China Shanghai SSE rose 0.53%. Singapore Strait Times rose 0.80%. Japan 10-year JGB yield rose 0.0056 to 0.226.

Eurozone Sentix investor confidence dropped to -26.4, dynamics reminiscent of crisis year 2008

Eurozone Sentix Investor Confidence dropped from -15.8 to -26.4 in July, worse than expectation of -20.0. That's the lowest level since May 2020. Current situation index dropped from -7.3 to -16.5, worst since March 2021. Expectations index dropped from -24.0 to -35.8, lowest since December 2008.

Sentix said: "In every respect, the dynamics are reminiscent of the crisis year 2008, and what was then the collapse of the financial system is now the danger of the collapse of the European energy supply. While the financial system essentially consists of money, which can be printed by its own central bank in any amount as needed, a lack of gas is not so easy to replace.

"Moreover, practically all sectors of the economy would be negatively affected by a gas or electricity blackout. So it is time for governments to realise the gravity of the situation and take effective countermeasures. One way or another, they cannot rely on the ECB this time. Rather, the states should rely on war diplomacy".

Eurozone PPI up 0.7% mom, 36.3% yoy in May

Eurozone PPI rose 0.7% mom, 36.3% yoy in May, versus expectation of 1.0% mom, 36.7% yoy. For the month, industrial producer prices increased by 1.7% for intermediate goods, by 1.3% for non-durable consumer goods, by 0.9% for durable consumer goods and by 0.6% for capital goods, while they decreased by -0.2% in the energy sector. Prices in total industry excluding energy increased by 1.3%.

EU PPI rose 0.8% mom, 36.4% yoy. Among Member States for which data are available, the highest monthly increases in industrial producer prices were recorded in Finland (+5.5%), Estonia (+5.4%) and Lithuania (+4.9%). Decreases were observed in Ireland (-19.4%), Slovakia (-4.4%), the Netherlands (-0.8%), Bulgaria and France (-0.1% both).

Swiss CPI accelerated to 3.5% yoy in Jun, highest since 2008

Swiss CPI rose 0.5% mom in June, above expectation of 0.3% mom. The monthly rise was due to several factors including rising prices for fuel, heating oil, and fruiting vegetables. Over the 12-month period, CPI accelerated from 2.9% yoy to 3.4% yoy, above expectation of 3.2% yoy. That's also the highest level since July 2008.

Looking at some more details, core inflation rose 0.2% mom, 1.9% yoy. Domestic products inflation rose 0.3% mom, 1.7% yoy. Imported production inflation rose 1.2% mom, 8.5% yoy.

Australia expects resource and energy export earnings to make successive records this year and next

Australia's Department of Industry, Science and Resources said in a new quarterly report that resources and energy exports earnings are expected deliver two successive record years in 2021-2022 and 2022-2023, before falling slightly in 2023-24 to a third highest ever figure.

Resources and energy export earnings are estimated to be at AUD 405B in 2021-22, AUD 419B in 2022-23, and then notably lower at AUD 338B in 2023-24. The growth was mainly driven by higher prices as volume would remain below 2019-20 high throughout the forecast period.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9543; (P) 0.9593; (R1) 0.9644; More...

Intraday bias in USD/CHF stays neutral and outlook is unchanged. Price actions from 1.0063 are still seen as a consolidation pattern. On the upside, break of 0.9731 resistance will argue that such consolidation has completed and bring stronger rally back to retest 1.0063 high. However, another fall below 0.9493 will dampen this view and target 0.9459 resistance turned support.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Economic Indicators Update

WTI closed last week with minor changes, close to $107. The dynamics of the previous two weeks indicate a timid attempt to return to the bullish trend after the correction. However, there are more signs of an end to the bullish trend so far, despite the rebound.

The US oil producers are expanding their drilling activity. Baker Hughes reported last Friday that 595 oil production rigs are operating across the country, up 1 for the week and +219 for the year. It takes about half a year from drilling to production, and that’s a substantial margin for the future.

The production dynamics suggest that there are enough wells already in operation to replace those that have run out and ramp up supply. Production last week was 12.1m BPD. More oil than America has produced in its history for only 13 months since March 2019. So, a lot of oil is already supplied, some of which the US can export.

Meanwhile, the strategic reserve continues to sell off at a record pace, dropping to levels where it last was in 1986. Interestingly, these government interventions are sufficient to stabilise commercial reserves.

The US is no longer short of oil and petroleum products, conditionally sending the surplus through overseas sales from reserves. Initial logistical difficulties and seemingly endless production force majeure in OPEC countries (the new incident in Libya at the weekend) are holding back the fall in quotations.

Oil trader Vitol, before that Trafigura, spoke of signs of oil demand destruction at current prices. Previously, after 2010, oil prices above $100 were also holding back economic growth and could only hold higher for as long as monetary or government stimulus was in effect and crashed as soon as conditions started to tighten. That is precisely the situation we are now in.

The technical analysis of the charts, in our view, remains on the side of the bears. The WTI price has failed to break above the former uptrend support line and remains below the 50-day moving average.

Should the oil price fall below last month’s low of $101, it would signal that the bears are gaining an increasing advantage, and further declines could accelerate sharply. A complete correction of the latest bullish rally could be a return to $92. However, a deeper slide towards $80-85 cannot be ruled out if economic data worsens further and inflation requires further decisive rate hikes.

AUDUSD switched to a bullish mode after stepping again on the bottom line of the 2021 bearish channel at 0.6765 last Friday.

The pair has almost recouped Friday’s loss ahead of the RBA rate decision due on Tuesday at 04:30 GMT, but the 50-period simple moving average (SMA) on the four-hour chart, which has been a key constraining zone since the start of June, is still overhead at 0.6890. Note that the 23.6% Fibonacci retracement of the 0.7282 – 0.6763 downleg is sitting around the same level too.

On the other hand, the fast progress in the RSI, which is looking to exit the bearish area, and the growth in the MACD, which has climbed back above its red signal line, is boosting optimism that the pair may extend its recovery in the short term. The 38.2% Fibonacci of 0.6961 may come first into view in this case. A more aggressive rally could even reach the 0.6993 resistance, where a close higher could see another test near the 200-period SMA and the 50% Fibonacci of 0.7022.

In the bearish scenario, where the price flips back below the nearby support of 0.6850, the way will clear again towards the channel’s lower boundary seen around 0.6765. Failure to bounce here could trigger a quick decline towards the 0.6565 handle taken from April-May 2020.

All in all, although the short-term bias is improving for AUDUSD, buyers may wisely wait for a close above the familiar barrier of 0.6885 before they drive the price towards 0.6961.