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The British pound is in positive territory on Wednesday. This follows an abysmal 5-day slide which saw the pound fall as much as 600 points. In the North American session, GBP/USD is trading at 1.2060, up 0.53% on the day.

FOMC expected to deliver 75-bp salvo

All eyes are on the Federal Reserve, with the FOMC rate decision later today. The Fed is clearly under pressure as inflation surges with no peak in sight – CPI accelerated to 8.6% in April, up from 8.3% in March. This was the highest inflation rate since 1981. The Fed’s aggressive stance may shift into overdrive, with a 75-bp hike priced in by the markets at almost 100%. Just a few days ago, the most likely scenario was a 50-bps increase, but hawkish winds are blowing, and a 75-bp move will likely elicit a sharp response from the financial markets. Investors will also be closely monitoring the rate statement and Fed Chair Powell’s press conference. I would not be surprised to see the US dollar cash in with strong gains following today’s meeting.

The Fed finds itself in a tough spot as it struggles to combat inflationary pressures, which are now more than four times higher than the Fed’s inflation target of 2 per cent. The price for the Fed’s aggressive rate-hike cycle could well be a recession, but Fed policy makers clearly prefer a (hopefully) short recession rather than inflation expectations becoming unanchored. The big question is will the Fed manage to guide the US economy to a soft landing as it continues to aggressively raise rates.

BoE expected to hike by 25bp

After the Fed is done, attention will shift to the Bank of England, which holds its policy meeting on Thursday. The likely scenario is that the cautious BoE will raise rates by a modest 25 bps, but we could see a larger hike if the Fed is overly hawkish at its meeting. With unemployment in the UK at a low level of 3.7%, the BoE has room to be more aggressive with its monetary policy. As for the British pound, a 0.25% hike won’t be of much help. If the BoE surprises with a larger rate increase, the pound would likely respond with gains.

GBP/USD Technical

• GBP/USD faces resistance at 1.2108 and 1.2215
• There is support at 1.1916. This is followed by 1.1772, a major support level.

Oil and gas took a massive hit during the New York trading session. Oil and gas fell sharply for different reasons, but in both cases, we could witness a bearish energy reversal after more than fivefold price gains from the macrocycle lows of April 2020.

Natural gas was momentarily losing over 20% on Tuesday on reports that Freeport LNG is set to get its terminal back online within 90 days. It is speculated that a full recovery is not expected until the end of the year, but gas futures have managed to cut losses from 20% to 18%, trading at $7.26 at the time of writing.

It’s counter-intuitive, but the gas price peaked on the day the Freeport LNG fire was announced on June 8, and from a peak at $9.6, the price has fallen by a quarter. If we do see a reversal, it would not be surprising if gas loses ground rapidly down to 6.5 or even 6.0 before the bears make their first attempts to lock in profits.

Oil is also turning around. Brent is in its fifth trading session showing a downtrend with a sequence of increasingly lower lows and highs. Yesterday morning, we saw bulls’ efforts to break the trend run into furious selling as the price lost 5% or almost $6 in less than five hours.

In early March, we had already seen that oil was looking too expensive for buyers in the market and economy, causing a demand shock and triggering a correction. Fresh data from the IEA highlights that global inventory rose in April for the first time in almost two years. However, OPEC+ is increasingly falling short of quotas, and US production has stagnated near 11.9m BPD for the last ten weeks.

Our estimate is that we will see the end of a multi-month rally in oil strengthen if Brent consolidates below $114. That would be a drop from the beginning of the month and a dip below the locally significant level, which was resistance in April and May and support in early June.

An even more reliable signal for the bears’ victory would be a consolidation below $110, where the 50-day moving average now passes. That could open a direct and unexpectedly fast road to the area of $100 by the end of August. However, we expect it to stay in the $100-120 range for the rest of the year.

Markets

European markets were put immediately on edge even before the official open. Financial media reported that the ECB would hold an emergency meeting to discuss “current market conditions”. Investors concluded this meant addressing the steep rise in yields/spreads for heavily indebted countries, including Italy. The massive drop in the 10y Italian yield of more than 40 bps ahead of the meeting’s outcome suggested they were expecting something way more than promising “PEPP reinvestment flexibility” announced at the regular meeting last week. In a sign that widening spreads became an issue for the common currency once again, the euro staged a small rebound towards EUR/USD 1.05. Alas, it became a tale of over-promising and under-delivering. The ECB simply announced that “it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism.” Regarding any new anti-fragmentation instrument, the ECB gave its staff instructions to hurry up its completion a bit. European bond markets, both core and peripheral, pared some of the early morning gains shortly after the statement was released in a sign of disappointment. However, the sharp recovery resumed soon thereafter with the move coinciding with the publication of May US retail sales. The headline figure printed negative for the first time in five months (-0.3% m/m), core gauges rose less than expected and the April readings were revised downwardly. German Bund yields slip 17.2-20 bps in the 2-5y bucket. Tenors further out shed 15 bps (10y) with the very long end underperforming (30y: -5.8 bps). Peripheral spreads vs. Germany’s 10y yield tank between 10 (Spain and Portugal) over 22 bps (Italy) to 27 bps (Greece). US yields nosedive between 6.2 bps (30y) to 11.6 bps (5y) lower ahead of the Fed policy meeting. EUR/USD forfeited all gains to trade slightly lower in the low 1.04 area even as risk sentiment is not at all bad (stocks trade 1-2%+ higher). EMU/US interest rate differentials may be at play here. Sterling shrugs of news that the EU is resuming legal action against the UK over the implementation of the NI protocol while simultaneously launching a second case on matters regarding custom checks. It follows Johnson’s bill to unilaterally amend the protocol earlier this week. EUR/GBP eases from above 0.87 to 0.863 currently. Cable tries to safeguard the 1.20 big figure.

With the ECB having laid an egg, we can now turn to what was supposed to be the one and only focal point today: tonight’s Fed policy meeting. Newspaper reports on Tuesday paved the way for a 75 bps hike instead of the 50 bps hinted at by the Fed at the previous meeting. Such a big move last happened in 1994. We believe chair Powell will rubberstamp another 75 bps hike in July unless the inflation outlook improves materially. In essence this would confirm current market expectations and should thus not come as a big surprise. The dot plot will probably already be outdated if only because it won’t reflect tonight’(and July’s) bigger-than-previously announced rate hike. Governor estimations of the neutral rate (2.4% previously) is worth looking into though. Raising it de facto means the Fed expects the high inflationary environment to stick around for longer. Powell’s tone may prove all-important for US bond markets and the dollar. Keep a close eye at EUR/USD. 1.035 is extremely close. A break lower brings parity back on the radar …

News Headlines

Bulgaria’s government of Prime minister Kiril Petkov will face a no confidence vote in Parliament next week. The vote was filed by the Gerb party of Center-right former Prime Minister Borissov and comes after the junior party left the coalition government last week. As reason of the no confidence vote, the opposition mentions the government’s failure in its economic and fiscal policy, including the government’s ability to address surging inflation. Today, Bulgaria reported May inflation figures at 1.2% M/M and 15.6 % Y/Y (from 14.4 in April), the highest level since 1998. Political uncertainty can complicate the country’s plan to join the euro in 2024.

The AUDUSD rebounds on Wednesday after five straight days of steep fall, as revived risk sentiment gave fresh boost to Aussie.

Oversold daily techs and potential formation of bullish engulfing pattern today, may act as initial reversal signal, though recovery needs a clear break through pivotal 0.70 zone (psychological / Fibo 38.2% of 0.7283/0.6850 bear-leg) to generate firmer bullish signal.

Larger picture remains firmly bearish that may signal limited recovery, while sharp change in bets over today’s Fed decision (most of analysts now expect 0.75% hike instead of previous 0.5% consensus that would lift the US dollar and end a brief recovery attempt.

Bears eye 2022 low (0.6828) loss of which would open way for test of pivotal Fibo support at 0.6758 (50% retracement of 0.5509/0.8007 rally) and spark stronger bearish acceleration on break.

Res: 0.6970; 0.7000; 0.7015; 0.7066.
Sup: 0.6850; 0.6828; 0.6758; 0.6647.

Retail sales lost some momentum in May, falling 0.4% month/month (m/m), weaker than the modest gain markets were expecting. Sales in the prior two months were also revised down.

As expected, sales at autos & parts dealers fell by 3.5% m/m. But, autos weren't the only durable goods category to slow. Sales at furniture (-0.9% m/m) and electronics and appliance stores (-1.3% m/m) both fell.

Sales at gasoline stations were on the rise again in May, up 4.0% m/m, driven entirely by prices, with estimated real sales looking flat in May.

Sales in the "control group", which excludes motor vehicles & parts, gasoline stations and building materials, and are used in calculating personal consumption expenditures (and GDP), were flat on the month.

Sales gains were pretty soft across the board, clothing up only 0.1% m/m, building materials and garden supplies up 0.2% m/m, and sales at non-store retailers reversing (-1.0% m/m) after a healthy gain in April. When deflated by their CPI category, most of these areas saw sales declines in real terms.

One exception was sales at restaurants and bars, which rose 0.7% m/m. That is a solid gain, but comes after three months of even heartier gains as consumers flock back to in-person dining.

Key Implications

We have long expected retail spending to slow as consumers shift towards services, but May's retail report was still weaker than expected. Retail sales really only capture the goods side of spending, while it is spending on services like concert tickets and long-awaited vacations that we expect to boost consumer spending in the near-term. The slowing in retail momentum is expected and reflects the normalization in goods spending after huge gains earlier in the pandemic.

Inflation is elevating nominal retail numbers, so the weakness was more pronounced in real terms. The retail report always grabs headlines, but it won't be holding on to them long today, with the FOMC set to deliver it's rate decision at 2pm. With market expectations ratcheting up to a 75 basis point hike in the past two days, attention is even more heightened than usual.

Daily Pivots: (S1) 134.41; (P) 134.93; (R1) 135.99; More...

USD/JPY continues to lose upside momentum as seen in 4 hour MACD. But further rally is expected as long as 131.34 resistance turned support holds. Current up trend should target 61.8% projection of 114.40 to 131.34 from 126.35 at 136.81. Firm break there will target 100% projection 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) 0.9916; (P) 0.9976; (R1) 1.0079; More...

Intraday bias in USD/CHF stays on the upside for 1.0063 resistance. Firm break there will resume larger up trend. Next target is 100% projection of 0.9193 to 1.0063 from 0.9543 at 1.0413. On the downside, below 0.9872 minor support will delay the bullish case and turn intraday bias neutral first.

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.

Daily Pivots: (S1) 1.1886; (P) 1.2046; (R1) 1.2158; More...

A temporary low is formed at 1.1932, after hitting 61.8% projection of 1.3297 to 1.2154 from 1.2666 at 1.1960. Intraday bias in GBP/USD is turned neutral first. But outlook will stay bearish as long as 1.2666 resistance holds. Sustained break of 1.1932/600 will target 100% projection at 1.1523 next.

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. On resumption, next target is 1.1409 low.

Daily Pivots: (S1) 1.0382; (P) 1.0434 (R1) 1.0470; More...

Intraday bias in EUR/USD remains neutral for the moment. Risk stays on the downside as long as 1.0786 resistance holds. Below 1.0396 will target 1.0339 long term support. Decisive break there will resume larger down trend. Next target is long term projection level at 1.0090.

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.

The forex markets are generally staying inside yesterday's range so far today. Stocks in Europe and US futures are recovering while treasury yields retreat. Traders are clearly turning cautious ahead of FOMC rate decision. The question is whether Fed would deliver 75bps hike as markets priced in, or stick to its 50bps per meeting plan. Euro's recovery attempt was brief as ECB delivered nothing special after the ad hoc meeting on fragmentation.

Technically, focuses remain on some levels to confirm Dollar's underlying strength, if it attempts to rally after FOMC. The levels include 1.0348 in EUR/USD, 0.6828 support in AUD/USD, 1.0063 resistance in USD/CHF and 1.3075 resistance in USD/CAD.

In Europe, at the time of writing, FTSE is up 0.99%. DAX is up 0.97%. CAC is up 0.78%. Germany 10-yaer yield is down -0.132 at 1.620. Earlier in Asia, Nikkei dropped -1.14%. Hong Kong HSI rose 1.14%. China Shanghai SSE rose 0.50%. Singapore Strait Times dropped -0.10%. Japan 10-year JGB yield dropped -0.0008 to 0.256.

Some readings on Fed:

• Could a 50-bps Fed Hike (Inadvertently) Weigh on Sentiment? AUD/JPY
• Fed to hike by 75bps? 10-year yield heading to 4%?
• Fed Policy Meeting: Switching to Sharper Rate Hikes?
• FOMC Meeting Preview – The Meeting the World is Watching
• Heads Up: Brace for a Hawkish FOMC Meeting
• FOMC Preview: Could the Committee Hike 75bps?

US retail sales dropped -0.3% mom in May, ex-auto sales up 0.5% mom

US retail sales dropped -0.3% mom to USD 672.9B in May, worse than expectation of 0.2% mom rise. Ex-auto sales rose 0.5% mom, below expectation of 0.8% mom. Ex-gasoline sales dropped -0.7% mom. Ex-auto, ex-gasoline sales rose 0.1% mom. Retail trade sales were down -0.4% mom.

For the 12-month period, retail sales rose 8.1% yoy. Gasoline station jumped 43.2% yoy. Food & beverage stores rose 7.9% yoy.

Also released, import price index rose 0.6% mom in May, versus expectation of 1.1% mom. Empire State Manufacturing index rose from -11.6 to -1.2, below expectation of 5.0.

ECB to apply flexibility in PEPP reinvestment, design new anti-fragmentation instrument

ECB said the Governing Council in an ad hoc meeting today to "exchange views on the current market situation" and reiterated the pledged to "act against resurgent fragmentation risks".

The council decided to "apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism".

Also, it decided to "mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument".

Eurozone industrial production rose 0.4% mom in Apr, EU up 0.3% mom

Eurozone industrial production rose 0.4% mom in April, below expectation of 0.5% mom. Production of energy rose by 5.4%, intermediate goods by 0.7%, non-durable consumer goods by 0.4% and durable consumer goods by 0.2%, while production of capital goods fell by -0.2%.

EU industrial production rose 0.3% mom. Among Member States for which data are available, the highest monthly increases were registered in the Netherlands (+5.6%), Finland (+3.5%) and Luxembourg (+3.2%). The largest decreases were observed in Ireland (-9.6%), Greece (-7.4%) and Lithuania (-7.1%).

Eurozone goods exports rose 12.6% yoy in Apr, imports rose 39.4% yoy

Eurozone goods exports rose 12.6% yoy in April to EUR 223.9B. Imports rose 39.4% yoy to EUR 256.4B. Trade deficit came in at EUR -32.4B. Intra-Eurozone trade rose 20.8% yoy to EUR 212.1B.

In seasonally adjusted term, exports rose 1.5% mom to EUR 229.7B. Imports rose 7.1% mom to EUR 261.4%. Trade deficit widened to EUR -31.7B, much larger than expectation of EUR -14.5B. Intra-Eurozone trade rose slightly from 211.2B to 215.1B.

SECO downgrades Swiss GDP forecasts, upgrades inflation

Swiss SECO downgraded 2022 GDP growth forecasts (sport event adjusted) from 2.8% to 2.6%. 2023 GDP growth was also lowered from 2.0% to 1.9%. On the other hand, CPI forecast for 2022 was raised from 1.9% to 2.5%. CPI for 2023 was also raised from 0.7% to 1.4%. Unemployment rate forecast was left unchanged at 2.1% in 2022 and 2.0% in 2023.

SECO said: "The Swiss economy made a solid start to the year, but prospects for the international environment have waned. In particular, the global economy is at risk from the war in Ukraine and developments in China."

It also warned: "The Swiss economy would be significantly affected if its key trading partners were to suffer a major economic downturn. This could happen, for example, as a result of widespread short-falls in energy supplies from Russia... In the face of rising interest rates, the risks associated with the surge in international debt levels are intensifying. There is an increased probability of financial market corrections."

Australia Westpac consumer sentiment dropped to 86.5, on inflation and interest rate

Australia Westpac Consumer Sentiment dropped from 90.4 to 86.5 in June. Over the 46-year history of the survey, the reading was only at or below this level during "major economic dislocations", including during COVID-19, the Global Financial Crisis, early 90s recession, mid-80s slowdown and early 80s recession.

Westpac said: "The survey detail shows a clear picture of a slump in sentiment being driven by rising inflation; an associated lift in interest rates; and a loss of confidence around the economic outlook, both here and abroad."

Regarding RBA policy, Westpac expects another 50bps rate hike in July, as the central bank needs to move quickly in the early stages in a tightening cycle when interest rates are clearly below neutral and risk of over-tightening is moderate.

China industrial production rose 0.7% yoy in May, retail sales down -6.7% yoy

China industrial production rose 0.7% yoy in May, much better than expectation of -1.0% yoy decline. Retail sales dropped -6.7% yoy, above expectation of -7.3% yoy. Fixed asset investment rose 6.2% ytd yoy, above expectation of 6.0%.

The National Bureau of Statistics said the economy "showed a good momentum of recovery" in the month, "with negative effects from Covid-19 pandemic gradually overcome and major indicators improved marginally."

Still, it warned, "we must be aware that the international environment is to be even more complicated and grim, and the domestic economy is still facing difficulties and challenges for recovery."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0382; (P) 1.0434 (R1) 1.0470; More...

Intraday bias in EUR/USD remains neutral for the moment. Risk stays on the downside as long as 1.0786 resistance holds. Below 1.0396 will target 1.0339 long term support. Decisive break there will resume larger down trend. Next target is long term projection level at 1.0090.

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.

Economic Indicators Update