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The Federal Reserve is undoubtedly expected to approve another jumbo-sized rate hike at the conclusion of its policy meeting on Wednesday at 18:00 GMT. Following the latest surprise pickup in inflation, investors have immediately become certain that the central bank may proceed with a triple rate increase in the following two meetings, though whether the Fed will violate its guidance to meet market expectations remains to be seen. If it moves forward, traders will probably need good assurances that the economy will stay afloat to push the dollar higher.

Investors wait for a triple rate hike

Recession fears have been stubbornly creeping into global markets since the previous FOMC policy meeting, undermining the Fed’s aggressive rate hike campaign, especially after GDP data revealed a shallow annualized economic contraction in the first quarter for the first time since mid-2020 because of trade imbalances and weaker inventory growth.

Despite the negative GDP prints, the data indicated a resilient domestic demand. Personal consumption and private investment picked up steam, allowing the Fed to stick to its plan and ramp up its fight against inflation by delivering a sharper 50bps rate hike in May as widely expected. It was the biggest rate increase since the dotcom bubble two decades ago, but the Fed said that it will not stop there, showing stronger commitment to similar rate increases in June and July.

The latest CPI report, however, and the rebound in inflation expectations signaled that rate increases have been ineffective so far this year and the Fed will need to gear up its rate hike plan to ramp up its fight against inflation. Although hopes for an inflation peak gained significant popularity recently because of potential fading base effects, May’s headline inflation figure surprisingly marked the highest annual growth of 8.6% since 1981 on the back of energy and services costs, suggesting instead that there is no immediate relief from inflation in sight. Consequently, investors became immediately certain that the Fed will sharpen its rate increases to 75 bps this month and in July and return to 50 bps rate hikes in the last two meetings of the year.

Economic weakness starts to shape up, but will the Fed proceed? 

Well, there is speculation that the Fed is behind the curve, and more needs to be done as long as the labor market remains tight, and demand keeps supporting the economy. That said, the Fed has been persistently favouring a smooth transition, clearly telegraphing its policy intentions to the public since the start of the year. If it surprisingly violates its guidance this time to meet market expectations for a 75 bps rate increase, there is a danger it will lose credibility - which is hard to regain.

Of course, there is some growing evidence that the US economy continued to lose steam in the second quarter. The savings rate, which skyrocketed during the lockdown periods, has slumped to the lowest since 2008, somewhat justifying the resilience in consumption. Home sales declined for the third straight month in April as higher mortgage rates and rising prices weighed, while jobless claims rose to the highest since the start of the year, portraying some cooling in the tight labor market too. In addition, the Fed’s latest Beige book for May detected moderation in retail and real estate markets and more importantly, diminishing growth expectations.

USD/JPY

The Fed, however, will likely play a safe game and stay on course, avoiding any reference to the R word for now, which could add more fuel to the stock sell-off. That could consequently disappoint a large group of investors, who anticipate a triple rate hike this week, and hence pressure dollar/yen below the nearby resistance of 134.26, especially if Powell entirely excludes the case of super-sized 75 bps rate hikes in the future.

In the hawkish scenario, where the Fed listens to market expectations and more policymakers place their rate projections for super-sized rate increases in the year ahead, Powell will need to provide a good justification that the economy is resilient enough to absorb sharper rate increases without falling into severe recession. In this case, dollar/yen could initially spike up to the 136.00 – 137.50 area and then towards the 139.15 region, which is the 261.8% Fibonacci extension of the previous downleg.

• GBPUSD broke support level 1.2175
• Likely to fall to support level 1.1945

GBPUSD currency was under bearish pressure after the pair broke the support level 1.2175 (which stopped wave 3 in the middle of 2022).

The breakout of the support level 1.2175 accelerates the active impulse wave 5 of the intermediate impulse wave (3) from the start of January.

Given the clear daily downtrend, GBPUSD can be expected to fall further toward the next support level 1.1945 (target for the completion of the active impulse wave 5).

• EURGBP broke resistance level 0.8585
• Likely to rise to resistance level 0.8700

EURGBP currency continued to rise strongly after this currency pair broke above the key resistance level 0.8585 (which has been repeatedly reversing the pair from November).

The breakout of the resistance level 0.8585 accelerated the active impulse waves 3 and (3) – which then broke above the next major resistance level 0.8650.

EURGBP can be expected to rise further toward the next resistance level 0.8700 (former strong resistance from April of 2021).

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New Zealand’s economy has had a bumpy but strong recovery from the pandemic lockdowns and data due on Thursday (Wednesday, 22:45 GMT) is expected to show GDP kept expanding in the first quarter. The healthy economic backdrop has allowed the Reserve Bank of New Zealand to ramp up rate increases as inflation has skyrocketed. But the local dollar has not been able to enjoy much of a boost from tighter monetary policy as the market turmoil from inflation and recession worries has only favoured the mighty US dollar.

From virus crisis to inflation crisis

Despite having one of the most stringent virus curbs in the world, New Zealand’s gross domestic product (GDP) was the first to rise above pre-pandemic level. But GDP peaked in the second quarter of 2021 and growth in Q1 is unlikely to be strong enough to surpass it. New Zealand tightened its virus rules in the first few months of the year as the country battled the Omicron wave.

Nevertheless, consumption fell only marginally, while higher commodity prices boosted the income earned from exports. Overall, the economy is expected to have expanded by 0.6% over the quarter and by 5.3% in the 12 months to March.

Growth in the second quarter likely accelerated as most restrictions have now been lifted. However, the economy is facing a different threat and this time it’s not a new Covid variant. As in most other countries, inflation is surging. New Zealand’s consumer price index jumped the most in more than 30 years in the first quarter, hitting 6.9% y/y. The RBNZ has already raised the cash rate to 2.0% but more hikes are on the way.

RBNZ leads in terms of stimulus withdrawal

The central bank has even gone a step further than its global peers by deciding to actively sell its government bond holdings. Over a five-year plan, the RBNZ will reduce its pandemic-era bond purchases by NZ$5 billion a year down to zero. The decision last week fuelled the selloff in New Zealand government debt as it came at a time when bonds are already under pressure from intensifying expectations that central banks will have to get a lot tougher to bring inflation under control.

The immediate risk in New Zealand from higher rates is the impact on the housing market from rising mortgage costs. A slowdown is already underway in the property sector and house prices have started to decline in many regions. A sharp drop in prices could eventually hit consumer confidence and that would be even more bad news for the economy.

However, New Zealand isn’t quite in the recession danger zone like many European economies are for example, and there are several positives for the outlook. For one, the government recently unveiled plans to spend up to NZ$1 billion to help low income families with the cost of living crisis, and this could only be the start of a new round of fiscal stimulus. China’s easing of its virus restrictions is another positive as it bodes well for exporters, not to mention the tight labour market.

Kiwi has been a surprise laggard

This then begs the question as to why the New Zealand dollar has been performing so poorly against the greenback this year. The kiwi’s year-to-date losses stand at about 8.5%, worse only than the yen and pound. New Zealand’s large current account deficit might explain why the kiwi is seen as a riskier bet than it’s aussie cousin.

But generally, risky currencies like the pound, aussie and kiwi take their cues as much from the US dollar and the mood on Wall Street as from domestic policies. With expectations of Fed rate hikes being continuously scaled up, the greenback has been on a winning streak this year, overpowering currencies with similarly if not more hawkish central banks as it has the added attraction of being the world’s reserve currency.

$0.62 level is looking shaky

Unless broader market sentiment improves – something that can only happen if inflationary pressures begin to ease – solid economic indicators out of New Zealand are unlikely to substantially shore up the kiwi, which is in danger of brushing a fresh two-year low soon.

If the May trough of $0.6213, or more importantly, the $0.62 level is breached, the next stop could be the 123.6% Fibonacci extension of the May-June rebound at $0.6127, followed by the 161.8% Fibonacci of $0.5989.

However, should the selling pressure subside, the kiwi could initially recover towards the 50% Fibonacci of $0.6395 before having another go at the June peak of $0.6576.

The Bitcoin hit the lowest in 18 months on Tuesday, in extension of Monday’s 15% drop, following weekly gap-lower opening and subsequent acceleration lower.

Crypto’s remain under pressure from Fed rate hikes, while the latest US inflation report showed that prices continue to rise that fuels expectations on more aggressive action from the US central bank on Thursday’s policy meeting (economists rise bets for 0.75% hike vs initially expected 50 basis points raise) that would add to the pressure.

Psychological 20k support and Fibo level at 19143 (76.4% of 3770/68911 rise) are in focus, but bears are likely to face strong headwinds at this zone, as daily studies are oversold and cracked 200WMA (22267) also obstructs bears , with failure to close below the indicator to signal that bears are running out of steam.

Overall structure remains firmly bearish, with profit-taking ahead of key supports, to give larger bears time to consolidate.

Fibo levels of the latest downleg from 31702 at 23345(23.6%) and 24942 (38.2%) offer solid resistances, while lift above 50% retracement (26233) would sideline immediate bears for possible stronger correction.

Res: 23345; 24942; 25223; 26233
Sup: 20763; 20000; 19143; 17540

Markets

Sterling isn’t having its best day. Cable touched its lowest level since March 2020 at 1.2064 and is extensively testing final support (1.2081; 76% retracement on 2020/2021 rally) before the March 2020 low at 1.1412. EUR/GBP rallies from 0.8578 at the open to currently 0.8650 (testing September 2021 high at 0.8658). The pair at last manages to take out the tough resistance zone around the 0.86 big figure. EUR/GBP 0.8699/0.8721 (38% retracement on 2020/2022 decline; Apr 2021 high) lines up as the next topside hurdle. The perfect storm for the UK currency has been in the making for quite some time now. The cost-of-living crisis is a global issue, but UK households were amongst the first to be heavily exposed, eg by the lifting of the energy price cap in April. More of the same will follow in October. This morning’s UK labour market report was strong, but media focused on the big drop in real wages. UK wages rose by 4.1% YoY in April with CPI inflation running at 9% Y/Y. The biggest fall in real disposable income on record (since 2001) doesn’t bode well for the UK economic outlook. A second item at play for sterling weakness is that the drop in real wages complicates the picture for the Bank of England. Especially as governor Bailey and co are an outlier when it comes to their focus. Especially at the Fed, but now also at the ECB, tackling inflation and reanchoring inflation expectations primes even as it comes at an economic cost. The Bank of England is more balanced and doesn’t want to overdo it when it comes to policy normalization in order not to suffocate the economy. It shows in today’s outperformance of UK Gilts against for example German Bunds. We admit that the BoE is already further advanced in its rate hike cycle, but the relative dynamic will start playing in GBP’s disadvantage going forward. Even if the BoE on Thursday conducts its fifth consecutive rate hike and even as GBP money markets take into account a 3.25% policy rate peak early next year. The final accident in the making the UK government’s solo approach when it comes to overturning parts of the Northern Ireland Protocol from the Withdrawal Agreement. The government yesterday published a bill with four unilateral proposals to override the Protocol. The publication of the bill (which still needs approval in Lower and Upper House) was immediately met with fury in Brussels with the European Commission revamping legal action against the UK. The government’s plans by the way don’t only infuriate the EU, but also part of Johnson’s own Tories and the election-winning Irish Republicans of Sinn Fein in Northern Ireland. On other markets, we’ve seen some consolidation: the dollar is a tad softer, stocks try to regain some ground (but lack strength) while the Bund and the Note future are stuck near the sell-off lows.
 
News Headlines

Swedish inflation hit 7.3% y/y in May. It’s the highest reading in 31 years and was a sharp increase from the 6.4% seen in April. Monthly dynamics came in at a red-hot 1%. CPIF, the Riksbank’s preferred inflation gauge using a fixed interest rate quickened from 6.4% to 7.2% y/y with all but one category showing (strong) monthly price gains. Both measures surprised to the upside (7%). Excluding energy, core CPIF rose to 5.4%, from 4.5%. Today’s numbers raise the odds for the Riksbank to hike by bigger moves than the inaugural 25 bps back in April. Markets consider such a move a done deal at the very least for the June 30 meeting (50 bps) but that has been the case even before the inflation print. EUR/SEK briefly fell (SEK strengthened) to 10.52 before paring gains immediately. The currency pair is currently changing hands around 10.63.

OPEC expects substantially lower oil demand growth next year as inflation and the (geopolitical) conflicts will hold a tight grip on the world economy. According to preliminary projections, oil consumption would expand by 1.8mln barrels a day, down from the 3.4mln anticipated for this year. To fulfill this demand while also compensating for lost (Russian) output, the oil cartel last earlier this month announced a quicker-than-planned removal of pandemic-era production curbs in July and August. Oil prices continued to rise though, and today is no exception. Brent is adding more than 2% to $124.4/b.

Gold lost about 3% on Monday alone and touched $1809 at the start of trading on Tuesday.

Yesterday’s sell-off provided us with four medium-term bearish signals on the daily timeframes.

First, the daily candlestick completely absorbed Friday’s bullish momentum, clearly showing the strength of the bears.

Secondly, gold’s recovery stalled on the approach of the 50-day moving average. The strong reversal indicates that the medium-term trend remains bearish.

Third, in a decisive move, gold has moved below its 200-day moving average, a significant long-term trend signal that works well in gold. A consolidation below this line is a prologue to a further downtrend. Knowing this, investors often increase selling on such a signal, intensifying the fall in the coming days after a consolidation below this line.

Fourth, gold’s recovery this week stalled near the 61.8% Fibonacci retracement level from the April peak to the May low.

Further near-term targets for the bears look like the $1790 area. If risk-off sentiments prevail in the global markets at those levels, gold may quickly return to the area of $1730-1770, where it found buyers’ support in the second half of last year.

If we move up to the weekly timeframes, a potential final sell-off is seen in the 200-week moving average at $1630, which is also a 50% retracement of the 2018-2020 rise triggered by the soft monetary policy.

Cable extends its steep fall into fifth straight day and dented pivotal Fibo support at 1.208 (76.4% of larger 1.1409/1.4249 Mar 2020/May 2021 rally), after fresh bearish signal was generated on Monday’s close below former 2022 low at 1.2155.

Near-term focus shifts towards psychological 1.20 support and Sep 2019 low at 1.1958, which guard Mar 2020 spike low at 1.1409, but overstretched daily studies suggest the action may pause for consolidation before larger bears resume.

Former key support at 1.2155 reverted to strong resistance, which should ideally keep the upside protected.

Res: 1.2155; 1.2207; 1.2276; 1.2301.
Sup: 1.2034; 1.2000; 1.1958; 1.1899.

The world’s largest cryptocurrency by market capitalization, Bitcoin, has been experiencing a vast sell-off since the beginning of the week, losing more than 25% before recovering some lost ground. Moreover, the broader crypto space has been following Bitcoin’s path amid increasing concerns over slowing global growth and a potential recession as major central banks tilt towards more aggressive tightening to combat rising inflation. In the last couple of days, two crypto trading platforms temporarily halted withdrawals and transfers, exacerbating the downfall and reminding investors that systemic risks in the crypto ecosystem are lingering.

Inflation remains the name of the game

Since the beginning of 2022, cryptocurrencies have been moving in tandem with equity markets, exhibiting a higher positive correlation with tech stocks. During that period, risky assets have been facing continuous downside pressures as investors appear to be moving towards defensive assets in the face of persistently high inflation and recession fears. The latest blow to risky assets was dealt on Friday by the May US CPI print, which came out hotter than expected at 8.6% year-on-year, debunking the peak inflation narrative.

Following that news, investors  increased their bets over an upcoming 75 basis points rate hike at the July meeting, inflicting devastating damage in equity and crypto markets. More precisely, the tremendous selling interest caused the cryptocurrency market’s capitalization to plunge below $1 trillion for the first time since January 2021.

Unregulated nature poses an additional threat

As turbulence rippled through the crypto space in the past few days, leading cryptocurrency exchanges were forced to temporarily pause some of their features amid increasing market volatility. On Monday, Celsius, a popular crypto lending platform, announced that it had halted all crypto and money withdrawals, alongside swaps and transfers between different accounts, which lead to its own token CEL losing more than 50% on the news. Furthermore, another famous crypto exchange, Binance, ceased Bitcoin withdrawals for more than 30 minutes, attributing this move to technical issues, with rumors suggesting that this action was taken due to the ongoing crypto bloodbath.

In addition, crypto exchange companies have been increasingly stating that they plan to proceed with layoffs to curtail their operating costs. Specifically, last week, both BlockFi and Crypto.com reported that they would cut 20% and 5% of their staff respectively as the dramatic shift in macroeconomic conditions has been largely weighing on the broader tech sector. The aforementioned developments paint a gloomy picture for the outlook of the crypto space, which combined with the regulatory woes and the recent Terra collapse have significantly deteriorated investors’ sentiment towards cryptocurrencies.

Bitcoin collapses to fresh 18-month low

The recent sell-off in crypto markets caused Bitcoin's price to fall to a fresh 2022 low, which is also an 18-month low, before bouncing back slightly.

Should negative momentum strengthen and the price dives beneath the recent low of $20,794, the November 2020 support region of $16,200 could act as the first line of defense.  Further downside moves could then stall at the August 2020 resistance of $12,500.

To the upside, bullish actions could propel the price towards the $28,737 level, which is the 61.8% Fibonacci retracement of the 3,850-68,999 upleg. Higher, the 50% Fibo of $36,425 may prove a tough obstacle for the bulls to overcome.