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Fed is widely expected to raise interest rates by 0.75% today, for the second time in a row, to bring the federal funds rate target rate to 2.25-2.50%. More tightening is expected afterwards, as most FOMC members believed that interest rates have enter into "restrictive" region to curb inflation, which is already at multi-decade high.

The questions are on the pace of tightening beyond the neutral range, its impact on economic activity, and risks of recession as a result. Fed Chair Jerome Powell will be grilled for these questions. But a concrete answer is unlikely for now. The next rate-setting meeting on September 21 is nearly two months away. Two sets of prices, jobs and activity data will be published during the time, and before the new economic projections. The situation is so uncertain for Powell to tell the markets anything meaningful.

Here are some previews on Fed:

• FOMC Preview – Assessing the Balance of Risk for Traders
• Fed to Likely Hike by 75 bps But May Still Weigh 100-bps Option
• FOMC Meeting Preview: Traders Looking for 75bps, Powell's Presser Key
• All Eyes on Bond Yields ahead of FOMC

As for market reaction, a major focus is on 10-year yield. It's so far still sitting comfortably above a key support zone of 2.709 and 38.2% retracement of 1.343 to 3.483 at 2.665. There is prospect of a rebound to flatten the yield curve of 2-year (3.053%) to 10-year (2.787%). But a firm break below 2.709 could signal a flush into bonds, which could send 10-year yield towards 50% at 2.413, and below. That will threaten the curve of 3-month (2.507) to 10-year yield, which will be a big warning.

Australia CPI rose 1.8% qoq in Q2, blow expectation of 1.9% qoq. For the 12-month period, CPI accelerated from 5.1% yoy to 6.1% yoy, below expectation of 6.3% yoy. RBA trimmed mean CPI came in at 1.5% qoq, 4.9% yoy, versus expectation of 1.5% qoq, 4.7% yoy.

The quarterly increase was the second highest since the introduction of the Goods and Services Tax (GST), following on from a 2.1% increase in Q1. The annual rise was the highest since the introduction of GST.

"Annual trimmed mean inflation was the highest since the series commenced in 2003 and annual goods inflation was the highest since 1987, as the impacts of supply disruptions, rising shipping costs and other global and domestic inflationary factors flowed through the economy," said Head of Prices Statistics at the ABS, Michelle Marquardt.

Full release here.

June 2022 CPI 1.8%qtr vs 1.7% forecast; Trimmed Mean 1.5% vs 1.4% forecast. The CPI came in broadly as expected even with food, clothing & footwear, household furniture, equipment & services surprising to the high side.

The CPI gained 1.8% in the June quarter splitting the difference between the market median of 1.9% and Westpac’s forecast of 1.7%. At two decimal places it was 1.78% so a firm 1.8%%. This increase was the second highest since the introduction of the GST and follows on from a 2.1% increase in the March quarter.

The annual pace lifted from 5.1% to 6.1% the fastest pace since the introduction of the GST (6.1%yr June 2001) and significantly faster than the mining boom peak in September 2008 of 5.0%yr.

The impact of HomeBuilder grants was there but it is less significant than in recent history. The more important story now for new dwelling inflation is the shortages of building supplies and labour, heightened freight costs and strong demand – these factors are also significant for the broader inflationary pulse we are now observing.

In June, automotive fuel reached a record level for the fourth consecutive quarter. Fuel prices rose strongly over May and June, following a fall in April, due to the 22c temporary cut in the fuel excise.

This broad spread inflationary pulse was captured by 1.5% gain in the trimmed mean, the market was forecasting 1.5%, Westpac was expecting 1.4%. It is also worth noting that the March quarter trimmed mean was revised from 1.4% to 1.5%. The annual pace of the trimmed mean lifted from 3.7%yr in March to 4.9%yr in June, the fastest pace since September 1991 (using the RBA’s historical estimates).

At two decimal places the trimmed mean rose 1.46% so a solid 1.5%; for completeness the weighted median gained 1.4% for 4.1%yr.

The ABS reports that annual goods inflation was the highest since 1987, as the impacts of supply disruptions, rising shipping costs and other global and domestic inflationary factors flowed through the economy.

The widespread nature of this inflationary pulse was further emphasised by the rise in the share of components of the CPI running faster than a 2.5%yr pace. The share lifted from 66% to 72.4% well up from 29% reported just back in September 2021; 72.4% is the largest share of the CPI components running faster than 2.5%yr since June 2001 75.3% (you have to go back to early 1991 to find a larger share).

Turning to the details the most significant price rises were for new dwelling purchase by owner-occupiers (5.6% vs 5.5% WBC), automotive fuel (4.2% vs 4.0% WBC). What did surprise us a little was the strength of the gains for food (2.0% vs 1.5% WBC), clothing & footwear (3.5% vs 1.2% WBC) and household furnishings, equipment & services (2.5% vs 1.5% WBC).

In their report the ABS noted that the price of goods (2.6%) continued to rise more strongly than that of services (0.6%) in the June quarter. As noted above it was in food and the furnishings, household equipment & services. Main contributors to the rise in food prices included vegetables (7.3% vs 4.8% WBC), meals out and takeaway foods (1.4% vs 0.2% WBC), and fruit (3.7% vs 6.3% WBC). Supply chain disruptions due to flooding events, labour shortages, and rising freight costs contributed to higher prices. Furniture prices rose (7.0% 3.1% WBC) due to increased transport and material costs as well as stock shortages.

Services recorded a smaller rise compared with goods. Financial services (1.2% vs 0.4% WBC) and holiday travel and accommodation (2.3% vs 2.0% WBC) rose. Child care (-7.3% vs 1.0% WBC) fell as the full effect of additional child care subsidies for families with two or more children under the age of 6, which commenced on 7th March, flowed through into this quarter. Before and after school care vouchers offered by the NSW Government also contributed to the fall in child care costs. Urban transport fares (-4.4% vs 0.6% WBC) fell due to free travel periods introduced by the NSW and Tasmanian State Governments within the quarter.

We are processing this data and will review the implications for our CPI forecasts.

DXY:

On the H4, with prices reversing off the ichimoku indicator, we have a bearish bias that prices will drop to the 1st support at 105.642 in line with overlap support and 61.8% fibonacci retracement from the 1st resistance at 107.543 where the pullback resistance and 50% fibonacci retracement are. Alternatively, price could break 1st resistance and rise to 2nd resistance at 109.291 where the swing high resistance and 61.8% fibonacci projection are.

Areas of consideration:

• H4 time frame, 1st resistance at 107.543
• H4 time frame, 1st support at 105.642

XAU/USD (GOLD):

On the H4, with price moving within a descending channel and RSI moving along a descending trendline, we have a bearish bias that price will drop from 1st resistance at 1724.44 where the pullback resistance is to 1st support at 1679.28 in line with 100% fibonacci projection and swing low support on the daily timeframe. Alternatively, price could break 1st resistance and rise to 2nd resistance at 1739.61 where the 38.2% fibonacci retracement and swing high resistance are.

Areas of consideration:

• H4 time frame, 1st Resistance at 1724.44
• H4 time frame, 1st Support at 1679.28

GBP/USD:

On the H4, with prices moving within an ascending channel and above the ichimoku indicator, we have a bullish bias that price will rise to the 1st resistance at 1.20566 where the pullback resistance is. Once there is upside confirmation of price breaking 1st resistance, we would expect bullish momentum to carry price to 2nd resistance at 1.21594 where the pullback resistance, 127.2% fibonacci extension and 61.8% fibonacci retracement are. Alternatively, price could drop to 1st support at 1.19320 where the pullback support and 50% fibonacci retracement are.

Areas of consideration:

• H4 1st resistance at 1.20566
• H4 1st support at 1.19320

USD/CHF:

On the H4, with price moving along the descending channel, we have a bearish bias that price might drop from our 1st resistance at 0.96536, which is in line with overlap resistance to the 1st support at 0.95799, which is in line with 78.6% fibonacci retracement, if the price keep going down, it may drop to our 2nd support at 0.94953, which is in line with the swing low. Alternatively, price may break 1st resistance and head for 2nd resistance at 0.97332 where the 50% fibonacci retracement is.

Areas of consideration

• 1st resistance level at 0.96536
• 1st support level at 0.95799

EUR/USD :

On the H4, with price moving in a descending trendline and RSI showing a descending trendline, we have a bearish bias that price will drop from the 1st support at 1.01487 in line with the 38.2% fibonacci retracement at the pullback support to the 2nd support at 0.99500 at the swing low. Alternatively, price may break through the 1st support and rise to the 1st resistance at 1.02728 at the swing highs in line with the 50% fibonacci retracement and 100% fibonacci projection.

Areas of consideration :

• H4 1st resistance at 1.02728
• H4 1st support at 1.01487

USD/JPY:

On the H4, with price broken out of the ascending trendline and moving below the ichimoku indicator, we have a bearish bias that price will drop to our 1st support at 136.723 where the overlap support is. Once there is downside confirmation of price breaking 1st support, we would expect bearish momentum to carry price to the 2nd support at 134.781 where the swing low support, 161.8% fibonacci extension and 61.8% fibonacci retracement are. Alternatively, price could head for 1st resistance at 137.792 where the pullback resistance and 61.8% fibonacci retracement are.

Areas of consideration:

• H4 time frame, 1st resistance at 136.661
• H4 time frame, 1st support at 134.781

AUD/USD:

On the H4, with price moving above the ichimoku cloud and breaking out of the descending trend channel and moving in an ascending support, we have a bullish bias that price will rise from the 1st resistance at 0.69838 at the overlap resistance in line with the 78.6% fibonacci retracement to the 2nd resistance at 0.70663 at the swing high. Alternatively, price may reverse off 1st resistance and drop to the 1st support at 0.68021 at the overlap support.

Areas of consideration

• H4 1st resistance at 0.69838
• H4 1st support at 0.68021

NZD/USD:

On the H4, with price breaking the descending trend channel, RSI showing an ascending trendline and moving above the ichimoku cloud, we have a bullish bias that price will rise from the 1st support at 0.62073 at the overlap support. If price breaks the intermediary resistance at 0.62708 at the swing high in line with the 61.8% fibonacci retracement and 100% fibonacci projection, we will have upside confirmation that price will rise to the 1st resistance at 0.63269 at the swing high in line with the 78.6% fibonacci retracement. Alternatively, price may break the support structure at the 1st support and drop to the 2nd support at 0.61354 at the pullback support.

Areas of consideration:

• H4 time frame, 1st support at 0.62073
• H4 time frame, 1st resistance at 0.63269

USD/CAD:

On the H4, with the price breaking the ascending channel, we have a bearish bias that the price may drop from our 1st support at 1.28166, which is in line with swing lows to our 2nd support at 1.27578, which is in line with the 161.8% fibonacci extension. Alternatively, the price may rise to the 1st resistance at 1.29509, which is in line with the overlap resistance.

Areas of consideration:

• H4 time frame, 1st support at 1.28166
• H4 time frame, 2nd support at 1.27578

OIL:

On the H4, with price moving along the bearish channel, we have a bearish bias that price might drop from our 1st resistance at 106.178, which is in line with the close swing high price to our 1st support at 102.304, which is in line with 50% fibonacci retracement. Alternatively, as the price is almost at the upper bound of the channel, the price may rise to 2nd resistance at 108.527, which is in line with overlap resistance. Take note the breakout point of 107.324 could be our intermediate resistance, which dropped after breaking the descending channel.

Areas of consideration:

• H4 time frame, 1st resistance of 106.178
• H4 time frame, 1st support of 102.304

Dow Jones Industrial Average:

On the H4, with price moving with a bearish channel and having a bullish break, we have a bullish bias that price might rise from our 1st resistance at 32227, which is in line with the swing highs to our 2nd resistance at 32767, which is in line with overlap resistance. Alternatively, price may reverse off the 1st resistance and drop to the 1st support at 31525, which is in line with the overlap support and 38.2% fibonacci retracement, if the price keeps going down, it may drop to our 2nd support at 30978, which is in line with 61.8% fibonacci retracement. Take note the price is testing the support of 31682.

Areas of consideration:

• H4 time frame, 1st resistance of 32227
• H4 time frame, 2nd resistance at 32767

• USD/JPY's ascendance showing potential signs of cooling
• Insufficient evidence yet of any dramatic retracement or reversal
• 135 and 131.50 are key levels to watch

Warning Signs Flashing

USD/JPY has been one of the latest entries into my higher frequency watchlists after price failed to make a substantive new higher low on the 22 July. As a result, I’m more vigilant for possible signs of reversal and see some pretty big risks buying ahead of Wednesday’s Fed decision. I’m too worried that either the 21 June 22 high of 136.710 or 29 June 22 high of 137.005, mark the first shoulder in a yet to be formed head and shoulders pattern or set the path toward a double top or triple tip formation. RSI divergence between the 14 June swing high of 135.495 and the subsequent 14 July swing high of 139.394 also adds to my new found caution.

Waiting for a Catalyst

Still, ample evidence to suggest that USD/JPY has reached its peak is lacking. Granted, down by c. 19% against the US dollar year to date, the Japanese yen has been the worst performing currency, but that alone doesn’t mean it is ripe for a reversal. Most of the fundamental conditions that have led the pair higher haven’t shifted; aggressive Fed tightening vs. ultra loose monetary policy from the BoJ persists, as do high energy prices and fears of global recession. In my opinion, the fundamental catalysts needed to reverse the yen’s fortunes, although brooding, have yet to appear.
Key Levels to Be Broken

Likewise, price is still well above its 200-day exponential moving average. This makes me cautious of being too bearish USD/JPY, even if the gap between the current price and the moving average look extreme. Were price to break below 135 underpinned by decent volumes I might become more convinced that USD/JPY’s fortunes have taken a shift for the worse. Even more substantive, would be a sustained break below the 131.50 level. At the moment, we are still a long way off from that level.

The gas story is in no hurry to leave the news headlines, and prices for the energy sector are behaving accordingly. In Tuesday’s trading in Europe, prices returned to the psychologically crucial round level of $2,000 per 1,000 cubic metres – around the December peak and the highest since mid-March.

Gas on the trading floor in the Netherlands closed above the current level of 2033 for only three days in early March. But then, due to logistical difficulties, gas prices in the US moved in a counter-phase.

Now that the USA is heralded as the world’s leading LNG exporter, gas prices in Europe and the USA are moving in the same direction. As a result, Natural Gas prices have risen by more than 7% in New York, exceeding $9.1 per 1,000 Btu, close to the highs of early June.

While the geopolitical situation has changed little in the meantime, and oil and gasoline prices have retreated significantly from the highs of early June, the nearest gas futures price has risen by more than 70% in the past 20 days.

Despite a fivefold increase from the lows of two years ago and proximity to the year’s extremes, US gas has ample upside potential. The price was above $13.5 in mid-2008, and the supply situation is much worse now that relatively wealthy Europe needs gas. In contrast, at that time, developing countries were pulling prices up against the recession-stricken US and UK.

Short-term price dynamics are determined more by uncertainty about supplies from Russia and the ability to replace them with other countries than by a persistent link to the economic growth rate.

The situation leads us to the view that we will see more sharp market movements soon, related both to technical factors (short squeeze) and sentiment as well as to attempts by consumer country politicians to disrupt the one-way move in this market.

July appears to be the start of the sharpest wave of strengthening in gas prices, with the potential target being the $14 area – above the 2008 highs – where the price could end up in the next two months.

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Turmoil ensues in the global financial scene with rampant inflation, amplified recession fears and wide-reaching geopolitical risks, have investors scramble to reassess the future prospects of the shiny metal. Not only that, but the declaration of monkeypox as a global health emergency from WHO, stirred the waters even more and raised the inevitable question of how governments might respond towards this new threat and what implications will it have on the grander scheme of things. Having said that, in this report we aim to shed light on the current and upcoming events that are of crucial importance for the future development of the precious, as well as a technical analysis of assessing its potential short-to-medium horizon.

Gold’s price has been confined in a sideways price action for the past few sessions, slightly above the $1,700 range, possibly showcasing an absence of conviction on where it might lead to next. Traders brace themselves for tomorrows’ scheduled Fed’s interest rate hike decision and the follow-up speech by Chairman Jerome Powell, awaiting in anticipation on whether the hike will meet the 75-basis point consensus or will there be an upshot surprise of 100 basis points hike. Should the rate match the expectation we might see a rather small yet supporting reaction towards the greenback as the decision is already mostly priced in and could in turn weigh slightly on the precious. However, should the Fed’ opt for an even more aggressive hike and take the market by surprise, then we might see the dollar get a substantial boost and as consequence observe the precious retract, becoming more expensive and thus unattractive for international investors. The aggressive rate hike stance by the Fed, comes after the four-decade high of the consumer price index rate, released in June, exacerbating fears that inflation will take a toll on the consumer front and become entrenched in the economy for longer. On the flip side, should the Fed opt in for the more aggressive monetary policy tightening option in the following months, we might also see the probability of the US economy entering a recession increase to 40%, according to Reuters, thus the chances for a “soft-landing” dwindle drastically in our opinion. Another factor that might impact the shiny metal’s future outlook are the bond yields. Even though gold is considered a safe haven and a hedge against inflation, it could fall out of favor when contrasted with the US treasuries as, the precious bears no-yields. Bond yields however, and the US 10 year in particular, has been declining for the past few sessions which could provide support for gold making it a viable option for investors’ portfolios, thus increasing the demand for bullion.

Finally, we also note the upcoming financial releases for the US, namely the GDP rate figure for Q2 to be released on Thursday the 28th of July alongside with the Initial jobless claims figure for last week and on Friday the 29th of July, the Consumption rate for June and the University of Michigan’s final market sentiment report for July, all being of material importance for the dollar and as a consequence for gold’s price.

Technical Analysis

XAUUSD H4

Looking at the XAUUSD 4H chart we can observe the descending trendline initiated on the 13th of June, which highlights the lower peaks and lower troughs of the precious. However, we also observe the stalling and the confinement of the bullion’s price action between the 1716 (S1) support line and the 1736 (R1) resistance line, since the 20th of July, possibly showcasing traders’ indecision towards the shiny metal, ahead of the Fed’s rate decision tomorrow 28th of July. Thus, we hold a sideways price action bias for gold’s for the time being. Supporting our case, is the RSI indicator below the 4H chart, flat lining on the 50 level and the convergence of the price action with the 20 moving average line of the Bollinger bands. Should the bulls take over and for us to change our assessment, we would require a clear break of the 1736 (R1) resistance level, the descending trendline and a possible challenge of the 1752 (R2) resistance line. Given though the pre-mentioned downward trendline and should the bears reign over, we may see the break below the 1716 (S1) support level and the move past the 1702 (S2) support barrier. While in an extreme bearish scenario we may see golds price approaching the 1682 (S3) support hurdle. Please note that higher than usual volatility may be present for gold’s price at the time of the release of the Feds interest rate decision, hence caution is advised should gold traders be active at that time.

US Conference Board Consumer Confidence dropped from 98.4 to 95.7 in July, below expectation of 96.3. Present Situation Index dropped from 147.2 to 141.3. Expectations Index dropped from 65.8 to 65.3.

"Consumer confidence fell for a third consecutive month in July," said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. "The decrease was driven primarily by a decline in the Present Situation Index—a sign growth has slowed at the start of Q3. The Expectations Index held relatively steady, but remained well below a reading of 80, suggesting recession risks persist. Concerns about inflation—rising gas and food prices, in particular—continued to weigh on consumers."

"As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes, and major appliances all pulled back further in July. Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months."

Full release here.

Markets

Recession fears continue to haunt European markets. The EMU PMI last week falling below the 50 boom-or-bust level and yesterday’s poor German IFO flagged a sharp deceleration of activity going into H2. Russia reducing gas supply a few days after restarting deliveries via the Nord Stream 1 pipeline only highlights the risk for a big winter supply shock paralyzing key parts of the economy. EMU bond investors increasingly embrace the recession narrative. German yields again tumble between 7.5 bps (2-y and 30-y) and 9 bps (5 & 10-y), the belly of the curve outperforming the wings. After clearing key 1.12%/1.18% support, the German 10-y yield (0.92%) decisively slips below the 1.0% barrier. The 10-y euro swap (1.74%) extends its journey south of 2.0%, with next support near 1.63% (May bottom). Short-term yields show a bit more resilient. Even so, markets ever more question whether the ECB will be able to hike its deposit rate above 1.0% going into the end of the year. Interesting to see whether EMU CPI data later this week will be able to at least partially rebalance the market focus from growth back to inflation, annex the ‘unavoidable’ need further ECB tightening. On intra-EMU bond markets, Italy underperforms (10-y spread vs Germany +5 bps) as markets question the country’s access to next tranches of the EU recovery fund as the country’s reform agenda might stall due the upcoming elections. US yields also stay on a downward trajectory as markets are counting down to tomorrow’s Fed policy decision. Will the Fed also slow the pace of rate hikes beyond tomorrow’s widely expected 75 bps hike? US yields are easing between 4bps (2-y) and 7 bps (5/10-y). European equities are ceding up to 1.0%. The Nasdaq opens with a similar loss. Despite recessionary fears, cyclical commodities including copper, iron ore and oil show tentative signs of bottoming after recent setback. The reference Dutch gas contract jumps to the highest level since March (194.5 EUR/MWh)

Of late, a ST topping pattern in the US dollar and last week’s ‘unexpected’ 50 bps ECB hike temporary gave the euro some reprieve. However, with any upside attempts decisively blocked in the 1.0275 area, EUR/USD today again fell prey to the forces of gravity, trading near 1.0140 compared to opening levels around 1.0220. The move this time was mainly euro weakness rather than USD strength. USD/JPY even declines marginally (136.3). EUR/CHF even dropped to a new multi-year low (0.9770) illustrating the euro underperformance. EUR/GBP also dropped to the 0.845 area, even as cable struggles not to fall below the 1.20 barrier.  

News Headlines

The Hungarian central bank (MNB) lifted policy rates by 100 bps. The base rate now stands at 10.75%. On Thursday, the central bank will bring the one-week deposit rate to that same level. Underpinning the decision are strong and intensifying price pressures. Inflation hit 11.7% in June, core measures even 13.8% y/y. Rising costs continue to quickly feed through to consumer prices, the MNB says. With prices expected to keep accelerating into the autumn months, risks for second-round effects build unabatedly and must be addressed. The MNB will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the MNB’s 3% target in a sustainable manner and inflation risks become evenly balanced. The Hungarian forint left intraday lows behind after the policy statement was published but risk-off limits the currency’s upside. EUR/HUF is trading around the 400 barrier.

Europe already reached a political agreement to cut the use of gas by 15% next winter. The Commission proposed to do so only last week. The fast approval comes as the threat of Russia fully cutting off gas supplies is increasingly turning reality after the country announced it will take another turbine offline for maintenance. Supplies from Wednesday on will reduced from 40% of capacity to just 20%. Gas consumption cuts are voluntarily though can become mandatory under request of at least 5 countries or if the Commission deems there’s a high risk of a shortage. Both scenarios need majority backing from member states.