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Frontloading policy tightening is the talk of the town on interest rate markets these days. The Bank of Canada was leading by example as it yesterday raised its policy rate by 100 bps The move was justified as serving a soft landing as it hopefully removes the need to raise rates higher and longer further down the road. A 9.0%+ US inflation print fully opened the debate whether the Fed should consider a similar move on July 27. Markets think it’s likely. This morning, the Monetary Authority of Singapore and the central bank of the Philippines provided evidence that the frontloading recipe is broadly applicable. Strong labour data caused the debate to spill over to Australia. EMU markets of late were focused on recession risks rather than on the need for aggressive ECB anti-inflationary action. Yields recently even were at risk of falling below key supports (2-y swap 1.05/10% area, 10-y swap 2.0% area, 10-y Bund 1.15/18% area). Investors finally realized that the ECB in one why or another will also face the question how far it can stay behind the curve as inflation mounts. Short-term EMU yields intra-day jumped almost 20 bps, but ‘enthusiasm’ faded later. German yields currently rise between 12 bps (2-y) and 2.5 bps (30-y). Aside from inflation fear and recession risk, EMU bonds (and the euro) are facing a new headwind from a political crisis in Italy. A no confidence vote might cause PM Draghi to resign. Next steps in the process are unclear for now. The combination of higher yields, the Italian crisis and global risk-off widens the Italian 10-y spread over Germany by 16 bps. Spain/Portugal add 6 bps. The US flattening trend continues with yields rising between 10 bps (5-y) and 3 bps (30-y). US data were mixed with the headline PPI printing higher than expected at 11.3%, but jobless claims rising 244k. Persistent political uncertainty annex recission fears keep European equities in the defensive (Eurostoxx -1.5%). First US Q2 earnings from major banks also didn’t help sentiment (S&P -1.5%). Brent oil extends its journey below $100 p/b ($ 97.25).

Anticipation on potential Fed frontloading keeps de dollar in the driver’s seat. The DXY index (108.8) is touching the highest levels since September 2002. This move is mainly driven by USD/JPY as the pair surpassed the 139 big figure. EUR/USD initially copied the price pattern from the previous days, hovering between 1.005 and 1.0000, but finally forced the break (0.996). Interestingly, the Aussie dollar and even more the loonie don’t profit from the CB’s proactive monetary policy. The Canadian dollar even underperforms against the euro (EUR/CAD gains 2 big figures, 1.316). The sterling rally from last week/early this week also stalls. EUR/GBP rebounds to the 0.846 area.
 
News Headlines

Hungary’s EU funds minister Navracsics told the Mandiner weekly that they don’t rule out the possibility of accepting the jurisdiction of the EU’s chief prosecutor. Orban earlier called such measure a red line which infringes on national sovereignty. However, the PM is getting in dire straits when it comes to funding his lavish fiscal policy. Over the past weeks, his cabinet has been courting the EU in order to overcome their stand-offs and secure the release of EU funds under the multi-annual budget framework and pandemic-related. The EU delayed disbursements of up to €37bn, about €10bn of which can’t be recovered after the end of this year without deal. The forint strengthened slightly on the news, from EUR/HUF 412 to 407. Earlier on the day, the local currency tended to weaken following the Hungarian national bank’s decision to keep its 1-week deposit rate unchanged at 9.75%.

Swedish inflation (CPIF; CPI with fixed interest rate) unexpectedly accelerated by 1.2% M/M to 8.5% Y/Y (from 7.2% Y/Y), the highest level in over three decades. The monthly change was mainly driven by price increases in transport (mainly higher fuel prices). All other categories rose as well with lower prices on clothing (seasonal summer sale) being the exception. The Swedish swap yield curve bear flattens significantly today with yields rising by 18.3 bps (2-yr) to 6.7 bps (30-yr). Money markets discount a 100 bps (!) rate hike by the Riksbank in September. As we’ve seen before over the past weeks/months, the local currency doesn’t really profit from this frontloading for rate hikes. EUR/SEK trades stable around 10.60.

Daily Pivots: (S1) 1.0000; (P) 1.0037; (R1) 1.0074; More...

EUR/USD's fall continues today and intraday bias stays on the downside. Firm break of 100% projection of 1.1184 to 1.0348 from 1.0773 at 0.9937 could prompt downside acceleration to 161.8% projection at 0.9420. On the upside, break of 1.0121 minor resistance will turn intraday bias neutral again. But outlook will stay bearish as long as 1.0348 support turned resistance holds.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0773 resistance holds, in case of rebound.

Daily Pivots: (S1) 1.1823; (P) 1.1895; (R1) 1.1962; More...

GBP/USD's down trend resumed after brief recovery and intraday bias is back on the downside. Current fall should target 100% projection of 1.2666 to 1.1932 from 1.2405 at 1.1671. Decisive break there will target a test on 1.1409 long term support. On the upside, above 1.1966 minor resistance will turn intraday bias neutral against and bring more consolidations.

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 1.3065).

Daily Pivots: (S1) 0.9752; (P) 0.9794; (R1) 0.9830; More...

USD/CHF's rise resumed after brief retreat and intraday bias remains on the upside for retesting 1.0063 high. Decisive break there will resume larger up trend. On the downside, break of 0.9754 will dampen the bullish view and turn bias neutral again first.

In the bigger picture, medium term up trend from 0.8756 (2021 low) is still in progress. Next target is 1.0342 (2016 high). Sustained break there will resume long term up trend from 0.7065 (2011 low). This will remain the favored case as long as 0.9471 resistance turned support holds.

Daily Pivots: (S1) 136.39; (P) 136.96; (R1) 137.44; More...

Intraday bias in USD/JPY remains on the upside for the moment. Current up trend should target 100% projection of 114.40 to 131.34 from 126.35 at 143.29. On the downside, below 137.74 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

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) 1.2988; (P) 1.3019; (R1) 1.3055; More...

USD/CAD's strong break of 1.3082 confirms up trend resumption . Intraday bias is back on the upside. Next target is 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. For now, outlook will stay bullish as long as 1.2935 support intact, in case of retreat.

In the bigger picture, the firm break of 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022 should confirm that down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise should be seen to 61.8% retracement at 1.3650 next. This will now remain the favored case as long as 1.2516 support holds.

Dollar stays strong in early US session after release of another record print of PPI inflation. Buying of Dollar is currently concentrated again Yen and Canadian. But the moves in Aussie and European majors are also picking up. Loonie is the worst performing one today, despite the mega 1% rate hike by BoC yesterday. It's some what weighed down by oil prices, with WTI breaching April's low. Yen is currently the second worst.

Technically, EUR/USD breaks parity with another fall today. A main focus is indeed on 100% projection of 1.1184 to 1.0348 from 1.0773 at 0.9937. As long as this projection level holds, there is still prospect of a near term rebound. However, sustained break there could prompt further downside acceleration to 161.8% projection at 0.9420. This should be decided in the next few days.

In Europe, at the time of writing, FTSE is down -1.36%. DAX is down -1.64%. CAC is down -1.56%. Germany 10-year yield is up 0.0607 at 1.203. Earlier in Asia, Nikkei rose 0.62%. Hong Kong HSI dropped -0.22%. China Shanghai SSE dropped -0.08%. Singapore Strait Times dropped -1.22%. Japan 10-year JGB yield dropped -0.0029 at 0.235.

US PPI rose 1.1% mom in July, 12-mnth rate at record 11.6% yoy

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.

US initial jobless claims rose to 244k, slightly above expectations

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.

EU downgrades 2022 Eurozone GDP forecasts to 2.6%, 2023 to 1.4%

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."

Australia unemployment rate dropped to 3.5%, lowest since 1974

Australia employment grew 88.4k in June, above expectation of 30.0k. Full time jobs grew 52.9k while part-time jobs rose 35.5k. Unemployment rate dropped sharply from 3.9% to 3.5%, below expectation of 3.8%. That's the lowest level since August 1974. Participation rate rose from 66.7% to 66.8%. Monthly hours worked was essentially unchanged at 1856m.

Bjorn Jarvis, head of labour statistics at the ABS, said: "The 3.4 per cent unemployment rate for women was the lowest since February 1974 and the 3.6 per cent rate for men was the lowest since May 1976."

"The large fall in the unemployment rate this month reflects more people than usual entering employment and also lower than usual numbers of employed people becoming unemployed. Together these flows reflect an increasingly tight labour market, with high demand for engaging and retaining workers, as well as ongoing labour shortages."

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2988; (P) 1.3019; (R1) 1.3055; More...

USD/CAD's strong break of 1.3082 confirms up trend resumption . Intraday bias is back on the upside. Next target is 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. For now, outlook will stay bullish as long as 1.2935 support intact, in case of retreat.

In the bigger picture, the firm break of 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022 should confirm that down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise should be seen to 61.8% retracement at 1.3650 next. This will now remain the favored case as long as 1.2516 support holds.

Economic Indicators Update

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.