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The Bank of Canada is widely anticipated to raise interest rates again on Wednesday, but expectations are high that it will be a super-sized increase this time when the decision is announced at 14:00 GMT. With inflation expectations running at a record and the labour market still tight, the BoC could signal more big rate hikes are on the way. But will policymakers voice some concerns about the growth outlook amid rising recession risks globally, and can the Canadian dollar find its feet against the mighty greenback?

BoC poised for jumbo rate hike

The Canadian economy is in a relatively good place right now. It isn’t facing a severe energy crunch like Europe, it isn’t as exposed to China’s on-and-off lockdowns as Australia and New Zealand are, and it may even have more momentum than the US economy, which has lost substantial steam lately. The comparably upbeat picture can be backed by a red-hot labour market and an inflation rate fast approaching 8%.

This has left investors in no doubt that the Bank of Canada will press on the brakes harder at its July meeting, having hinted in June that it is “prepared to act more forcefully if needed”. Hence, market pundits are fully convinced that the overnight target rate will be raised from 1.50% to 2.25%, with some even predicting a 100-basis-point hike.

That then puts the spotlight on what the BoC’s intentions are after July: will policymakers maintain the quicker pace of tightening at subsequent meetings, or will they be wary of a possible downturn in the economy towards the end of the year?

Canada’s economy could be slowing

The risk of a recession is growing in the UK and Eurozone and there is speculation that America is already in one. There is no immediate danger in Canada, especially as its economy is being shored up by high oil prices, but there has been some deterioration in the data.

Economic activity slowed to a four-month low in June according to the Ivey PMI and employment fell unexpectedly during the same month. The drop isn’t seen as too worrying just yet and the unemployment rate continued to decline, reaching an all-time low of 4.9%. But there are also concerns about the housing market, which appears to be cooling and home prices likely peaked in February.

Inflation expected to stay high

But like other central banks, the BoC has to balance growth risks with its 2% inflation target. Although oil prices have been under pressure ever since mid-June when the recession panic set in, supply remains very tight and could get even tighter in the coming months, meaning there doesn’t seem to be any significant let-up in energy prices in the medium-term horizon. Hopes for an easing in supply shortages are diminishing too as major industrial regions in China keep being placed under lockdown orders, creating knock-on effects on global supply chains.

The BoC’s own business outlook survey published last week showed inflation expectations have surged over the last quarter. But what likely set off alarm bells for policymakers is that short-term expectations for inflation by consumers have risen to a record high, while many firms are planning to increase wages at a faster rate in a bid to retain staff. Wage growth accelerated to 5.6% y/y in June, reflecting how widespread labour shortages are becoming.

Can the loonie gain from a hawkish decision?

All this will probably keep the BoC leaning towards the hawkish side on Wednesday and Governor Tiff Macklem could well flag more ‘forceful’ action at the September meeting in his press conference. But investors will also be sifting through the Bank’s quarterly economic forecasts due to be published the same day for clues on the growth outlook. If the latest projections aren’t too pessimistic and the risk of a recession in Canada is seen as quite low, that could provide some much-needed upside for the loonie.

The US dollar is currently trading near the strong C$1.3075 resistance region. A hawkish statement and not so gloomy growth forecasts would reinforce this barrier and potentially push dollar/loonie down towards the 50-day moving average, which is close to converging with the 61.8% Fibonacci retracement of the May-June downleg at C$1.2862.

A strong US dollar is an obstruction

However, if the BoC is reluctant to signal another 75-bps rate hike and expresses some serious doubts about the growth prospects over the next year, dollar/loonie might finally be able to break above the C$1.3075 resistance and head towards the 123.6% Fibonacci extension of C$1.3208.

Overall, out of all the big central banks, the odds of a dovish tilt are probably the lowest for the Bank of Canada, and while the loonie has enjoyed solid gains versus all other majors over the last 12 months, it looks set to continue to struggle against its US rival due to the greenback’s status as the preferred safe-haven currency in the current uncertain economic environment.

The price of gold fell to a new nine-month low on Tuesday, at one point falling below $1725. In the region of $1720-1740, gold has been finding support in the declines of the last 15 months, and the daily charts clearly show that gold sellers have been slowing down lately.

Interestingly, gold has been living its life in the last few days, experiencing a sharp drop earlier in the month, but gaining support last week. Judging by the market dynamics, the most aggressive decline of the single currency in the previous week has supported gold buying.

Since March, the euro gold price has already found support on several occasions at the approach of the €1700 area, an important milestone, and the area of the high in August 2020, maintaining a substantial downside potential.

It would be naive to assume that buying gold now would protect capital in the event of existential problems in the Eurozone. But this assumption is difficult to confirm with history.

In 2012, gold was losing with the euro, and it only reversed upwards in the second half of the year following the recovery of the eurozone confidence.

Gold has reached the 61.8% of the 2018-2020 growth wave with accumulated local oversold. In such an environment, a short-term rebound is highly likely, which would be true if the dollar also loosens its grip.

However, a rebound in the coming days could prove to be a bull trap or not at all. Towards the most pessimistic scenario, seasonality and downside potential on higher timeframes is in favour.

Gold rarely changes its chosen trend in March-April, but it often does so in August-September. On the weekly candlesticks, the gold is far from the oversold area, and it is easy to see that we have seen reversals on these intervals when the oversold area is touched.

A potential target for the bears could be the 200-week moving average, pointing upwards and now passing through $1650.

Markets

EUR/USD is a highly frequented chart these days. With yesterday’s slide at the start of the week, the pair was less than a whisker away from parity. The decline extended in Asian and most of European dealings, leading EUR/USD to hit 1.00 exactly at 11:46 am according to the Bloomberg terminals. This 20-year low was immediately followed by some technical return action higher, suggesting it serves as a strong psychological barrier to break. At the time of writing, EUR/USD is changing hands in the 1.005 area. We fear it’s only a matter of time before a break occurs. If not today, then perhaps tomorrow with the release of US CPI that may bring back the focus to the Fed and its aggressive tightening campaign. We suspect a lot of stop-losses will be triggered in case EUR/USD goes sub 1, causing the downleg to accelerate. The test of parity happened against the same background as yesterday, i.e. risk aversion. This was visible in other currency crosses as well with the Japanese yen outperforming peers. USD/JPY is taking a step back to 136.79, EUR/JPY extends a series of declines to 137.34. Unlike yesterday, sterling is trading a bit more in the defense. EUR/GBP (0.846) recoups part of Monday’s losses but still falls way short of returning to the upward sloping trend channel. Fallout on equity markets stayed limited today. The EuroStoxx50 erased losses of as much as 1.3% to trade flat currently. US markets open with minor gains (up to 0.8% in the Nasdaq). Core bonds surged. German Bunds continue to outperform US Treasuries. German yields/European swap yields drop between 8/9 bps at the front end and 15+ bps at the long(est) tenors. Germany’s 10y yield is testing the critical 1.12%/1.15% support level. The European 10y swap yield (-13bps)  is struggling and currently failing to retain the 2% barrier. US bond yields shed 7.2 bps (2y) to 8.8 bps (20y) in a bull flattener. Testament to recessionary risk aversion is a further decline in the likes of oil, even as OPEC’s first 2023 outlook shows no relief in the oil market squeeze. A barrel of Brent eases almost $5 to $102.2. The limited batch of data available today told the same story. Germany’s ZEW dropped way more than expected with the current situation gauge falling from -27.6 to -45.8. Expectations fell off a cliff, from -28 to -53.8 (-40.5 expected), the lowest since the sovereign debt crisis in 2011.

News Headlines

The National Bank of Poland (NBP) in its July economic forecasts again revised the central path for inflation sharply higher from the March forecast. The NBP now expects 2022 inflation at 14.2% (from 10.8% in March) and at 12.3% next year (from 9.0%). Inflation is still expected at 4.1% in 2024. According to the new forecast Y/Y inflation is expected to peak in the first quarter of next year (18.8%). The NBP has an inflation target of 2.5% (+/-1.0ppt). At the same time, growth for this year was upwardly revised to 4.7% Y/Y (from 4.4%), but is expected to slow to 1.4% next year (from 3.0%), also reaching a bottom in Q1 next year (0.5% Y/Y). The ‘stagflationary outlook’ comes as the NBP last week raised its policy rate by a smaller than expected 50bps to 6.50% and as NBP governor Glapinski signaled that the NBP is nearing the end in its tightening cycle. Polish rates are rising sharply today in line with regional (risk-off) momentum (2-y swap +25bps). The zloty weakened to EUR/PLN 4.85 intraday, but currently trades near 4.80.

The central bank of Hungary today raised the base rate by 2.0% to 9.75%. The MNB last week indicated that it intended to close the gap between the 1W week deposit rate and the base rate after it hiked the 1W rate to support the forint. The MNB today reiterated it stands ‘ready to respond quickly and flexibly by setting the interest rate on the one-week deposit instrument if warranted by the rise in short-term risks in financial and commodity markets’. ‘The further rise in inflation and persistent inflation risks warrant the decisive continuation of the tightening cycle. The MNB continuously monitors developments in financial market risks as well and stands ready to intervene in a decisive manner using every instrument in its monetary policy toolkit, if necessary’. Until now, the MNB rate hikes were no game-changer for the forint. The forint this morning traded at EUR/HUF 414.5, within reach of the all-time low, but gained modestly after the MNB interest rate decision (currently 408). Short-term rates in Hungary continue to rise. The market now sees the top in the rate hike cycle only a tad below 13%.

The US dollar has been trading like a rocket lately, crushing every other major currency as recession concerns pushed investors into the safety of the reserve currency. The latest inflation numbers at 12:30 GMT Wednesday and retail sales on Friday will be crucial in determining whether this trend still has some miles left in the tank as euro/dollar battles with parity.  

All weather currency 

A unique dynamic has been playing out over the past few months - all news has been good news for the US dollar. Either economic data is strong and traders become more confident the Fed will raise interest rates at a faster clip to control inflation, or disappointing data magnifies recession concerns and the reserve currency attracts safe-haven flows.

Either way, the dollar tends to benefit. This is also because there is no alternative, as every other major currency is wrestling with its own problems. The euro has been smothered by the energy crisis, the Bank of Japan’s refusal to consider higher rates has wrecked the yen, while abysmal risk sentiment has left its marks on sterling and commodity currencies.

One of the few elements that can change this ‘strong dollar’ dynamic is a serious slowdown in inflation that lessens the pressure on the Fed to hike rates ferociously, elevating the importance of the upcoming data.

Inflation and retail sales

The show will get started with CPI inflation stats on Wednesday. The forecast is for the monthly rate to clock in at 1.1%, an acceleration from the 1.0% in May. This would propel the yearly rate higher to 8.8%, from 8.6% previously.

That said, some signs suggest inflation has started to lose its punch. For instance, the S&P Global PMI survey reported that service sector companies raised their selling prices at the softest pace since last September because demand has started to falter. Similarly, used car prices and various commodity prices have started to roll over.

This would suggest that the risks surrounding the inflation report are tilted toward a slight disappointment, although the catch is that it might be too soon for the retreat in commodity prices to have a meaningful impact on inflation. It will probably be more visible next month.

Then on Friday, retail sales for June will hit the markets. Expectations are for a rebound in monthly terms, although it is the yearly rate that tells the story. It currently stands at 8.1%, below the inflation rate, showing that real consumption of goods has essentially been stagnant.

What’s next

In the markets, any disappointment in the upcoming data would likely lead to some profit-taking in the dollar. Taking a technical look at euro/dollar, there is not much resistance until the 1.0350 zone, which is quite far from current prices. Perhaps 1.0180 might come into play before that - an area that is more visible on the four-hour chart.

In the bigger picture, it’s difficult to envision any trend reversal in the dollar until the situation in the rest of the world begins to improve. For instance, if some more energy production comes back online, that would lessen the pressure on the euro and yen. Some good news from Ukraine could have the same effect.

A persistent slowdown in US inflation might also do the trick, although the reason why inflation drops will also matter for the dollar. If inflation is cooling because demand is falling apart and markets are panicking about recession, safe haven demand could continue to support the reserve currency even if some Fed hikes are priced out.

What is needed is a supply-driven improvement in inflation, before the dollar can really retreat. That’s not on the radar yet, which suggests the rally might still have legs. A decisive move below the parity level in euro/dollar could signal a resumption of the trend, opening the door towards the 0.9860 region.

The NFIB's small business optimism index dropped in June to 89.5 from 93.1 in May, below the consensus forecast, which expected the index to dip marginally to 92.5. The index has been below the historical average since the beginning of the year.

All ten subcomponents declined. Firms, expecting higher real sales collapsed by 13 points, while those expecting the economy to improve and planning to increase employment fell 7 points each. Small businesses believing that now is a good time to expand fell by 3 points and so did those reporting inventories "too low" and planning to add more inventories. The remaining sub-components deteriorated marginally by 1 or 2 points.

Labor market indicators were mixed in June. A net 48% of firms raised compensation to attract workers (down 1 point over May), but 28% of firms are planning to raise compensation in the next 3 months (up from 25% in May). Firms planning to increase employment dropped by 7 points to 19%, while the number of firms with unfilled job openings declined by 1 point to 50% - still relatively high by historical standards.

Key Implications

This was a glass more than half empty report as a greater share of small business owners are becoming increasingly bearish on the economy. Firms expecting better business conditions dropped to the lowest level in the history of the survey, with a smaller proportion of firms expecting higher real sales and fewer firms able to raise prices. This suggests that business are not confident they will be able to pass rising costs to consumers going forward.

Despite this, demand for labor remains high with a much higher than average share business owners unable to fill job vacancies. Firms continue to raise red flags about the quality of labor supply, with roughly a quarter of them reporting it as the single most important factor. Businesses may be able to attract higher quality workers by raising wages and, indeed, many firms are doing or planning to do so.

Higher costs are expected to erode profits and is the reason business optimism is deteriorating. And so it may continue until we see further easing in the current labor demand-supply mismatch accompanied by softer price gains. We'll report on the latter tomorrow morning. Stay tuned!

The precious metal continues to be under pressure as the dollar soars to new highs as a response to the aggressive interest rate hiking agenda of the US Federal reserve, in an attempt to ease rogue inflation that whiplashes the economic market and as consequence puts extensive pressure on the consumer front. Gold exchange traded funds saw record outflows in the past two months as the market continues to price in the possibility of a recession and the safe haven asset falls out of favor. In this report we aim to shed light on the events of the recent past and upcoming events that are of crucial importance for the future development of the bullion, as well as a technical analysis assessing its potential short-to-medium horizon.

XAU/USD fell below $1,800 per troy ounce last week, plunging well below, closing the week near the $1,740 level once seen before at the end of September 2021. Currently gold marks its fourth consecutive month trading in the reds, since reaching the $2,000 level amidst the Russian invasion of Ukraine. Aiding to the deterioration of gold was also the piping hot inflation levels currently experienced worldwide, forcing central banks to sprint into action, attempting to contain it by tightening their monetary policies. More specifically, in Fed’s June meeting minutes, it was stated that FOMC will continue to march aggressively towards a 75-basis point rate hike at their next meeting. Aligning in favor with their monetary policy agenda, was the employment report release for June last Friday, where the results indicated that the US labor market is still tightening given also that the actual rates and figures were better than forecasted. The relatively speaking, favorable results sent the USD Index on upward spiral extending its already overextended rally, north of the 108 level, territory last seen 20 years ago. This in effect contributed to the precious metal sliding even lower, given the negative correlation of the two trading instruments.

On another note, New York’s Federal Reserve president John Williams, commented on 8th of July, that US economic growth could fall below 1% this year and remain stagnant throughout 2023, as Fed’s primary objective is curbing inflation. This statement puts him at the low-end spectrum of the Fed’s recent growth projections. He also commented that, even though, the June’s unemployment rate report remained stable at 3.6% for the fourth consecutive month, he projects that rate to rise to 4% during 2023. The projections towards economic growth restrictions, continuation of the inflationary pressures and central bank’s aggressive responses could in fact weigh down on the shiny metal even more.

Further evidence supporting extension towards the downside comes from derivative trading analytics. Dealers in the COMEX market assess institutional investors’ appetite and sentiment for gold, using the net-long position metric, and data indicates that fewer institutional investors expect a rally of the yellow metal in the short-term. Furthermore, precious metal strategists also point to hesitancy towards adding gold to their portfolios and await evidence indicating the transition of the global economy into stagflation, looking forward for the end of the Fed’s tightening cycle.

In terms of financial releases coming up in the next days, we note the release of the highly anticipated US CPI rates on MoM basis for June and the YoY, tomorrow 13th of July, where an increase could justify the Fed’s hawkish plans for the next meeting and most likely will cause the Bullion’s price to deteriorate further.

Technical Analysis

XAUUSD H4

Looking at XAUUSD 4H chart we can observe its downward sloping trend initiated on the 13th of June where it started to slide from the $1878 level, reaching lower peaks as time went by, without finding much support to ease its fall. On the 5th of July, it broke below the $1800 mark plunging lower, finding support at the $1720 (S1) support level, an area once visited before in August 2021. Having said that, we maintain a bearish outlook bias for the future continuation of the precious metal’s price action. Supporting our case is the RSI indicator found below our 4-hour chart, which closes in on the 30 oversold level showcasing the negative sentiment surrounding gold at the current time. Also worth pointing out, is the price action taking place near the lower bound of the Bollinger band, adding to our case. Should the bears continue to reign over, we might see a break below the $1720 support (S1) line and a move close to the $1700 (S2) support barrier. Should the bulls take over however, and for us to change our assessment towards a bullish bias, we would require seeing a break above the $1783.6 resistance (R1) line and a definitive move towards the $1812 resistance (R2) level.

USD is trading higher, at 1:1 vs EUR, which is a very big level. At the same time, we also see stocks moving slightly lower but this can be an only short-term intraday weakness as traders will mostly stay patient or on the sideline till tomorrows important US CPI figures. Keep in mind that if inflation would slow down, just slightly, then this can be the first point to limited interest rate hikes by the FED and US yields may come down and pull DXY lower as well.

From an Elliott wave perspective we see EURUSD moving to a very big level now; currently seen in a fifth wave here around party, As such, I would not be surprised if we see some back and forth moves around this figure, or ideally even a technical reaction higher in the near term. From an Elliott wave perspective, a three-wave rally is something we would normally expect after five waves down from 1.0615.

Daily Pivots: (S1) 136.34; (P) 137.05; (R1) 138.12; More...

Intraday bias in USD/JPY is turned neutral first with current retreat. Some consolidations could be seen but outlook will remain bullish as long as 134.73 support holds. Break of 137.74 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) 0.9782; (P) 0.9813; (R1) 0.9863; More...

USD/CHF's rally is still in progress and intraday bias stays on the upside. . Consolidation pattern from 1.0063 should have completed with three waves down to 0.9493 already. Further rise would be seen to retest 1.0063 high first. Decisive break there will resume larger up trend. On the downside, break of 0.9670 minor support will dampen this bullish view and turn intraday bias neutral 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.