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The era of subzero interest rates will conclude in the eurozone next month after a decade, but what is less certain is how fast the monetary tightening phase will develop in the year ahead as recession risks build up in investors’ mind. Flash CPI inflation figures will provide some clues on Friday at 10:00 GMT, with forecasts pointing to a new record high. 

Inflation to hit a new all-time high

The headline CPI inflation figure is expected to unlock a new record high at 8.4% y/y in June compared to 8.1% in the previous month, while the core measure, which excludes volatile food and energy prices, could see a moderate increase to 4.5% y/y from 4.4% previously. Growth in consumer prices is already quadruple the central bank’s 2.0% symmetrical target and twice as high the level when the euro currency was first launched in 1999. Therefore, policymakers have no other choice than to catch up with other major central banks and rush to raise interest rates after the regular asset purchase program (APP) ends on July 1.

Perhaps, accumulated inventories due to retailers' overspending to restock shelves during the pandemic period, may motivate some discounting in prices, though that may not be enough to cool inflation metrics towards the target in the near term. Hence, even though consumer confidence has plummeted to the all-time low reached in April 2020, the ECB will likely listen to market expectations and gear up its rate hike cycle by delivering two aggressive 50-bps rate increases in September and October; something Lagarde could not exclude during her latest speech in Portugal.

Soft landing in doubt

However, the problem that arises at this point is that eurozone member states all have a different economic background and the unavoidable path of higher borrowing costs may raise fresh sovereign risk in indebted economies such as Italy, which is the third largest economy in the bloc.

The spread between the Italian and German 10-year bond yields that is considered a measure of financial stress in the euro area, has widened to the largest since the start of the pandemic, forcing the central bank to start studies on a new bond-buying anti-fragmentation tool. Investors anticipate a compromise to be reached on July 21, though the program may require participation in the European Stability Mechanism conditionality, which some member states may not be willing to undertake. The old issue of how fiscal policy is implemented across the union might be another challenge, while the Italian national election on June 1, 2023 could also cause some delay.

EUR/USD  

The eurozone’s uncertain economic outlook explains the short-lived upside reversals in euro/dollar and this may remain a headwind in the near term. New peaks in inflation may barely move the euro unless the data calls for even aggressive rate hikes beyond July. In this case, it would be interesting to see whether recession fears can offset any inflation-driven bullish corrections in the euro.

Technically, a step below the nearby support of 1.0480 could squeeze the price directly towards the double bottom area of 1.0352. Alternatively, a close above the descending trendline and the shorter-term simple moving averages (SMAs) seen around 1.0600 are required to bring the previous high at 1.0786 back under examination.

Markets

The first German regional CPI number immediately grabbed investors’ attention this morning. North Rhine Westphalia CPI fell by 0.1% M/M to moderate from 8.1% Y/Y to 7.5% Y/Y. The euro fell with EU yields as this suggested that expectations for Friday’s EMU print (final input before July ECB meeting) are too aggressive (0.7% M/M & 8.5% Y/Y) while simultaneously confirming that the ECB won’t have to step it up compared to current policy normalization guidance. Other German regional numbers and eventually the national reading confirmed the North Rhine Westphalia dynamic. However, the devil is in the details. Most of the moderation comes from a one-off discount on train tickets. Spanish and Belgian inflation data soon dashed easing inflation hopes. Spanish inflation accelerated by 1.8% M/M to double digit figures (from 8.5%) with the underlying core measure surging to 5.5% Y/Y. Belgian inflation rose by 0.85% M/M to 9.65% Y/Y (from 8.97%). June EC confidence numbers stabilized, avoiding a further decline. Those data capped the strong opening start of European bonds. German yields at the time of writing cede 2.5 bps (30-yr) to 5.1 bps (5-yr) with the belly of the curve outperforming the wings. US yields are practically unmoved. The focal point for US investors follow tomorrow with (outdated) PCE deflators and especially Friday’s manufacturing ISM. The euro failed to really overcome opening weakness with fragile risk sentiment (European stocks -1%) and relative yield dynamics playing in favour of the dollar. EUR/USD currently loses the 1.05 handle. Sterling remains on a slippery slope with EUR/GBP slowly but steadily moving in the direction of the 0.8721 YTD high. At the ECB conference in Sintra, ECB Lagarde, Fed Powell, BoE Bailey and BIS Carstens are currently in a panel discussion. Powell reiterated that the US economy is well positioned to handle a tighter policy, though getting to a soft landing will be a quite challenging. He thinks that markets are by and large aligned with the Fed’s intentions. Money markets currently discount a policy rate of 3.5% around the turn of the year which is seen as the cycle peak. We continue to believe that risks are tilted to the upside of those expectations. Lagarde’s comments obviously are a copy-paste from yesterday’s speech where she indicated to switch from a gradual approach to a more decisive one in case of for example the treat of de-anchoring inflation expectations.
 
News Headlines

Germany plans to bring its finances back in line with its constitutional limits, also known as the debt brake after having spent extraordinary amounts in the period 2020-2022. Finance minister Lindner is targeting a little more than €17bn in additional borrowing next year, a significant cut from the almost €140bn this year. Additional borrowing in the years thereafter should be somewhere between €12.3bn and €13.8bn. The debt brake caps new debt at 0.35% of GDP. The borrowing plans assume German GDP growth of 2.2% this year and 2.5% in the next.

Russia is looking at spending extra revenue from oil and gas to buy “friendly” currencies as a way to ease a scorching rally in the Russian ruble. There is a strong influx of FX because of high demand for and prices of energy. At the same time, FX demand/ruble supply has all but evaporated due to capital controls and import declines. “In order to influence the exchange rate, we are ready to invest in the currencies of friendly countries and through cross-rates with the dollar and euro, we will regulate the value of the ruble in dollars and euro,” Russian finance minister Siluanov said. The ruble erased a 4% gain on the report to trade at USD/RUB 53.15 – still the strongest level  in 7 years. Russian central bank governor Nabiullina earlier said there is still room for further reductions in the key rate. After having lifted the policy rate to 20% shortly after the invasion, the central bank in the meantime lowered them back to pre-war level of 9.5%.

Daily Pivots: (S1) 135.39; (P) 135.89; (R1) 136.66; More...

USD/JPY's break of 136.70 resistance indicates up trend resumption. Intraday bias is back on the upside. Next target will be 100% projection of 114.40 to 131.34 from 126.35 at 143.29. For now, outlook will remain bullish as long as 134.25 support holds, in case of retreat.

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) 1.2146; (P) 1.2219; (R1) 1.2257; More...

Outlook in GBP/USD remains unchanged as range trading continues. Intraday bias stays neutral. Outlook stays bearish as long as 1.2666 resistance holds. On the downside, break of 1.1932 will resume larger down trend from 1.4248. However, firm break of 1.2666 will suggest medium term bottoming and bring stronger rebound back towards 1.3158 support turned resistance.

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 1.3140).

Daily Pivots: (S1) 1.0481; (P) 1.0543 (R1) 1.0584; More...

No change in EUR/USD's outlook as range trading continues. Intraday bias remains neutral. Further fall is in favor with 1.0786 resistance intact. On the downside, sustained break of 1.0339/48 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.

Daily Pivots: (S1) 0.9544; (P) 0.9565; (R1) 0.9597; More...

Intraday bias in USD/CHF stays neutral as it continues to lose downside momentum as seen in 4 hour MACD. Fall from 1.0048 is still seen as the third leg of the consolidation pattern from 1.0063. Strong support should be seen around 0.9543 to bring rebound. On the upside, above 0.9731 minor resistance will turn bias back to the upside for retesting 1.0063 resistance. However, sustained break of 0.9543 will bring deeper fall back to 0.9459 resistance turned support.

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) 1.0042; (P) 1.0086; (R1) 1.0117; More....

EUR/CHF's fall continues today and breaches parity to as low as 0.9990 so far. Intraday bias stays on the downside for retesting 0.9970 low. Decisive break there will resume larger down trend. Next target is 0.9650 long term projection level. On the upside, however, above 1.0214 minor resistance will delay the bearish case, and turn bias back to the upside for stronger rebound.

In the bigger picture, as long as 1.0505 support turned resistance (2020 low) holds, long term down trend from 1.2004 (2018 high) is expected to continue. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. However, firm break of 1.0505 will suggest medium term bottoming, and bring stronger rebound towards 1.1149 structural resistance.

Swiss Franc continues to rise broadly today, with additional help from selloff in Euro. The common currency is weighed down by Germany CPI, which unexpectedly slowed in June. But for now, Aussie, Sterling and Yen are even weaker than Euro. On the other hand, Canadian Dollar is second strongest as supported by rebound in oil prices, while Dollar is third.

Technically, GBP/CHF's falls through 100% projection 1.3070 to 1.2134 from 1.2598 at 1662 and there is no sign of bottoming yet. Outlook will remain bearish as long as 1.1800 resistance holds, for 161.8% projection at 1.1084, which is close to 202 low at 1.1107. The decline in GBP/CHF could accelerate further if EUR/CHF takes out 0.9970 low with some power.

In Europe, at the time of writing, FTSE is down -0.15%. DAX is down -1.58%. CAC is down -1.08%. Germany 10-year yield is down -0.0039 at 1.590. Earlier in Asia, Nikkei dropped -0.91%. Hong Kong HSI dropped -1.88%. China Shanghai SSE dropped -1.40%. Singapore Strait Times dropped -0.17%. Japan 10-year JGB yield dropped -0.0016 to 0.232.

Fed Mester: Getting interest rates up to 3-3.5% expeditiously is really important

Cleveland Fed President Loretta Mester told CNBC today, "if conditions were exactly the way they were today going into that meeting (in July) — if the meeting were today — I would be advocating for 75 because I haven't seen the kind of numbers on the inflation side that I need to see in order to think that we can go back to a 50 increase."

"I think getting interest rates up to that 3-3.5%, it's really important that we do that, and do it expeditiously and do it consistently as we go forward, so it's after that point where I think there is more uncertainty about how far we'll need to go in order to rein in inflation," she said.

"At the Fed, we're on a path now to bring our interest rates up to a more normal level and then probably a little bit higher into restrictive territory, so that we can get those inflation rates down so that we can sustain a good economy going forward," she said. "Job one for us now is to get inflation rates under control, and I think right now that's coloring how consumers are feeling about the economy and where it's going."

Released from the US, Q1 GDP contraction was finalized at -1.6%.

ECB Simkus: We should move decisively toward monetary-policy normalization

ECB Governing Council member Gediminas Simkus said that by July meeting, "should see some change in the data, some change in relation to what we have seen at the beginning of June". He added, "if we see this change in data that points to the persistence of inflation, to its acceleration, 50 basis points should be a policy option for July."

"With these levels of inflation and inflation being more and more broad-based, with wages growing in the euro area, we should move decisively toward monetary-policy normalization," said Simkus,

ECB has pre-committed to a 25bps rate hike in July. Another hike is also pre-committed for September, but the size would be dependent on incoming data.

Eurozone economic sentiment dropped to 104 in Jun, EU down to 102.5

Eurozone Economic Sentiment Indicator dropped from 105.0 to 104.0 in June. Employment Expectation Indicator dropped from 112.6 to 110.9. Economic Uncertainty Indicator rose from 23.4 to 24.8. Industry confidence rose from 6.5 to 7.4. Services confidence rose from 14.1 to 14.8. Consumer confidence dropped from -21.2 to -23.6. Retail trade confidence dropped from -4.2 to -5.1. Construction confidence dropped from 6.3 to 3.7.

EU Economic Sentiment Indicator dropped from 104.2 to 102.5. Employment Expectation Indicator dropped from 112.2 to 110.6. Economic Uncertainty Indicator rose from 22.6 to 23.9. The ESI fell across the six largest EU economies: confidence dropped most markedly in the Netherlands (-3.6), but also in Germany (-1.9), Spain (-1.9), Poland (-1.5), France (-1.0) and Italy (-1.0).

From Germany, CPI slowed from 7.9% yoy to 7.6% yoy in June, below expectation of 7.9% yoy.

BoJ Kuroda: Japan not much affected by global inflationary trend

BoJ Governor Haruhiko Kuroda said, "Unlike other economies, the Japanese economy has not been much affected by the global inflationary trend, so monetary policy will continue to be accommodative," according to the recording released by the Bank for International Settlements (BIS).

After 15 years of deflation that lasted through 2013, businesses have be "very cautious" in raising prices and wages. "The economy recovered and companies recorded high profits. The labour market became quite tight. But wages didn't increase much and prices didn't increase much," he added.

Also released, Japan retail sales rose 3.6% yoy in May, below expectation of 4.0% yoy. On seasonally adjusted basis, sales rose 0.6% mom.

Australia retail sales rose 0.9% mom in May, higher prices added to growth

Australia retail sales rose 0.9% mom in May, above expectation of 0.4% mom. That's the fifth consecutive monthly growth.

Ben Dorber, Director of Quarterly Economy Wide Statistics said, "There was growth across five of the six retail industries in May as spending remained resilient. Higher prices added to the growth in retail turnover in May. This was most evident in cafes, restaurants and takeaway food services and food retailing."

EUR/CHF Mid-Day Outlook

Daily Pivots: (S1) 1.0042; (P) 1.0086; (R1) 1.0117; More....

EUR/CHF's fall continues today and breaches parity to as low as 0.9990 so far. Intraday bias stays on the downside for retesting 0.9970 low. Decisive break there will resume larger down trend. Next target is 0.9650 long term projection level. On the upside, however, above 1.0214 minor resistance will delay the bearish case, and turn bias back to the upside for stronger rebound.

In the bigger picture, as long as 1.0505 support turned resistance (2020 low) holds, long term down trend from 1.2004 (2018 high) is expected to continue. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. However, firm break of 1.0505 will suggest medium term bottoming, and bring stronger rebound towards 1.1149 structural resistance.

Economic Indicators Update

Bitcoin declined on Tuesday following the US market, where the bears reigned the upper hand again, taking more than 3% from the Nasdaq index.

The local technical picture is rather worrying. The recent bounce might have been enough to consolidate the bearish forces before a new attack. Traders should be ready for the new test of lows at 18K before the end of this week if moods on financial markets don’t reverse.

According to CoinShares, capital outflows from crypto funds last week amounted to the all-time high at $423 million, with almost all funds withdrawn coming from bitcoin-based products. The driver was the launch of ProShares’ first US bitcoin inverse ETF, which allowed investors to open short positions in the cryptocurrency.

Simply put, the institutions that have been such a significant driver of Bitcoin and Ether’s growth in the previous couple of years are now selling off these assets, putting additional pressure on the entire market. What the crypto market lacks currently is long-term institutional HODLers.

Bank of America said concerns about the crypto winter had not cooled investor interest in the industry.

SEC chairman Gary Gensler clarified his stance on bitcoin in an interview with CNBC, calling it a commodity. MicroStrategy CEO Michael Saylor said it would allow politicians and governments to support bitcoin as a technology and digital asset.

According to a Mastercard survey, in Latin America, 51% of the payment system’s card users have bought cryptocurrencies. About a third of respondents invested in stable coins. Investments in NFT and DeFi projects are pretty popular.

USDJPY managed to gain fresh buying traction around the resistance-turned-support area of 134.42 last week, with the price currently looking to extend its broad uptrend above the 20-year high of 136.70.

Although the clear positive slope in the simple moving averages (SMAs) is still backing the bullish direction in the market, the momentum indicators warrant some caution over the strength in the market. The RSI, although above its June lows, has marked a new lower high after peaking in an overbought area. Similarly, the MACD is gradually losing momentum below its red signal line despite remaining elevated in the positive area.

Should the bulls snap the top of 136.70, the next obstacle could be the 261.8% Fibonacci extension of the 131.34 – 126.35 downleg at 139.15, while the broken support line could immediately cap the rally near 140.70, preventing a spike towards the tentative resistance line seen around 143.53.

On the downside, the 20-day SMA and the 134.26  base, which is also the 161.8% Fibonacci extension, may buffer a potential negative reversal. If not, the decline could sharpen towards the 131.48 low, where the 50-day SMA is currently converging. Failure to bounce here may produce another important bearish correction towards the 128.87 constraining zone.

All in all, although USDJPY is trading in bullish territory, technical signals reflect some weakness in buying appetite. Traders could wisely wait for a durable move above 135.45 before becoming more confident on the latest upturn.