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Markets

What a way to start the week. The US inflation print published on Friday continued to reverberate through markets. It already began in Asian dealings before traders in the region smoothly passed on the baton to Europe and the US. Bonds again took center stage. Both German Bunds and US Treasuries fell off a cliff at a pace that was even worse than Friday’s for the former and only marginally less intense for the latter. Changes range from 11.3 bps (30y) to 15.9 bps (2y) in the US. A closely watched “recession predictor”, the 10y/2y spread temporarily turned negative. The 10y reference rate surpassed the previous cycle intraday high of 3.20% and is currently attacking the 2018 top at 3.26%. These incredible moves happen just days before Wednesday’s Fed meeting at which markets clearly expect the central bank to be even more aggressive than already is the case. Money markets currently price in 175 bps tightening by the September meeting. This implies they expect the Fed by then not to continue with 50 bps moves seen in May to July but with an even bigger-sized 75 bps rate hike. German Bunds add 4 bps (30y) to 16.2 bps (2y) with the latter taking out the 1% level for the first time in more than a decade. European swap yields even skyrocket more than 20 bps (2y)! Speculation builds for the ECB to catch up with more than just one jumbo-sized (50 bps) rate increase in September. Another one for October is already fully discounted. UK Gilts outperform today, printing yield gains of “only” 6.2 bps in the 2y and 5y bucket. In an almost identical session to Friday’s, equities are once again under selling pressure. Stocks shed 2.3% in Europe. Wall Street opens with losses up to 2.8% for the Nasdaq.
 
The risk-off is also the dominant theme for currency markets. The Japanese yen outperforms peers despite the sharp core bond yield rise. EUR/JPY retreats from 141.35 to 140. USD/JPY tested the 135 big figure before paring all gains (and more) back to 134. The greenback takes a honorable second place, enjoying from both risk aversion as another spike in US (real) yields. DXY (trade-weighted dollar) jumped from 104.15 to near the previous cycle high of 105. Sterling is trading on softer footing. Today’s batch of economic data (industrial production, monthly GDP numbers) was unconvincing and stretches the dilemma for the Bank of England to its limits. More data follows tomorrow (labour market) and Friday (retail sales) with the UK central bank policy meeting in between (Thursday). EUR/GBP rises from 0.854 to 0.859 currently. GBP/USD (1.2178) teeters on the brink of falling below the previous YtD low at 1.2156 after two days of heavy declines.
 
News Headlines

The National Bank of Belgium provided an update of its projections for the Belgian Economy. After a solid increase in activity in Q1, the economy is expected to barely grow in the near term, mostly due to the impact of high inflation on private consumption. Still, growth should pick up again by the end of the year. The NBB sees economic growth for this and next year unchanged from its March forecast at 2.4% and 1.5% respectively. 2024 growth was upwardly revised from 1.9% to 2.0%. The NBB expects activity to stay above potential in the next two years. The labour market should continue to be highly robust: job creation is expected to slow down a little but remain positive. Inflation has risen under the impetus of rising energy prices and second-round effects but is believed to have reached its peak in May and should gradually fall back as energy prices moderate and supply chains normalize. It is projected to come back down from an average 8.2% in 2022 to 1.3% in 2024. The budget deficit is estimated at 4.5% of GDP for 2022 and is forecast to further deteriorate over the projection period (5.0% in 2024). Government debt is on a rising path, going from an expected 105.3% of GDP to 110.9% in 2024.

Gold price started a fresh increase from the $1,825 support zone against the US Dollar. The price broke the $1,840 resistance to move into a positive zone.

Besides, there was a clear move above a major bearish trend line with resistance near $1,845 on the hourly chart. The price even settled above the $1,850 level and the 50 hourly simple moving average.

The price traded as high as $1,879 before there was a downside correction. It traded below the $1,870 level. The next major support is near the $1,858 level, below which the price might decline towards the $1,845 support level in the near term.

An immediate resistance on the upside is near the $1,868 level. The next main resistance could be near the $1,880 level, above which the price could start another steady increase. In the stated case, it could rise towards $1,895 on FXOpen.

Daily Pivots: (S1) 133.71; (P) 134.09; (R1) 134.82; More...

Intraday bias in USD/JPY is turned neutral again with current retreat. Some consolidations would be seen. But downside should be contained by 131.34 resistance turned support to bring another rally. On the upside, break of 135.18 will resume larger up trend to 61.8% projection of 114.40 to 131.34 from 126.35 at 136.81. Firm break there will target 100% projection 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) 0.9793; (P) 0.9845; (R1) 0.9925; More...

USD/CHF's rise from 0.9543 is still in progress. Intraday bias stays on the upside for retesting 1.0063 resistance first. Firm break there will resume larger up trend. Next target is 100% projection of 0.9193 to 1.0063 from 0.9543 at 1.0413. On the downside, below 0.9764 minor support will delay the bullish case and turn intraday bias neutral first.

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) 1.0469; (P) 1.0555 (R1) 1.0605; More...

EUR/USD's fall from 1.0786 is still in progress. Intraday bias stays on the downside for retesting 1.0348 and 1.0339 long term support. Decisive break there will resume larger down trend. Next target is long term projection level at 1.0090. On the upside, above 1.0610 minor resistance will turn intraday bias neutral first.

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) 1.2242; (P) 1.2380; (R1) 1.2459; More...

GBP/USD accelerates lower today and intraday bias remains on the downside. Decisive break of 1.2154 low will will resume larger down trend. Next target is 61.8% projection of 1.3297 to 1.2154 from 1.2666 at 1.1960. Break there will target 100% projection at 1.1523 next. On the upside, above 1.2310 minor resistance will delay the bearish case, and turn intraday bias neutral first.

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. On resumption, next target is 1.1409 low.

Sterling falls broadly today after GDP unexpected contracted for the second month in April. Chance of an overall contract in Q2 is raised while there are few positive signs for Q3 for now. Meanwhile, the remaining chance of a 50bps hike by BoE later this week is basically priced out. Aussie and Kiwi are the next weakest on risk aversion. European indexes are in deep red while US futures point to gap downs. US 10-year yield breaks above 3.2 handle in pre-trading. Yen overpowers Dollar today, and Swiss is the third strongest with Canadian.

Technically, now, the focus is on whether Sterling would break through some key near term support levels. The levels include 1.2154 support in GBP/USD and 0.8617 resistance in EUR/GBP and 162.88. Firm break of these levels could prompt even deeper selloff in the Pound. But at the same time, attention is also on 139.99 minor support in EUR/JPY and 162.88 minor support in GBP/JPY. Break of these levels could come if risk aversion intensifies.

In Europe, at the time of writing, FTSE is down -1.36%. DAX is down -2.19%. CAC is down -2.38%. Germany 10-year yield is up 0.0781 at 1.598. Earlier in Asia, DOW dropped -3.01%. Hong Kong HSI dropped -3.39%. China Shanghai SSE dropped -0.89%. Singapore Strait Times dropped -1.33%. Japan 10-year JGB yield rose 0.0009 to 0.255.

NIESR: UK GDP to stagnate in May and June, contract -0.4% in Q2 overall

NIESR said the negative growth of -0.3% mom in UK GDP in April "increases the chances of a recession. The impact of rising energy prices is likely to "impede recovery in the coming months. It now forecasts month-on-month GDP growth to "stagnate in May and June, leading to a decline of -0.4% in Q2 overall.

"April's headline 0.3 per cent fall in GDP hid some strength in private services sectors: strong growth in retail, hospitality and other services suggests that some households may have been able to smooth their consumption in the face of the inflation shock. Manufacturing appears to be suffering as a result of the impact of high petrol and energy, with declines in 8 out of 13 sub-sectors, but April's overall decline was principally driven by the winding-down of the Test and Trace programme, which had made significant positive contributions to GDP over most of the Covid-19 period". Rory Macqueen, Principal Economist, NIESR.

UK GDP fell -0.3% mom in Apr, all sectors contracted

UK GDP contracted -0.3% mom in April, worse than expectation of 0.2% mom growth. Services fell -0.3% mom. Production fell -0.6% mom. Construction also fell by -0.4% mom. This is the first time that all main sectors have contributed negatively to a monthly GDP estimate since January 2021.

Also released, manufacturing production came in at -1.0% mom, 0.5% yoy, versus expectation of 0.2% mom, 1.8% yoy. Industrial production was at -0.6% mom, 0.7% yoy, versus expectation of 0.2% mom, 0.5% yoy. Goods trade deficit widened to GBP -20.9B.

BoJ Kuroda: Recent sharp falls in Yen negative and undesirable

BoJ Governor Haruhiko Kuroda told the parliament today that recent sharp yen falls are "negative and undesirable" to the economy. The depreciations raise uncertainty over the outlook and make it difficult for companies' business planning. He pledged again to carefully monitor the developments and their impacts.

Kuroda also reiterated that BoJ must maintain ulta-loose monetary policy. He added that Japan is not facing stagflation, where high inflation and economic stagnation co-exist, and was not facing the risk of sliding back into that state.

NZIER downgrades NZ GDP forecasts, upgrades inflation

In the new Consensus Forecasts of NZIER, growth projections for the forecast horizon were revised down while inflation projections were revised up. NZIER noted "increasing headwinds" for the New Zealand economy, including "continued global supply chain disruptions as countries continue to grapple with COVID-19, the war in Ukraine and rising interest rates." The highest inflation outlook reflects "expectations that high inflation will remain persistent".

In June survey (comparing to March survey):

• 2022/23 GDP growth at 2.9% (revised down from 3.6%).
• 2023/24 GDP growth at 1.9% (down from 2.7%).
• 2024/25 GDP growth at 2.1% (down from 2.5%).
• 2022/23 CPI at 4.1% (up from 3.5%).
• 2023/24 CPI at 2.6% (up from 2.5%).
• 2024/25 CPI at 2.4% (up from 2.3%).

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2242; (P) 1.2380; (R1) 1.2459; More...

GBP/USD accelerates lower today and intraday bias remains on the downside. Decisive break of 1.2154 low will will resume larger down trend. Next target is 61.8% projection of 1.3297 to 1.2154 from 1.2666 at 1.1960. Break there will target 100% projection at 1.1523 next. On the upside, above 1.2310 minor resistance will delay the bearish case, and turn intraday bias neutral first.

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. On resumption, next target is 1.1409 low.

Economic Indicators Update

The AUDUSD extends steep fall into fourth straight day and falls below 0.70 support for the first time in one month.

Risk aversion and stronger US dollar on expectations for more aggressive Fed after another red-hot inflation figure, keep the Aussie under pressure, along with signals of new Covid outbreaks in China that add to negative outlook.

Technical studies on daily chart are in full bearish setup, with additional negative signals seen on formation of bearish engulfing on weekly chart and last week’s close below 200WMA after 2.3% weekly drop.

Bears look for a daily close below 0.70 handle to add to negative signals for probe through pivotal Fibo support at 0.6935 (76.4% of 0.6828/0.7283 upleg) that would open way for attack at 0.6828 (2022 low).

On the other side, oversold conditions warn of price adjustment before bears resume, with extended upticks expected to stay below 0.71 zone to keep bias with bears and offer better selling opportunities.

Res: 0.7055; 0.7083; 0.7109; 0.7119
Sup: 0.6956; 0.6935; 0.6872; 0.6828

NIESR said the negative growth of -0.3% mom in UK GDP in April "increases the chances of a recession. The impact of rising energy prices is likely to "impede recovery in the coming months. It now forecasts month-on-month GDP growth to "stagnate in May and June, leading to a decline of -0.4% in Q2 overall.

"April's headline 0.3 per cent fall in GDP hid some strength in private services sectors: strong growth in retail, hospitality and other services suggests that some households may have been able to smooth their consumption in the face of the inflation shock. Manufacturing appears to be suffering as a result of the impact of high petrol and energy, with declines in 8 out of 13 sub-sectors, but April's overall decline was principally driven by the winding-down of the Test and Trace programme, which had made significant positive contributions to GDP over most of the Covid-19 period". Rory Macqueen, Principal Economist, NIESR.

Full release here.

The Euro holds in red for the third straight day and retraced almost 76.4% of 1.0349/1.0786 corrective leg, signaling that larger downtrend is on track to complete its short corrective phase and threatening of renewed attack at key longer term support at 1.0340 (Jan 2017 low) after previous attempt last month stalled just ticks ahead of this level.

The single currency was pressured by ECB’s policy decision which lacked more hawkish tone and disappointed traders, while stronger dollar on risk aversion and soaring US inflation, adds pressure.

Early Monday’s fresh weakness cracked a minor higher base at 1.0459 and pressuring pivotal Fibo support at 1.0452 (76.4% of 1.0349/1.0786 upleg), with break here to open way for test of 1.0349/40 (2022 low / Jan 2017 low).

Falling and thickening daily cloud continues to weigh and adds to negative signals from rising bearish momentum, although oversold stochastic suggest that bears may take a breather before final push towards 1.0349/40 targets.

Upticks are expected to offer better selling opportunities while holding below 1.0568 (daily Kijun-sen / broken 50% retracement of 1.0349/1.0786 upleg).

Res: 1.0516; 1.0568; 1.0606; 1.0619
Sup: 1.0452; 1.0400; 1.0388; 1.0349