The Weekly Close Out

Dollar Index (DXY):

With lower tier economic data this week and no fresh geopolitical developments, the dollar has taken directional instructions from the yields, which have been on a tear as well as hawkish Fed speak. One of the most hawkish FOMC members Bullard was on the wires again suggesting rates needed to be raised to around 3.5% this year and that a 75bps move shouldn’t be excluded. Daly and Evans both Doves also have come round to the 50bps club and are advocating for the rates to be back at neutral by the end of the year (2.5%). We also heard from the head of the table, Jerome Powell who basically all but assured the markets of a 50bps hike at the May meeting. Looking at the latest OIS pricing we can see the market has priced three consecutive 50bps hikes through May to June. The IMF released their latest forecasts. The main takeaway being global growth downgrades and upgraded inflation, in essence a stagflation environment. Jobless claims data from an initial claims perspective underwhelmed with around 4k higher than expected. The big data point for this week will be the PMI out later today.

(Source: TradingView - Past performance is not indicative of future performance.)

DXY is ramping higher, likely to take out its former high around 100.884. If we start getting into the 102 area, we’ll be back at 2017 levels (excluding the covid March 2020 spike). The RSI is inching closer to overbought territory. Moving averages are all pointing in the right direction too. On the downside, 100 would be a key level for bulls to defend.

EURUSD:

The euro has had a decent week with hawkish comments by governing council members seeing a flurry of bid orders hit the market. It began with the Bundesbank President who believes inflation returning to the 2% target is increasingly unlikely. Kazaks kept the hawkish flame alive by putting rate hikes in play for the July meeting amid significant inflation risks. Belgian central bank President, Wunsch shared his thoughts about policy rates rising to positive levels this year and that a July hike is not an unreasonable idea. He even challenged market rates’ pricing in the face of the inflation risks. ECB Deputy Governor Guindos rounded off the hawkish commentary with his view that APP could culminate in July, followed immediately by a rate hike. PMI figures out of the eurozone were better than expected for services, but a tough off for manufacturing. The composite number slightly beat. Rate markets have 75bps pencilled in as December arrives.

Macron put a good show at last night’s debate. A poll taken straight after the debate put him at 59%, slightly better than current polling of around 55/56%. It looks likely that Macron will bring it home again on Sunday, however, one can’t completely rule out a political upset.

(Source: TradingView - Past performance is not indicative of future performance.)

EURUSD tried to get back into its channel, but unfortunately for euro bulls this was short lived. Price is now back near the 1.08 lows. The RSI still shows some negative divergence. On the upside, 1.09 coinciding with the 21-day EMA will be a key level for bulls to overcome.

GBPUSD:

Cable has had a tough week. The BoE'S Mann seems to be a fan of frontloaded hikes now, which will require less tightening further down the line. Andrew Bailey spoke on Thursday about the hot labour market, avoiding providing too much forward guidance on rates given the unpredictable nature of data currently and lastly that he feared being too aggressive with raising interest rates as it could plunge the economy into recession. Rates markets currently envisage over 6 hikes by year end, which after Bailey’s admission of needing to be cautious provides further proof that markets have gotten ahead of themselves. Cable sliced through 1.30 like butter. Much weaker retail sales numbers and PMI figures which missed expectations shows the pressure the UK consumer is currently under. Bank of England rate pricing is now looking too aggressive and Cable is wearing it.

(Source: TradingView - Past performance is not indicative of future performance.)

Cable has fallen through the trapdoor today. Definitely think this is some forced selling too as stops are triggered below the key psychological 1.30 level looking at the speed of the move. The RSI isn’t even in oversold territory, providing further room for a slide. 1.28 would the level to monitor.

USDJPY:

The yen continued to slide against the dollar, maintaining its trend from last week. It actually set a new record on Tuesday. It achieved 13 consecutive daily declines, which is the longest losing streak since the 1970s. The jawboning from officials was out in full force with the Japanese Finance Minister Suzuki admitting that the negative effects of the yen’s weakness outweigh the positives. This was followed by the Chief Cabinet Secretary, Matsuno who stated the yen’s moves are being watched with vigilance. watching forex moves including yen with vigilance. The BOJ’s upper band of 0.25% for their YCC was tested once again by the market, but for the third time the BOJ stepped in to defend this level with unlimited purchases of bonds.

On Wednesday we saw some profit taking as US yields pared back their gains. Japan data overnight indicated inflation in line with estimates with core at 0.8% and headline at 1.2%. We heard further commentary from Japan's Finance Minister Suzuki that quick yen fluctuations are undesirable, and what is happening currently can be considered as rapid moves. Next week’s meeting could be interesting. Could we see the ceiling on the YCC band raised to 0.5% from 0.25% or a shorter tenor say the 5-year targeted instead of the 10-year? I still think inflation is too far from target to see those policy changes at next week’s meeting, but worth considering their options. The weakness in crude given Japan’s energy dependence will provide some relief for policy makers.

(Source: TradingView - Past performance is not indicative of future performance.)

USDJPY seems to be levelling off/in a holding pattern as it moves closer to the 130 region. With the BOJ and Fed meeting next week, traders will likely hit the pause button on any fresh positions. The RSI remains in deeply overbought territory, but not at peak levels. Any pullbacks I’d monitor the 126 level and on the upside, the previous high of 129.4 and 130 above.

Gold:

Gold didn’t like the climb higher in real yields as well as a brief period in positive territory (first time since June 2020). The dollar was also stronger and equity markets strangely enough rallied which could have also contributed to some of the yellow metal’s weakness with flows away from safe-haven assets to risk assets. Higher interest rates are headwinds for gold and with the spate of hawkish commentary out of Fed members as well as a repricing of even tighter Fed policy last night it’s no wonder the yellow metal is struggling to push higher.

(Source: TradingView - Past performance is not indicative of future performance.)

Gold is back below the $1950 level and near to the 50-day SMA, which will be key in preventing further sell-offs. Maybe we’ll enter the range again between $1920 and $1940. The RSI rejected the 62.8 level as it has done previously.

Crude Oil:

Crude got pummelled on Tuesday, closing almost 5% in the red. Despite the announcement of the EU launching an embargo on Russian oil, the lower global growth forecasts by the IMF and China’s zero covid policy was too much for the black liquid to overcome. US Inventory data indicated a massive drawdown in stock levels, circa 8mln barrels. Yet, crude continued to sell-off rapaciously. The Iranian US nuclear deal remains logjammed.

(Source: TradingView - Past performance is not indicative of future performance.)

Crude is clinging onto the 50-day SMA around the mid-$107 area. There is horizontal support around the $105 level. Below there $100 would be the next major support. The RSI isn’t providing much useful info at these levels. On the upside $110 is the one to watch.