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The Weekly Close Out

Luke Suddards
Research Strategist
Jul 22, 2022
Another big week for macro markets comes to an end with the ECB hiking by 50bps and providing some detail on the new anti-fragmentation tool, TPI. Flash PMIs for the eurozone are in contractionary territory. Read below to find out more.

Dollar Index (DXY):

Pullback in dollar is being driven by a cooling in rate hike expectations from a 100bps hike to 75bps for the July 27 meeting. The housing market continues to creek with homebuilder sentiment tumbling all the way to 55 from 67 last month. The cost of land, construction and financing is higher than the market value of a home disincentivizing building activity according to the NAHB Chairman. Adding to the woes in housing, existing home sales plunged by 5.4% MoM vs -1.1% exp and -3.4% prev. Affordability is a problem as the median selling price increased to $416k vs $407.6k previously. We also saw an uptick in the mortgage rate to 5.82% from 5.74% and a decline in mortgage applications of 6.3%. To add salt to the wounds, the Atlanta Fed Q2 GDPNOW tracker was revised down to -1.6% from -1.5%.

The surge in risk sentiment yesterday, led to some dollar selling as flows ignited by the left hand side of the dollar smile reversed. However, the dollar seemed to have stabilized mid-week as fears over geopolitical instability ramped up from NS1 and Lavrov of Russia announcing their intention to pursue further annexations of Ukraine’s territory. US yields were also a touch higher vs other G4 yields, so a rate spread widening helped too. News of Draghi’s government collapsing also pushed investors away from the euro likely into the dollar as the single currency faces some of its toughest challenges ever. Initial jobless claims continues on its uptrend as it breached the 250k threshold, 11k above expectations. News broke that Biden has also tested positive for covid, but is suffering only mild symptoms. The dollar is mildly bullish as the weekend approaches. Flash PMI numbers out later today will give us an interesting health check on the US economy.


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

DXY is finding support dynamically from its 21-day EMA as well as the round number of 106. A break of this level, would bring 105.5 into play. Price does seem to be subdued to the topside around 107. The RSI still remains above 50, indicating a bias to the upside.


The euro got off to a good start to the week at the expense of losses in the greenback and a narrowing of the yield spread. Tuesday injected upside into the single currency as a Reuters sources article hit the wires stating that the ECB were considering either a 25bps hike or 50bps hike for Thursday. This saw over 100bps of hikes priced over July and September meetings. Many market participants were left wondering whether the ECB was trial ballooning a larger rate hike via Reuters, similarly to the Fed who leaked their rate move to the WSJ just before their meeting. Maybe the hawks are pushing for a 50bps hike and are prepared to loosen up the conditions attached to the anti-frag tool. The same Reuters article stated that European Commission reforms and budget discipline will be the guiding criteria.

Another blustering tailwind came in the form of news that Nord Stream 1 gas flows would restart after the end of the maintenance period (Thursday), but at reduced levels. 40% of gas flows at this stage would still be positive compared to zero. The situation remains incredibly fluid as Putin later remarked that another turbine could be sent for maintenance work later this month. The EU also wants to propose a voluntary 15% cut in natural gas usage. Greece, Spain and Portugal have already rejected this outright. EU Commission President Von Der Leyen, believes a full cut-off is a likely scenario. Eurozone flash consumer confidence for June was the lowest on record (-27 vs -24.9 forecast) and shows more pessimism than during the height of covid. Super Mario Draghi’s reign comes to an end and Italian politics is plunged into chaos. A snap election (will be held on September 25) now risks a paralyzed government which could struggle to implement the necessary reforms to receive EU recovery funds – watch the BTP-Bund spread. NS 1 gas flows have resumed at 40% of its capacity as the maintenance period comes to an end. 26 July is the next important date to mark in the calendar as Putin hinted that another turbine could go into maintenance.

The main event, the ECB Meeting caused a rollercoaster ride for the euro. At first EURUSD responded positively to the 50bps hike, taking rates out of negative territory. However, this soon faded as the press conference and anti-fragmentation tool (TPI) was revealed. I’ll go through the main takeaways. The 50bps move was clearly a trade-off to get the hawks on board with TPI. Forward guidance is well and truly dead (not a bad thing in this uncertain backdrop – flexibility is king), as the ECB will now make decisions based on a meeting by meeting approach depending on what the data reveals. Without an anchor for rates, markets will have carte blanche to engage in price discovery, based on what key data reveals. Just shy of 75bps is priced for the September meeting. Lagarde also told the market that the ECB is accelerating hikes, but not changing the final rates level.

In terms of the economic outlook, Lagarde expects inflation to be higher for some time and risks are tilted to the upside, luckily wage growth is still contained. Her baseline scenario is for no recession this year or next.

So what more do we know about the new anti-frag tool, TPI? All member states can be eligible for TPI, completely at the discretion of the Governing Council. Multiple signals will be used to assess if a spread move is unnecessary and disorderly. The size seems to be open-ended. We also received fairly vague conditionalities that would need to be met in order to be eligible for the programme. 1) Compliance with the EU fiscal framework 2) No severe macro imbalances 3) Fiscal sustainability 4) Sounds and sustainable macro policy - complying with RFF & EU Commission recommendations. Based on these criteria and the evolving political situation in Italy, I’d doubt they’d actually be eligible for this programme – that’s a problem. Purchases will be allowed to target maturities up to 10-years – BTP-Bund spread (10-years). We also didn’t receive specifics on how purchases will be conducted? Most likely is the deposit facility sterilization method. Also, I noticed another interesting facet of the tool, that private sector securities will also be eligible for purchases. That would likely entail the purchase of banking sector debt. The political risk premium priced into the BTP-Bund spread is clearly seen as a “necessary” by the ECB as the market was informed that their internal metrics don’t show unwarranted fragmentation and they don’t expect to trigger the tool any time soon.

Flash PMIs for Germany and the eurozone as a whole have fallen into contractionary territory, highlighting the severe downside risks to the growth outlook.


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

The 21-day EMA around 1.025 is providing stickiness for the bulls to overcome. On the downside there is some support at circa 1.013. For more aggressive sell-offs the obvious level to monitor is parity. The RSI is in the low 40s, signalling a bias for the downtrend.


Sterling took advantage of the better risk sentiment and weaker dollar to move back above 1.20, albeit short lived. UK employment data out Tuesday was fairly solid as 296k jobs were gained over the three months to May vs 170k expected. The unemployment rate printed at 3.8% vs 3.9% forecasted. Average earnings including bonuses (measure of wage pressures) actually came in at 6.2%, below the 6.7% expectation and down on the previous month of 6.8%. BoE Governor Bailey spoke at Mansion House and the main takeaways were 1) a resolute commitment to the 2% inflation target 2) a 50bps hike is on the table now, but is not locked in as Bailey made sure to make clear 3) publish detail around how the BoE plans to shrink their balance sheet via active sales of gilts at the August meeting, which could take place as early as September. The pace would be around £50 – 100 bln over a year through a combination of sales and maturing gilts.

Inflation figures out on Wednesday may bring some relief for the BoE when looking at core which underperformed expectations both on a MoM and YoY basis – 0.4% and 5.8%. Headline rates printed above consensus at 9.4% YoY and 0.8% MoM. This also marked a 40-year high. The driving factors were energy and food costs. On the political front, the field has been whittled down to two – Rishi Sunak and Liz Truss. It now goes to the 200 000 party members who will vote on the 2 September. We will know who the new Prime Minister is on the 5 September. This will be a battle of ideologies. In the head to head polls of party members it shows Truss dominating Sunak (latest from Yougov 62-38). By Truss staying loyal to Johnson, it looks like it’s given her a boost in the eyes of party members who still liked Boris. Sunak is only ahead by 24 votes, which doesn’t really allow him to say he is the choice of MPs to get legislation through the Commons. Both candidates have agreed to a Sky News TV debate on August 4. They will now spend their time campaigning to win over party member support.

Flash PMI numbers for the UK managed to escape the fate of Europe, by avoiding contractionary territory, but still down on previous months numbers. Consumer confidence remains at multi-decade lows, but stayed constant with last month’s figure. Retail sales were a mixed bag really, with a beat on both the headline and ex fuels MoM, but the headline number suffered a large negative revision to the previous month’s figure. The market is currently priced for practically a 50bps rate hike from the BoE come August.


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

Price has been beautifully contained by the 21-day EMA. We briefly saw a move above the 1.20 Maginot line, but the bears got their offers ready. On the downside, levels warranting monitoring would be 1.19 and below there 1.18. The RSI, continues to keep a short the rallies mindset in place.


Dollar yen hasn’t been doing much with zero news flow pertaining to the cross. With US yields fairly contained, the monetary divergence play hasn’t been able to build momentum. The BOJ meeting took place as expected – no changes to monetary policy or its forward guidance. The inflation outlook was raised for 2022, but then falls in 2023 and 2024. Downside risks to economic growth in the near-term were raised too. Governor Kuroda in his press conference after the decision stated he has no intentions of raising rates under YCC, that the BOJ needs to keep persistent easing going and that there are no plans to widen YCC 0.25% cap range. He also said that only large interest rate hikes would arrest the yen weakness, I just can’t see the BOJ moving by 25bps given their incredibly cautious nature. Yen is getting sold as a result of this and higher US yields. Japanese core inflation was in line with expectations at 2.2% (slightly above target), but not throwing any surprises the markets way.


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

The uptrend continues to stay in place although this week saw a minor pullback to support at the 21-day EMA. 137 and 136.5 are levels of support and on the upside a move to the previous high would be what the bulls want to see. The RSI is in the high 50s providing legs to this uptrend.


As the week got underway, gold was being pulled in both directions by a softer dollar and higher real yields, both contradictory forces. Wednesday saw higher real yields and a stronger dollar, which attracted sellers to the yellow metal (As a reference, from a broader perspective, over the last 5 years, gold prices have typically sold off around 0.9% for every 1% move higher in the DXY index and vice versa – from JPM). $1700 has been sliced through and the selling momentum is picking up pace. A stronger dollar and higher real yields is really hurting the precious metal. One has to wonder are we due a change of direction and a bit of a mean reversion? My colleague, Chris Weston, has found that price is 6.2% below the 50-day SMA (2 Std deviations from long-term average). Every time it goes below 2 Std deviations, we see mean reversion higher. $1675-1680 is a crucial support level. This looks to have occurred as we move into the weekend.


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

$1680 support provided a floor for gold to restage its comeback (for now). The oversold mean reversion bounce looks to be playing out as the RSI charges higher. The next upside target is the former range support at $1750 and on the downside $1700 would be a key line in the sand if this rally runs out of steam and turns lower.

Crude Oil:

Crude rebounded from its slump as the week got underway as the weaker dollar, sea of green across risk assets and an unproductive meeting with Biden and the Saudi’s failed to see a significant increase in oil supply being added to market. This pushed price up by over $5 a barrel. The Saudi’s Foreign Minister mentioned something interesting which came up on my news feed, that there isn’t a lack of oil, but rather a lack of oil refining capacity. Private inventory data from API on Tuesday showed a near 1.9mln build. Risk-on, supply disruptions via keystone pipeline, a softer dollar in a backdrop of lower liquidity due to the summer holidays, saw crude have a solid Tuesday. Official data on Wednesday indicated a drawdown of half a million vs an expectation of a build. Crude was flat into the close of the Wednesday session.

Oil tumbled yesterday as the risk premium was unwound as NS1 gas flows came back online reducing the need for substitution demand to oil, this is clearly crude negative. The ECB’s larger than expected rate hike won’t help the demand side of the equation either. Libya's National Oil Corporation said Wednesday that preparations were under way to export crude oil after the lifting of force majeure on terminals and oil fields. We also got more Libyan oil (700k bpd, expected to rise to 1.2 mln bpd in about a week) as export restrictions were lifted.


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

Crude looks like it wants to test the range support at $100 (just above the 200-day SMA) again as it faces selling pressure around its 21-day EMA. $110 is the near term resistance. The RSI reading points to a short the rallies approach.

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