The Weekly Close Out

Dollar Index (DXY):

The greenback has been performing well this week with US treasuries breaking through the key psychological 3% level and risk sentiment on the backfoot. Tuesday saw firmer risk sentiment help attract dollar sellers. 10-year yields dropping back below 3% also removed the yield differential advantage. The Atlanta Fed nowcast has chopped its forecast for Q2 GDP growth from 1.3% to 0.9%. If it falls another 0.9% points then the US economy would suffer a recession (2 consecutive quarters of negative growth). Speaking of growth downgrades we also had the World Bank slashing its global growth forecast for 2022 from 2.9% from 4.1% in January. The OECD joined the club with their latest economic forecasts, downgrading global growth for 2022 to 3% vs 4.5% back in December. The US housing market continues to cool with mortgage applications falling by 6.5% as the 30-year mortgage rate ticked up to 5.4%.

Wednesday night’s 10-year auction tailed the when issued yield once again, with demand tepid before today’s US CPI print (market expecting 8.3% YoY). Thursday’s jobless claims continued their uptrend with a 229k print, above the 206k expected. Yet higher yields and lower equity markets saw solid demand for the greenback. The number will be important for evaluating the Fed’s path of rate hikes. The White House has warned of a hot number.

The dollar had a nice bounce of its 50-day SMA and sits just above the 103 round number. The RSI is still got some room before overbought concerns creep in. The former range resistance around 104 would be my initial upside target. On the downside, the 50-day SMA would also interest.

EURUSD:

The euro remained flat with down and up days as traders awaited the ECB meeting before opening fresh positions. We did have some manufacturing data in the form of Germany’s factory orders which declined by 2.7% MoM vs the 0.3% gain expected. Some optimism was seen as the final estimate of euro area Q1 GDP growth came in 0.3% points higher than both the MoM and YoY numbers.

The ECB meeting certainly didn’t disappoint and this will be seen as the inflection point for a major change in policy direction. I’ll unpack the major outcomes of the meeting and the reaction in the euro. 1) APP will be ending on July 1 and there will be a 25bps rate hike at their July meeting (however dovishly APP reinvestments will continue for as long as necessary – definitely no QT then) 2) In order to throw the hawks on the GC a bone if the medium-term inflation outlook deteriorates a larger increment than 25bps will be appropriate at the September meeting - during the press conference Lagarde gave an even more concrete piece of information. She stated that if the September projections put 2024 inflation at 2.1% or higher than the rate hike will be bigger than 25bps. Beyond September it’ll be “gradual” and data driven. 3) As an important signal for market rate pricing the ECB forecasts both headline and core inflation north of their 2% target. 4) There was no new anti-fragmentation tool or information either, instead PEPP reinvestments will be used as the first line of defence. This clearly will not be enough as we’ve seen by looking at the BTP-Bund spread blowing out. Sources out after the meeting stated there’d been no progress on the new anti-fragmentation tool since their seminar in April.

I think the ECB likely thought they wouldn’t see that sort of pressure on spreads as they’re only going to move by 25bps in July. Well they were certainly wrong. Will Christian I’m not here to close spreads Lagarde have to make a change of tack – I think so. German 2-year yields spiked, yet this was not enough for the euro. Peripheral spread widening is never a good thing for the euro and given the weaker growth it’s unlikely the ECB will meet the market’s current pricing of rates (150bps by December – two 50bps hikes given only four meetings left till then).

Price was rejected at the 1.08 level (also the 38.2% Fibonacci level) and has now fallen below both its 50-day SMA and 21-day EMA. We’re close to the former range resistance which will likely act as support for now. Below there the 1.05 level would be key. On the upside, 1.07 and 1.08 would be the levels to watch. The RSI is in no man’s land.

GBPUSD:

The big story for sterling was Boris Johnson’s no confidence vote. Prior to the vote, the pound was unperturbed. My thinking for this reaction was that traders saw no risk from a change of the guard and a continuation of current policy. Additionally, a snap election would have been the real risk and this was not going to happen. Many are also of the view that the rebels played their hand too early with the June 23 by-elections coming up and the cost of living squeeze not biting properly yet. Current rules (unless changed by the 1922 committee, which MP Tobias Ellwood is pushing for) allow Boris not to be challenged for a year. Monday evening saw Johnson survive the vote with 211 confident in him and 148 not confident votes (41% of his own party voted against him, more than Theresa May’s 37%). On the data front the UK saw a chunky revision to its final services PMI estimate, printing at 53.4 vs 51.8 expected.

We also got an update on the Brexit front from RTE European Editor Tony Connelly, that “the UK government will introduce a bill that will allow future ministers to fundamentally override the Northern Ireland Protocol by emphasising the UK internal market over the EU single market.” We’ll have to see how Boris Johnson’s weakened position affects him getting this legislation through parliament. To finish the week, in Brexit land, there was news that the Eurosceptics within the Tory party has forced Liz Truss to amend parts of the legislation due to drop this week on the NI protocol. Things are about to get interesting.

GBPUSD sits within its recent trading range, above the 1.24 level on the downside with 1.26 on the upside. The 50-day SMA is just above there. The RSI isn’t providing any strong signals.

USDJPY:

The dollar yen has hit a 20-year low moving back to levels last seen in 2002. BoJ Governor Kuroda is doing nothing to help strengthen the yen with rhetoric that Japan is not in a situation that warrants tightening monetary policy and that to support the economy powerful monetary easing will continue. This cross is the cleanest way to play the monetary policy divergence theme. My colleague Chris Weston shared an interesting point with me about how there were no trades in the 10-year JGB on Tuesday. For such a large and liquid market this is quite remarkable. The yen continues to be the release valve to absorb the pressure of bond intervention. Final estimates of Japan’s Q1 GDP data showed a smaller contraction than expected at -0.5% vs -1%. Thursday showed the first signs of profit taking from yen sellers. This could change with today’s US CPI print. The BoJ’s Kuroda continued to inform market participants that is the velocity as opposed to the level of USDJPY that’s important. Rapid depreciation is undesirable as it causes chaos for businesses.

USDJPY looks to be rolling over at around the 135 round number. The RSI is also rolling over in overbought territory. The key question though, is this a trend reversal or a temporary retracement. I’d watch what price does around the former highs of 131.5. On the upside, 135 will be key.

Gold:

Gold continues to ebb and flow in tune with the dollar and real yields which have both been up and down through to mid-week. Thursday saw sellers try push the yellow metal back down to the 200-day SMA aided by a resurgent dollar and surging real yields. Today’s CPI could see some excitement injected back into gold. On the downside, a break of the 200-day SMA and $1830 would be important. On the upside, $1850 and $1870 are key.

Oil:

Oil has been mixed as we approached the mid-week mark. Saudi Aramco raised the price of its Arab Light crude for Asian customers by $2.10 a barrel – this was above the $1.50 expected by the market, indicating confidence in demand. Beijing was also easing their covid restrictions boosting the demand side of the equation further. Risk sentiment and USD yo-yoed. The CEO of Trafigura surmised that we could see a price tag of $150 or higher for a barrel of crude. He wasn’t alone in these forecasts with major investment houses jumping onto the bullish bandwagon. Private inventory data out late Tuesday night showed a build in inventories whereas a drawdown was expected. Wednesday was interesting as the UAE’s Energy Minister cast a shadow of doubt over OPEC+’s ability to bring additional supply to the market and further believes that oil prices are far away from their peak. Official inventory data followed the private readings with a build vs the expected drawdown.

Crude was down a touch as we got closer to the weekend with a stronger dollar and tepid risk sentiment keeping price contained above the $125 mark.

Crude continues to trend upwards nicely, with the RSI mimicking price action. It is near overbought on the momentum reading. $130 on the upside would be my first target to watch and then $120 on the downside would be important to keep on the radar as well as the former range resistance around $115.