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The Weekly Close Out

Luke Suddards
Research Strategist
May 20, 2022
Option expiry today could see a pop higher in the S&P 500 into the weekend as dealers unwind their delta hedges, however, could this be used as an opportunity for rallies to be sold as we switch from a Fed put to a Fed call regime. Some are questioning whether the dollar's top is in too.

Dollar Index (DXY):

The macro backdrop remains favourable for the greenback with shallower liquidity, slowing global growth and US real yields marching higher. The Fed’s Williams provided more credence to the 50bps hike narrative at upcoming meetings on Monday. Bullard the hawk seems to have fallen in line with the party line of 50bps hikes at upcoming meetings. Retail sales out on Tuesday showed a resilient US consumer. Retail sales ex-autos (autos creates upward pressure) were better than expected and the control measure (read on consumer spending) are a positive sign for Q2 GDP. Adding to the solid numbers was a significant revision to last month’s number from 0.5% to 1.4%. Although the initial reaction to Fed Chair Powell’s comments on Tuesday evening were to bid risk assets and offer safe havens, I would describe his rhetoric as being on the hawkish side.

Jerome Powell is singularly focused on stamping out inflation whether that causes higher unemployment and market volatility. We can see this from his comments 1) that no one should doubt our resolve to tackle inflation 2) natural rate of unemployment is higher 3) markets are orderly and functional. Ultimately, he believes that without price stability the economy doesn’t work. This is where myself and Mr Jerome Powell begin to disagree. I believe the 2% inflation target is outdated and the Fed needs to adjust it higher to be more realistic with a post pandemic and war economic environment. Get inflation down for sure, but to get it to 2% is going to require substantive demand destruction and “pain”. The hawkish parts of the speech the market grabbed onto were 1) the Fed will keep lifting rates until there’s clear evidence of inflation falling as well as 2) that rates could be taken above neutral. It seems like Turnaround Tuesday was a dead cat bounce and risk assets were underwater throughout Wednesday’s session. The typical warning signs of risk-off were flashing red – AUDJPY, equities and Bitcoin down, VIX and credit risk up and bonds bid. The narratives driving this move boil down to a delayed reaction to the reality of Powell’s hawkish tone and the ensuing economic pain, weak US housing data and faltering consumer confidence indicated by Walmart and Target’s results.

Initial jobless claims data came in 18k higher than expected at 218k. The Fed’s Esther George spoke on CNBC yesterday and stated that she’s comfortable with 50bps increase in the Fed Funds rate and would need to see something “very different” to support larger rate increase (read 75bps). She’s considered to be one of the more hawkish voting members. She also conceded that equity markets is one of the avenues through which financial conditions will tighten – can you say Fed call? The likely drivers behind the greenback’s weakness throughout Thursday are - lower yields, particularly at the front end of the curve as well as flows into riskier assets. The dollar remains subdued despite higher yields this morning as risk sentiment improves. I’d only revaluate my bullish dollar thesis if I begin to see a Fed pivot emerging and global growth dynamics improving as well as a technical break of the May 5 low at 102.2.


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

Price remains below the 21-day EMA and is just above the 23.6% Fibonacci level. If we break below the May 5 low of 102.2, then that could be dangerous with the next key level around the 50-day SMA and the 38.2% Fib level. On the upside moves back into the 103.8 resistance will be key for bulls. The RSI is in no man’s land.


Despite weak Chinese data overnight on Monday the euro saw a pop higher on the back of comments from the ECB’s Villeroy regarding the effect of too weak an exchange rate as a significant driver of imported inflation. Effectively going against their price stability objective. As a result he further informed the market to expect a decisive June meeting and an active summer. We also got some updated forecasts from the EU commission. They now see eurozone economic growth at 2.7% in 2022 vs the 4% previously and inflation at 6.1% in 2022 vs 3.5% previously. For 2023 that figure declines to 2.7% (still above the ECB’s 2% target). Tuesday saw the ECB’s perennial hawk Knot floating the first 50bps hike for the ECB, stating that this size increment should not be excluded if the data indicates broadening inflation. He sees a 25bps hike as realist for the July meeting. This helped compress the 2-year yield spread between US and German bonds.

Euro bulls jumped on this and sent EURUSD back above 1.05 and money markets priced in over 100bps hikes in 2022 (would be a hike at every meeting from July to December). Wednesday saw more of the same with the hawkish baton passed to the ECB’s Muller who gave his backing for a 25bps hike in July. Fellow GC member Rehn also told the market how many on the GC support fast moves in normalizing policy. We had the final estimate of eurozone inflation figures out with only a miss to the downside on the headline YoY number at 7.4% vs 7.5% exp. Thursday morning brought more news regarding the ECB - it certainly has been a busy week for them. MNI were informed by Eurosystem sources that the majority on the GC are prepared to back at least two 25bps hikes this year with some even comfortable with three. STIR markets are pricing in four 25bps hikes through 2022. Not usually a data point that garners much attention, however, the eurozone recorded a monthly current account deficit of -€1.57bln for the first time since April 2012. The slowdown in China and Ukrainian war has hit Europe’s exports.

Yesterday saw the ECB minutes hit the deck. The main conclusions to draw from the minutes were that the ECB as a whole seems comfortable with a July rate hike, however, the rate path going forward is more uncertain as the minutes pointed to evidence that even relatively small steps might be sufficient to bring policy into restrictive territory as well as reaching neutral only at a very late stage of the normalization process. Flexibility remains paramount, emphasizing being driven by economic data. Vice President of the ECB De Guindos gave a speech whereby he expects APP to end earlier in Q3 and that a rate hike could take place some time after that. Early this morning the ECB’s Visco made it clear that a June rate hike is out of the question and that July was perhaps the time to start rate hikes. Eurozone money markets now price in a circa 52% probability of a 50bps rate hike in July.


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

EURUSD remains sub 1.06 and the 23.6% Fib level as well as fluctuating right on the 21-day EMA. 1.06 is range resistance for the bulls. The RSI is just shy of the 50 level. On downside moves I’d look to the range support at 1.05 to see how price navigates that level.


Governor Bailey of the BoE faced a grilling during his testimony in front of the select committee. When asked if the BoE feels helpless in the face of inflation, he stated the central bank is in a very uncomfortable, difficult place. Tuesday was a really solid day for cable. Early morning labour data kicked the positive sentiment off with the unemployment rate falling to the lowest since 1974, 83k jobs gained for Q1 (March on its own saw a gain of 502k) vs the 5k exp and wages 1.6% points above expectations at 7%. The ONS provided an interesting fact with vacancies above the number of unemployed people. There is now 562k less people employed now than before the pandemic. This data in aggregate pointed to a tight labour market, which led to the money market pricing in an additional circa 10bps through 2022. Adding to the bullish price pressures was a potential short covering as speculators are positioned very net short.

Tuesday also brought some significant news on the Brexit front. Liz Truss, the UK’s Foreign Secretary announced in the Commons that legislation will be brought forward over the next few weeks which would “revise” parts of the NI protocol. Essentially, the objective is to remove checks on goods moving between GB and NI which are certain to stay within NI. New powers for the UK government to decide on tax and spending policies within NI and address the issue of ECJ jurisdiction, opting for an arbitration mechanism instead (such as that used for the entire trade agreement). Truss stated that the UK’s preference is for a negotiated solution with the EU. Sefcovic from the EU side has been invited to London for more talks, but did state he was concerned by the news of this planned legislation and that if elements of the NI protocol were unilaterally disapplied by the UK then all measures at the EU’s disposal would be considered. On Thursday, the Telegraph penned an article stating that the EU is deciding whether to target Brexiteer MPs and Tory ministers with tariffs on exports of companies within their constituencies. That should be an interesting one.

Wednesday saw cable dragged lower, despite a 40-year high inflation print (many are surmising this could be the peak) it was still short of expectations, reducing rate hike expectations. Gilt yields slipped lower as a result and then the sellers arrived as general risk-off ensconced the market, hitting the highly cyclical pound. At a business conference Chancellor Sunak announced that at the autumn budget he plans to cut business taxes in an attempt to encourage investment.

Consumer confidence out overnight hit a record low not seen in 48 years, however, retail sales came in much better than expected at 1.4%. An important facet to note is that this measure is volume based so removes the inflationary effect. We will have to see if UK consumer spending can remain firm over the next few months as opposed to a single data point. UK ONS card spending data did indicate a decline of 6% points from last week, again it’s the trend which is key. Huw Pill, the Chief Economist at the BoE, gave a speech in Wales this morning and the key points discussed were 1) that the MPC has not yet made a decision regarding the commencement of gilt sales 2) tightening still has further to run 3) inflation forecast to rise into double digits (not in the inflation has peaked camp).


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

With positioning so short in GBP it can cause some significant upswings in price as shorts run for cover. Price is now finding some resistance in the form of the 21-day EMA. 1.24 is a solid springboard for bulls in terms of support. Next level on the upside would be 1.26 if 1.25 is cleared. The RSI still has some room to run before the 60 resistance becomes a concern.


Overnight commentary from BOJ Governor Kuroda as the week got underway about FX intervention followed the same script – 1) not targeting FX market 2) important for FX to move stably with excessive moves undesirable 3) closely watching the impact on prices and the economy. The yen remains resilient with a downside bias on USDJPY as risk sentiment sours and yields fall lower. Additionally, Q1 GDP data out early Wednesday morning showed a smaller contraction than expected (not the main driver, but another minor positive). Dollar yen is rising this morning despite core inflation out of Japan printing north of 2% for the first time in seven years. Could Japan finally break its deflationary regime. US yields moving higher and better risk sentiment is seeing JPY sold as the session gets underway.


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

USDJPY has slightly reclaimed the 128 level, yet still remains below the 21-day EMA. 130 is the key level for further thrusts higher in USDJPY and on the downside 127 lows around end of April would be important to monitor. The RSI is bouncing higher around the 50 mark with room in either direction for bulls and bears.


Gold steadied after dipping below the key $1800 level during Monday. A weaker dollar and lower yields was enough for buyers to step in and defend that key psychological level. Powell’s comments pushed real yields higher and the 200-day SMA stopped the yellow metal in its tracks. Wednesday saw lower real yields, a only moderately stronger dollar and risk-off undertones propel gold higher. Gold had a very strong day on Thursday, surging through the 200-day SMA and reaching a high of just below $1850 as US yields rolled over and the dollar got clubbed lower. Will the yellow metal close above this key moving average into the weekend?


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

Gold is back reaching for the $1850 level as it remains above the key 200-day SMA. The RSI came very close to moving into oversold territory but now is charging higher. On the downside, the 200-day SMA and former range resistance around $1830 will be key for bulls to hold onto.


Brent bounced off the 50-day SMA as the week got underway on optimism around China’s lockdown easing as Shanghai reported 3 days of zero community spread. Then price ran into the $115 brick wall and dealt with various headwinds such as tariffs being placed on Russian oil as opposed to outright bans (more supply), the Biden administration showing signs of potentially lifting Venezuela’s sanction as they allow Chevron to negotiate their oil licence and Powell’s policy plans likely leading to demand destruction and lower growth.

Despite a significant drawdown in US crude inventory levels, oil was pulled down as other risk sensitive assets moved lower. Thursday brought some interesting news with China in talks with Russia to buy their oil to top up their strategic reserves. The Treasury Secretary Yellen also indicated that there had been no substantial progress regarding discussions for tariffs on Russian crude. Combining this with a renewed risk appetite and weaker USD saw the black liquid bounce off its 50-day SMA. Brent remains above its 50-day SMA as the weekend approaches.


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

Price is finding support in the middle of its range off the 50-day SMA and the $110 level. Targets wise, on the upside, $115 will be the major level to watch and on the downside, the 50-day SMA around $110 will be key. The RSI similarly to price is smack bang in the middle of its overbought and oversold bounds.

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