The Week Ahead 11th – 15th July: EURUSD towards parity

Welcome to the Key to Markets preview of the Week Ahead.

Currency Pair Performance

5-day performance as of July 7, 2022. 13:00 GMT

Source: finviz.com

10 Big Stories Last Week

In case you missed it…

Boris Johnson resigns. After months of damaging headlines and losing a third of his government, the PM resigns. GB/USD hits a session high on the news.

Oil falls below $100. Recession fears hurt the demand outlook sending oil prices crashing below $100, losing close to 10% in a single day. Citigroup forecasts oil will drop to $65 bp by the end of the year.

Russia threatens the gas supply. European Commission chief Ursula der von Leyen warns Europe to prepare for a complete cut-off of Russian gas, raising fears of a recession.

EUR/USD heads towards parity. The pair tumbles on energy security concerns, recession fears, and a surging USD on hawkish Fed bets and safe-haven flows.

Commodities fall 20% from June high. The Bloomberg commodities spot index, which tracks 23 energy, metal, and crop futures, has slumped on concerns of stagnating growth hurting demand.

Tesla Q2 deliveries fall short. The EV maker delivered 254,695 vehicles, 9,395 below analysts’ consensus. This was also down 17.9% in the previous quarter but up 27% YoY.

Expectations of another 75bp Fed hike rise. After the FOMC minutes, the probability of a 75 bp rate hike in July rose to 94%. Gold fell to a new 2022 low as a result.

RBA raised rates by 50 basis points. This was the second straight outsized hike taking the OCR to 1.35% as the central bank fights inflation, which is expected to rise to 7%

Microsoft’s acquisition of Activision Blizzard was called into question. The UK competition watchdog will investigate the $69 billion deal on fears it could lead to “worse outcomes for consumers.”

BoE warns of an economic storm. The central bank’s financial stability report painted a deteriorating picture of the UK. Banks were told to ramp up their buffers.

Chart of the Week

As market concerns turn from inflation to recession, the bond market is flashing a warning signal.

The two-year and ten-year treasury yields inverted again this week, a traditional warning of a recession. The two-year yield rose above the ten-year yield for the third time this year as the markets fear that aggressive Federal Reserve tightening will push the economy into recession.

The 2/10 spread has inverted 28 times since 1900. In 22 of those instances, a recession followed.

5 Things to Watch This Week

1. RBNZ rate announcement
The RNBZ has adopted an aggressive approach to hiking interest rates, which isn’t expected to change soon. The markets have priced in another 50-basis point rate hike in July, which would take the cash rate to 2.5%. With peak inflation, elusive interest rates could rise to 3% by August. The NZD/USD has fallen over 5% since early June.

2. BoC rate announcement
The BoC surveys showed that inflation expectations continue to rise, adding pressure on the BoC to announce another outsized rate hike in July, to prevent consumer price growth from becoming entrenched. The BoC raised rates by 50 basis points in June, the most significant single hike since 1998. USDCAD has risen over 2.5% since the start of June.

3. US CPI & retail sales
US CPI climbed to a fresh 40-year high of 8.6% in May, defying expectations of a pullback. Consumer prices are expected to continue rising to 8.7% YoY in May. The data comes as the market prices in a 94% probability of a 75 basis point rate hike in July. In addition to inflation, the market will look to see whether surging prices are changing consumer habits. Retail sales are expected to rise 0.8% MoM in June after slumping by 0.3%.

4. US bank earnings
US banks will kick off earnings season this week with JP Morgan Chase up first. While rising interest rates are good news for the banks, boosting net interest income, higher rates are a double-edged sword. Rising interest rates also mean a decline in the market value of banks’ securities, investments, and loans. Costs are also likely to rise, and bad loan reserves could creep higher.

5. UK leadership battle
After Boris Johnson finally resigned, attention is expected to quickly shift to the Conservative leadership battle, which will determine not only who will lead the party but also the county. With critical issues at stake, such as Brexit and the cost of living crisis, the new leaders’ agenda could significantly impact the economy and the pound. Currently, Dominic Raab and Rishi Sunak are the top contenders.

Economic Calendar Highlights

Source: FXStreet.com

Technical Analysis:

TA of the major asset classes (Forex – Commodities – Indices…).

EUR/USD (H4 Candlestick Chart)

The Euro is still moving to the downside by posting lower highs and lows. The market is facing strong support around the 1.0175 mark. This could lead to a strong rebound toward the confluence area, which is made of the resistance level (1.0365) and the bearish trend line. New sellers could choose this spot to ride the downtrend to push it again toward the 1.0175 level.

GBP/USD (H4 Candlestick Chart)

The Pound is also moving to the downside inside a bearish channel formation. The price is currently trying to reverse by testing resistance formed by the June 15 and July 1 lows around 1.1985. If this level breaks, the next resistance is from the top channel line; however, a drop towards 1.1770 could be expected if it holds.

USD/JPY (H4 Candlestick Chart)

After a series of higher highs and lows, the price of USD/JPY has entered a parallel channel formation. Since there is an overall uptrend, there is a higher chance of seeing the range broken to the upside, where the market could reach the 139.75 mark. This price is found using the AB=CD pattern, which says that the lengths of the impulsive waves must be approximately equal.

AUD/USD (H4 Candlestick Chart)

The Aussie is trading inside a parallel channel formation made of the key support & resistance level with the respective price values: 0.6765 & 0.6885. The price is currently testing the midpoint around the 0.6830 mark. If the price succeeds in breaking and closing above the midpoint, then the pair could reach the higher end of the channel, which is the 0.6885 level.

USD/CAD (H4 Candlestick Chart)

Loonie successfully broke the bearish channel to the upside and then entered inside a bullish flag formation. We expect a move higher towards the next potential resistance at 0.3220 if the price manages to break and close above the same strong resistance level around the 1.3075 mark.

Gold (H4 Candlestick Chart)

Gold continued its downward move after breaking the strong support level around the 1,786 formed by the June 1 low. Since then, lower highs and lows have been posted. The price is in a clear downtrend, and there is no sign of a reversal so that the yellow metal could reach the 1,682 mark by the end of next week.

Brent Oil (H4 Candlestick Chart)

UK Brent is in a clear downward movement where lower highs and lows have been posted, characterised by long-bodied bearish candles. The market is now consolidating under the resistance level near the 101 mark. If new sellers ride back the downtrend at this zone, there is a high probability that we see the price of UK Brent Oil reaching 95.50.

US 500 (H4 Candlestick Chart)

The US500 posted a triple bottom near a strong support level (3,743). This led to a reversal and a move higher, but the price is struggling to break the resistance level around the 3,853 mark. If a breakout and a close above this level occur, then the US500 could reach the next key resistance level around the 3943 mark.

Thank you very much for reading – and have a great week trading!

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