The Week Ahead 13th-17th June: a strong USD pullback

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

Currency Pair Performance

5-day performance as of June 9, 2022. 11:30 GMT

Source: finviz.com

10 Big Stories Last Week

In case you missed it…

Yen slides. The yen has dropped further versus its major peers on central bank divergence. USD/JPY reaches a fresh 20-year high, above 134.00. The yen dropped to a 7-year low versus the EUR and AUD.

Oil rises to a 3-month high. Oil rises over $120 amid ongoing tight supply and as demand improves with China easing lockdown restrictions.

ECB turns hawkish. The ECB lays the groundwork for a rate hike in July after ending its bond-buying programme. The move comes as inflation sits at 8.1%, a record high.

OECD slashes global growth forecasts. GDP was downwardly revised to 3% from 4.5% in December. The think tank expects the UK to experience the slowest growth of developed countries.

US 10-year treasury yields rise above 3%. 10-year bond yields hit a 4-week high and pushed over the critical 3% mark as inflation and central bank action remain key concerns.

UK PM survives a vote of no confidence. Boris Johnson won the vote by a slim margin of just 59%, raising questions over how long he can cling to power. GBP trades lower across the week.

The Twitter deal is, or isn’t on? Twitter will reportedly hand Musk the data he is after to keep the $44 billion deal on the table. Musk had threatened to walk away.

Apple enters the buy now pay later market. Apple will handle all the lending itself as the tech giant heads deeper into the financial services industry. Apple also unveiled its MacBook Air overhaul. Apple rose 1.8% this week.

RBA raises interest rates. The central bank surprised the market and hiked rates by 50 basis points taking the lending rate to 0.85%. AUD/USD failed to hold above 0.72.

Didi Global ADR jumps 35%. The Chinese ride-hailing app soars higher after regulators wind up a year-long investigation into the firm, allowing it to take on new customers.

Chart of the week

Source: Bloomberg

Inflation fears continue to be the key driving force behind the market. The idea of peak inflation passing before the stock market can make a meaningful recovery means traders are looking for signs that peak inflation is in the rearview mirror.
In Europe, the chart shows that spiking energy prices have been mainly responsible for the uplift in inflation. Bloomberg Economic expects inflation to peak in Q3 at around 8%. This is of course dependent on Russia or Western sanctions not creating another spike in prices.

5 Things to Watch This Week

1. Fed interest rate decision

The Fed is widely expected to raise interest rates by 50 basis points in the June meeting, after a 50 bp hike in May. Another 50 bp rate hike is expected for July. However, what comes beyond there is uncertain. Will the Fed continue to hike at an aggressive pace and risk pushing the US into recession? Investors will be keen to see where the Fed sees monetary policy heading in Q3 & Q4. A hawkish Fed could lift the USD to fresh 7-year highs

2. BoE rate decision

The BoE has hiked rates at the past four consecutive meetings and is expected to hike again as inflation remains elevated at over 9%. A 25-basis point hike is full-priced in, and a 50-basis point hike is 17% priced in at the time of writing. Even so, with growth as good as stalling, fears are rising that the BoE could tip the UK into recession if it continues to hike rates.

3. German inflation

German inflation reached a record high of 8.7% in April amid rising energy prices, food prices and supply chain disruptions. Inflation is expected to ease slightly in May to 7.8%. Could this feed the narrative that peak inflation has passed? With oil prices still rising and German PPI at a record 31%, it certainly seems optimistic to assume peak inflation has passed in Europe.

4. UK GDP

The UK economy contracted by -0.1% MoM in March and is expected to grow just 0.1% MoM in April. The data comes after dire economic forecasts from the World Bank and OECD, which warned that surging petrol prices and a crippling cost of living crisis would mean that Britain will be the weakest economy in the G7 next year. Weaker than forecast growth could hit risk sentiment and GBP

5. China retail sales

China’s retail sales fell to the lowest level in 2 years last month as COVID controls restricted the economy. May is likely to see sales remain depressed, given that the economy didn’t reopen until June. Expectations are for retail sales to fall by 6.1% YoY in May.

Economic Calendar Highlights

Source: FXStreet.com

Technical Analysis:

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

EUR/USD (H4 Candlestick Chart)

The euro is moving in a slight uptrend, respecting a bullish trend line by posting higher highs and higher lows. The price found buyers near the 1.0700 mark where a small-bodied bearish bar with a huge lower wick has been left. This shows that the buyers are still in control of the market and might push it all the way up to the 1.07485 level.

GBP/USD (H4 Candlestick Chart)

The Pound is trading inside a clear parallel channel between two key levels, which are the support and resistance, with the respective prices 1.2480 & 1.2580. The market currently is heading to the lower end of this channel, where bulls will try to push it back up again to the higher extreme near the 1.2580 level.

USD/JPY (H4 Candlestick Chart)

USD/JPY is moving aggressively to the upside after breaking the 131 level by a big-bodied bullish bar. The market is in a kind of correction where it might retrace to the area of confluence made by the bullish trend line and the support level (133). If enough buyers decide to ride the up trend around this area the market could reach the previous high recorded in 01.01.2002 and over 135.

AUD/USD (H4 Candlestick Chart)

Similarly to the Pound, the Aussie is bouncing inside a parallel channel made of a support and resistance line with the respective prices of 0.7160 & 0.7230. The market tested the lower end of this channel, where it found buyers, represented by the bullish morning star candle pattern left at this zone. The price looks set to move upward toward the old resistance level, however a fresh lower low would see a fresh downtrend created.

USD/CAD (H4 Candlestick Chart)

Loonie is clearly in a downtrend where lower lows and highs have been posted. The market was pushed furthermore to the downside near the 1.2600 mark, where a huge bearish bodied bar was left under it. Currently, the price is forming a bearish pennant where if the sellers manage to break it to the downside this will lead most probably to a lower move toward the 1.2470 mark.

Gold (H4 Candlestick Chart)

Gold isn’t doing much; there is indecision between bulls and bears, leaving the price trading inside a parallel channel. The market tested its inner layer of resistance at 1855 and posted bearish candles with long upper wicks, indicating the yellow metal could continue its move to the downside toward the 1837 mark.

Brent Oil (H4 Candlestick Chart)

UK Brent oil broke the strong resistance level around the 120 round number with positive momentum. The price is trading inside a bullish channel showing that the uptrend is still healthy. While the current correction remains above the lower channel line, a retest of the supper channel line can be expected alongside the next resistance, which is at the 128 mark.

US 500 (H4 Candlestick Chart)

The US500 is also trading inside a parallel channel made of a support and resistance level with the following price levels: 4104 & 4180. The market seems to have found buyers near the lower end of this pattern and was slightly pushed to the upside. Yesterday, at the close of the US session, the price left a bullish engulfing pattern which could lead to a move higher in today’s US opening session to test the higher end of this channel.

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

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