The Week Ahead 4th – 8th July: central bankers get serious about inflation

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

Currency Pair Performance

5-day performance as of June 30, 2022. 11:00 GMT

Source: finviz.com

10 Big Stories Last Week

In case you missed it….

Central bankers get serious about inflation. Bailey, Lagarde & Powell spoke on the Policy panel at the ECB’s forum. The three central bankers all said of prioritising inflation.

G7 blocks Russian gold purchases. G7 leaders announce plans to cap Russian oil import prices and halt Russian gold purchases to tighten the squeeze on Russian inflows.

DAX breaks below 13000. German index fell meaningfully below the key support as consumer confidence falls to a record low and recession fears loom.

Yen slides. Following Fed Powell’s speech at the ECB forum, USD/JPY jumped above 137.00 to its highest level since September 1998. The yen has fallen over 7% against the USD this month.

Russia defaults on foreign debt. The debt default was the first by Russia since 1918, as Western sanctions prevented the payment, even though Russia had the resources to pay its bills.

Tesla cuts jobs. The EV maker closed the San Mateo offices and cut the 200 autopilot employees that worked there. The move raises concerns that Tesla is accelerating its cost-cutting & shares fell 7%.

Bitcoin falls 10%. Bitcoin drops 10% across the week and trades down almost 40% across the month as crypto sentiment deteriorates and interest rates look set to rise sharply.

Copper signals a recession. Copper, often considered an indicator of global economic health, falls for a fourth straight week and trades down 13% this month, marking the third consecutive month of losses.

Shopify stock split. The e-commerce company’s 10 for 1 stock split, announced in April, took place but failed to boost the stock, which tumbled 14% across the week.

Nike tumbles 8% despite the quarterly earnings beat. Nike reported the above forecast earnings, and the board approved an $18 billion buyback. However, concerns over China saw Nike forecast Q1 revenue below forecasts.

Chart of the Week

Source: FRED ICE BoA high yield index option-adjusted spread

The chart shows that credit spreads continue to rise. The spread marks the difference in yield between bonds of similar maturity but different quality. A rising bond credit spread usually indicates a worsening economic condition and higher risk.

Here we see that the credit spread is around 2018 Q4 levels but still a long way from the 2008 financial crash or 2020 COVID stress. So far, this chart suggests that the markets are showing just an equity selloff. Concerns over weak growth or even a potential default cycle are high but not unusually high.

5 Things to Watch This Week

1. US Non-farm payrolls
Despite rising concerns over a recession, the US jobs market has proved remarkably resilient. In May, 390k jobs were added to the US economy, which was well ahead of the 325k forecast and the employment rate held steady at 3.6%. In June, companies are expected to have kept on hiring with expectations for 250k new jobs added. While this is still a strong number, it would be the third straight month of falling payrolls.

Also of note for US data and the dollar are FOMC minutes released on Wednesday, which might be treated as old news in the light of so much Fed testimony over the past fortnight.

2. RBA meeting
After a slow start, the RBA is now fully on board and determined to bring down inflation. Australian rates are rising. The only question is how fast? Given that there hasn’t been any inflation data since the last meeting, the RBA is unlikely to opt for a 75 basis point hike, leaving 25 or 50 as the main options, with the latter the most likely given how far the RBA needs to go to get rates back to ‘neutral’.

3. European Commission’s economic growth forecasts
The European Commission is due to release its quarterly economic growth forecasts, and the picture is unlikely to be pretty. In the spring projection, the EC forecasted slower growth and higher inflation amid the ongoing fallout from the Russian invasion and global supply chain disruptions. Forecasts were for GDP growth of 2.7% this year and inflation at 6.1%. The outlook for the EU is expected to deteriorate further with slower growth and higher inflation.

4. Canadian employment
The Canadian jobs market remains tight. Vacancies rose to around 1 million in April, up 44% from the previous year. Employment rose by 39.5k in May, ahead of the 30k forecast and up firmly from April’s gain of 15.3k. The problem that Canada is facing is not falling demand but a shortage of workers available. With unemployment at its lowest level in over 25 years, additional demand for labour could start showing up in wage growth.

5. China services PMI
The China Caixin Services PMI is expected to come in just below 50, the level separating expansion from contraction. However, with COVID lockdown restrictions easing, the contraction is expected to be smaller than in May. A strong rebound could be expected if the official PMI data is anything to go by.

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 successfully broke the parallel channel to the downside after posting two lower highs and lows. Yesterday the price posted a big bearish bodied bar under the lower end of the range where the price is consolidating. What we could see next is a continuation of the downtrend where the price of the Euro could reach 1.0380, the June 15 low.

GBP/USD (H4 Candlestick Chart)

The Pound also broke the channel’s lower end after an aggressive downward movement. Currently, the price is bouncing inside a flag formation, which is a continuation pattern. If/when the pair breaks this pattern to the downside, the price could continue to move downward toward the 1.1992 area, which was the daily close on June 14.

USD/JPY (H4 Candlestick Chart)

USD/JPY is struggling to break the 136 mark to the upside, where a slight correction to the lower end of the channel has been posted. If the price continues its move to the upside with a break of the 136 mark, this could lead to a move higher toward the area of confluence made by the higher end of the bullish channel and the 100 % Fibonacci extension level (139).

AUD/USD (H4 Candlestick Chart)

The Aussie failed to continue its move to the downside, where it found buyers near the 0.6870 mark. The price posted a bullish engulfing pattern after breaking the bearish trend line to the upside. This move could set up for a reversal and a move higher toward the 0.6950 mark, the resistance from the latter part of June.

USD/CAD (H4 Candlestick Chart)

Loonie failed to reverse and move lower due to the inverse head and shoulders posted below the 1.2910 mark. The price of “USD/CAD” managed to break the bearish trend line to the upside with strong bullish momentum. If the price closes above the 1.2910 mark, this could lead to a further movement to the upside toward the 1.3020 mark.

Gold (H4 Candlestick Chart)

The price of “Gold” managed to break the parallel channel to the downside after retesting the lower end of this range with a long upper wick. This indicates that the sellers are in control of the market, and there is a higher probability that they might push the price furthermore to the downside toward the 1,786 mark.

Brent Oil (H4 Candlestick Chart)

UK Brent tried to change direction by reversing to the upside. However, the sellers pushed the price lower near the 113 mark. The price broke the bullish trend line to the downside and currently is posting a slight correction. If this is a trend reversal as indicated by the trendline break rather than a correction, it could lead to a move lower toward the 104 mark.

US 500 (H4 Candlestick Chart)

The US500 tried to reverse to the upside last week, but it ended up as a false breakout. A double top pattern was posted, leading to a lower move and a break of the bullish trend line. The market is trading below a key level (3,800), where strong negative momentum is pressuring the price lower. While below 3,800, probabilities increase for a further movement toward the 3,660 mark.

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

Sign up for your Key To Markets account today or login here.