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EUR/USD – 1.0181 Despite euro's erratic fall from last Thurday's 2-week high of 1.0278 to retrace rise from July's 20-year bottom at 0.9953 to 1.0097 in post-FOMC, subsequent rally on broad-based usd's weakness due to less hawkish comments by Fed's Powell suggests pullback possibly over, above 1.0257 would yield stronger gain to 1.0295/00. On the downside, only below 1.0150/55 would risk another fall towards 1.0097. Data to be released on Thursday: Australia retail sales, export prices, import prices. France producer prices, Italy industrial sales, trade balance, EU business climate, economic sentiment, industrial sentiment, services sentiment, consumer sentiment, Germany CPI. US GDP, PCE prices, initial jobless claims, continuing jobless claims, KC Fed manufacturing and Canada average weekly earnings.  

The US economy is expected to have grown a modest 0.4% in the second quarter. A second consecutive negative reading will indicate the US is in a recession. USD strength or weakness will be directly linked to the market sentiment. The US will publish the preliminary estimate of the second quarter Gross Domestic Product on Thursday, July 28. The economy is expected to have grown at an annualized pace of 0.4%, improving from a 1.6% decline in Q1. Macroeconomic data, however, points to heightened downward risks for the economy, particularly figures linked to the last half of the quarter, as spending retreated sharply. A negative figure will mean the US is in a technical recession, defined as two consecutive quarters with negative GDP readings. Following the first year of the pandemic, global economies bloomed. The US expanded substantially throughout 2021 but lost momentum by the end of the year. Supply-chain issues and bottlenecks were initially blamed for the slowdown, alongside shocking spending that led to higher inflation. Central bankers were expecting the latter to be temporary, realizing too late that they missed big. Nor did they foresee Russia’s decision to invade Ukraine and create a global energy and food crisis… Read More »US Gross Domestic Product Preview: Would the US avoid a technical recession?

The US Federal Reserve has raised rates by 75 bps as expected to around 2.50%. An acknowledgment of some softening has been balanced by comments about a strong economy.  Fed Chair Powell has dropped guidance, moving to a meeting-by-meeting basis. Markets cheer lower chances of tougher policy, and it may prove short-lived.  “We think it's time to go to a meeting-by-meeting basis” – investors have seen this key quote as lowering the chance for yet another 75 bps rate hike in September. Markets are up, the dollar is down. Federal Reserve Chair Jerome Powell has also skipped a chance to push back against market expectations for rate cuts next year.  Is this rally justified? Another quote by Powell, that the Fed is looking for “compelling evidence that inflation is falling” may be interpreted as the Fed is in search for an excuse to slow down. It seems markets were on a quest to take profits on dollar longs, and for a “buy the dip” reaction in markets. However, it may prove short-lived. After the Fed raised rates by 75 bps as expected, it only provided token acknowledgement of some moderation in economic activity: However, it is followed by the word… Read More »Fed Quick Analysis: Powell abandons guidance, market cheer may prove short-lived

The US Federal Reserve has raised rates by 75 bps as expected to around 2.50%. An acknowledgment of some softening has been balanced by comments about a strong economy.  Fed Chair Powell has dropped guidance, moving to a meeting-by-meeting basis. Markets cheer lower chances of tougher policy, and it may prove short-lived.  “We think it's time to go to a meeting-by-meeting basis” – investors have seen this key quote as lowering the chance for yet another 75 bps rate hike in September. Markets are up, the dollar is down. Federal Reserve Chair Jerome Powell has also skipped a chance to push back against market expectations for rate cuts next year.  Is this rally justified? Another quote by Powell, that the Fed is looking for “compelling evidence that inflation is falling” may be interpreted as the Fed is in search for an excuse to slow down. It seems markets were on a quest to take profits on dollar longs, and for a “buy the dip” reaction in markets. However, it may prove short-lived. After the Fed raised rates by 75 bps as expected, it only provided token acknowledgement of some moderation in economic activity: However, it is followed by the word… Read More »Fed Quick Analysis: Powell abandons guidance, market cheer may prove short-lived

A combination of factors dragged EUR/USD to over a one-week low on Tuesday. The European gas crisis weighed heavily on the euro amid resurgent USD demand. The downside remains cushioned ahead of the highly anticipated FOMC decision. The EUR/USD pair witnessed aggressive selling on Tuesday and tumbled nearly 150 pips from the daily swing high, around mid-1.0200s. The sharp intraday fall dragged spot prices to over a one-week low and was sponsored by a combination of factors. The shared currency was weighed down by renewed worries over a halt of gas flows from Russia, which could trigger an energy crisis in the Eurozone. In fact, Gazprom announced that the flow through Nord Stream 1 will be cut to 20% of capacity in the next day or two, for an indeterminate time. Though temporary, the supply reduction could drag the region's economy faster and deeper into recession. Apart from this, resurgent US dollar demand exerted additional downward pressure on the major. The prospects for a global economic downturn continued weighing on investors' sentiment, which was evident from the prevalent risk-off environment. This, in turn, assisted the safe-haven USD to stage a solid rebound from the vicinity of its lowest level since… Read More »EUR/USD Outlook: Seems vulnerable amid European gas crisis, hawkish Fed rate hike awaited

The US Federal Reserve is set for another 75 bps rate hike on July 27. Fed Chair Powell's pledge to fight persistenly high inflation and policy guidance hold the key.  The US dollar is basing to kickstart a fresh rally towards a two-decade high. Despite an imminent technical recession in the US, the Federal Reserve (Fed) is determined to deliver another super-sized rate hike when it concludes its two-day policy meeting on July 27. Fed Chair Jerome Powell’s response to fighting inflation will be closely examined alongside the policy guidance for the September meeting. Inflation peaking, not so far After announcing the largest rate hike since 1994 in June, the Fed is set for the second consecutive 75 bps rate hike at its July policy meeting, lifting the federal funds rate range to between 2.25% and 2.5%. In doing so, the world’s most powerful central bank will be effectively ending the pandemic-era support for the US economy. Markets are wagering a roughly 80% chance of another 75 bps rate hike by the Fed this month when compared to a 20% likelihood of a full percentage-point rise, per CME’s Fed Watch Tool. The odds of a 100 bps rate hike at… Read More »Fed Preview: Dollar’s fate hinges on Powell’s policy guidance

The recession vs. inflation battle is increasingly shifting towards the former as reflected in the recent paring back in US Federal Reserve tightening expectations and growing market pricing of rate cuts beginning as soon as early next year.  The weakness in the US July Services purchasing managers index (PMI) added more weight to this argument.  This week's second quarter US Gross Domestic Product (GDP) data is likely to confirm two quarters of negative growth, which should mean technical recession though in the case of the US, recession is defined by the US National Bureau of Economic Research (NBER) as “a significant decline in economic activity that is spread across the economy and lasts more than a few months”.  Either way, the US economy is on a softer path. This week is a big one for events and data.  The Fed is widely expected to cut US policy rates by 75 basis points tomorrow.  Expectations of a bigger 100bps move have been pared back.  If the Fed does hike by 75bp it will likely result in interest rates reaching a neutral rate (the theoretical federal funds rate at which the stance of Federal Reserve monetary policy is neither accommodative nor restrictive).… Read More »Recession vs. inflation battle rages on

The Fed will hike another three-quarter point on Wednesday, at least. But looking ahead, what then? Target Rate Probabilities for Wednesday July 27 FOMC Meeting The above chart is courtesy of CME Fedwatch.  Looking Ahead Looking Ahead to December Target Rate Probabilities for Wednesday December 14 FOMC Meeting Key Points  The single most likely outcome (39.4 percent) for the FOMC meeting on Wednesday December 14 is for the Fed to target its base rate in the range 3.25-3.50 percent.  There is a 17.4 percent chance of 3.00-3.25 percent.  There is a significant (43.2 percent) chance of something higher than 3.25-3.50 percent.  The second most likely outcome (31.5 percent) for the FOMC meeting on Wednesday December 14 is for the Fed to target its base rate in the range 3.50-3.75 percent.    The current rate is 1.50-1.75 percent. There are meetings on July 27, September 21, November 2, and December 14. A 75 basis point hike in July is a given. That would takes us to 2.25-2.50 percent. To get to 3.25-3.50 percent in December would take two more 50 basis point hikes in September and December.  I am very skeptical the Fed will follow through all the way to the implied… Read More »A 75% chance the Fed hikes interest by 75 basis points on Wednesday, then what?

The Fed will hike another three-quarter point on Wednesday, at least. But looking ahead, what then? Target Rate Probabilities for Wednesday July 27 FOMC Meeting The above chart is courtesy of CME Fedwatch.  Looking Ahead Looking Ahead to December Target Rate Probabilities for Wednesday December 14 FOMC Meeting Key Points  The single most likely outcome (39.4 percent) for the FOMC meeting on Wednesday December 14 is for the Fed to target its base rate in the range 3.25-3.50 percent.  There is a 17.4 percent chance of 3.00-3.25 percent.  There is a significant (43.2 percent) chance of something higher than 3.25-3.50 percent.  The second most likely outcome (31.5 percent) for the FOMC meeting on Wednesday December 14 is for the Fed to target its base rate in the range 3.50-3.75 percent.    The current rate is 1.50-1.75 percent. There are meetings on July 27, September 21, November 2, and December 14. A 75 basis point hike in July is a given. That would takes us to 2.25-2.50 percent. To get to 3.25-3.50 percent in December would take two more 50 basis point hikes in September and December.  I am very skeptical the Fed will follow through all the way to the implied… Read More »A 75% chance the Fed hikes interest by 75 basis points on Wednesday, then what?

A quiet start to what will otherwise be a lively week in financial markets with particular focus on the US as the Fed meets Wednesday and big tech report earnings. Stock markets are modestly in the green, with a fair amount of straw clutching at play once more. Earnings not being as bad as feared, the Fed only hiking by 75 basis points and China putting together a plan in the hope of averting the next wave of the property crisis is among the reasons being given for stock markets rising. It all seems a bit desperate. Don't get me wrong, we need to take the small wins but none of the above scream recovery to me. Stock markets can't fall forever but the latest bear-market rally seems to be being driven by as much finger crossing as the previous ones. I think there may be a few more nasty surprises that will test the foundations of the latest market bottom. Those foundations could be rocked over the next few days if things don't go to plan. I expect the Fed will not hit the panic button yet and hike by 75 basis points again which still represents a very… Read More »Fed and earnings bring cautious optimism