What are we looking at
- The stronger dollar has re-emerged once more as risk appetite has soured
- EUR/USD closes in on parity: The world’s most widely traded forex pair has continued to fall to its lowest since December 2002. It has come within 5 pips of hitting parity this morning.
- Indices falling again: Rallies have continually been sold into throughout 2022 and the latest rebound fell over yesterday and is lower again today.
- Data trading: The German ZEW Economic Sentiment is the only data of note. A sharp decline in headline sentiment is expected. Any negative surprise will keep EUR under negative pressure.
Overview
The negative sentiment that gathered pace once more over the weekend continues to weigh on risk appetite. Sentiment on major markets is once again moving with a negative bias as markets consider the implications of further lockdowns in China and the restriction of gas flows from Russia into Europe. With risk appetite soured, we see higher risk assets such as indices and commodities falling. We also see the strengthening of the US dollar (USD). These moves gathered pace yesterday and continue this morning.
The big news for today’s session could be that this may well be the day that EUR/USD hits parity. The combination of European recession fears hampering the ability of the European Central Bank to hike rates to any significant degree has weighed on the EUR. Coming at a time when the USD has been in favour, we find EUR/USD trading at near 20-year lows. The reaction to hitting parity could be crucial. Will this massively psychological level be a big inflexion point and induce a rally (technical momentum indicators are oversold)? Or will a breach of parity open the floodgates to further downside?
After a quiet day yesterday, it is still fairly subdued today too on the economic calendar. The German ZEW Economic Sentiment gauge for July will be the main focus. The broad sentiment gauge is expected to deteriorate sharply in July, undoing two months of slight improvements. This is expected to be driven by deteriorating current conditions.
Today's news
Market sentiment remains negative: Having deteriorated from the open yesterday, market sentiment remains negative this morning. A bias of negative moves on indices and commodities, whilst USD continues to strengthen.
Treasury yields fell yesterday and continue to fall today: Treasuries are seen as a safe haven asset and buying bonds pull yields lower. The US 10-year yield fell -10bps yesterday and is another -8bps today. The spread between the 2s and 10s remains negative (inverted) at -10bps (-0.10%)
Fed speakers remain hawkish: The consistent line of hawkish speakers has been a big reason behind the USD strength. Bullard (2022 voter, extremely hawkish) is pushing for a +75bps hike in July and plays down the concept of recession. Bostic (not a voter until 2024, hawkish) is also looking for +75bps as he wants to get inflation under control.
China’s zero COVID strategy continues: The strategy is flexed once more as an entire city (Wugang in the Henan province) will be in lockdown for 3 days due to the emergence of just 1 COVID case.
Cryptocurrencies falling as risk appetite deteriorates: Bitcoin fell hard yesterday and is down another -3% this morning. The price has fallen decisively below $20,000 and is down -10% from Friday’s close.
Central Bankers speak from the Fed and BoE: The are a couple of speakers today, the FOMC’s Barkin (voter in 2024, hawk) speaks at 1730BST. The Bank of England Governor Bailey also speaks at 1800BST.
Economic Data:
- German ZEW Economic Sentiment (at 1000BST). Sentiment is expected to continue to deteriorate in July to -38.0 (from -28.0).
Major markets outlook
Broad outlook: Risk appetite continues to sour, driving indices and commodities lower, whilst strengthening the USD.
Forex: The USD is outperforming again, especially against EUR and GBP.
- EUR/USD fell hard yesterday and has continued lower today. The price has come within a handful of pips of hitting parity. This will be a key momentum with this being such a psychological level in the world’s most widely traded forex pair. The RSI is oversold at around 24 on the daily chart, but even on the 1-hour and 4-hour charts, there is little sign of any technical rally. We remain bearish but have to be cautious, given the immense round number support that could be housed. Initial resistance is 1.0070 and then 1.0190/1.0220.
- GBP/USD has fallen over again and broken below the support of last week’s low at 1.1875. This means there is almost no support until 1.1410. A two-week downtrend is a basis of resistance now at 1.1990. The momentum is negative without being exceptionally bearish though. The RSI is back around a level (c. 30) where rebounds have previously kicked in over recent weeks. Initial resistance is now 1.2055 and then 1.2165.
- AUD/USD has again seen a rally fall over around the overhead supply between 0.6830/0.6870. The decisive bear candle has also closed below 0.6760 support and opened two-year lows again. We continue to favour further downside towards the 0.6650 area in due course with near-term rallies as a chance to sell. A downtrend of lower highs over the past five weeks is a basis of resistance around 0.6830 currently. Resistance at 0.6875/0.6895 is key near term.
Commodities: Precious metals falling away again whilst oil may be forming a near-term top.
- Gold has been consolidating around $1732 in recent sessions but this support is creaking under the pressure of growing downside pressure this morning. Intraday resistance is growing around $1740/$1745 and momentum on the 4-hour chart is beginning to turn with a negative bias. A clean break below $1732 opens $1720 and potentially downside towards the key support at $1676. A close above $1752 is needed for an improvement.
- Silver has been consolidating above support at $18.91 but a negative candlestick yesterday and further downside this morning see the market on the brink of another downside break. Below $18.91 means further two-year lows with the next support c. $18.40. The caveat is that the RSI remains around the mid-20s and is oversold, so the threat of a near-term technical rally remains. Initial resistance around $19.48 needs to be broken to open the way towards the more considerable resistance between $20.20/$20.45.
- Brent Crude oil recovered well in recent sessions to firm the support of the medium-term range lows between $98/$102. However, the negative risk environment taking hold once more has seen the rally stall in recent sessions. Below $105.55 completes a small top that would imply pressure back towards $101.50. Resistance is firming at $109.65. With the RSI having faltered around 45 this rally has been a move that has simply renewed corrective potential.
Indices: A rebound has fallen over early this week.
- S&P 500 futures are now reversing the recovery seen throughout last week. The move lower yesterday has continued early today and is coming back towards a test of a three-week uptrend (currently around 3790). The concern is that the bull failure has come around the band of resistance between 3876/3950 and the RSI is faltering between 50/55 again (as it has done for the past three months). We still favour selling a faltering rally and look for confirmed failure signals. Below 3809/3849 support would be negative.
- German DAX fell yesterday and is lower again this morning. This move back lower has left resistance at 13,012 which will now be seen as an important marker for a potential sustainable near-term recovery. A small top has formed below 12,755 and implies a retreat towards the 12,500 area. Initial support is at 12,600/12,660 as a near-term pivot.
- FTSE 100 remains highly uncertain and lacking conviction as another long-legged/small-bodied candle on the daily chart has formed. Viewed on a one-month horizon, the market is in a choppy range between support at 6970/7013 and resistance at 7300/7370. With momentum remaining correctively configured and the RSI consistently below 50, we still favour selling near-term rallies within this month-long range. Initial support is now at 7071 as resistance has formed at 7218.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
