EUR/USD built on last week’s bounce from a two-decade low amid modest USD weakness. Reduced bets for a 100 bps Fed rate hike and sliding US bond yields undermined the buck. A positive risk tone also undermined the safe-haven greenback and remained supportive. The uptick lacked bullish conviction amid recession fears and ahead of the ECB on Thursday. The EUR/USD pair kicked off the new week on a positive note and built on its modest recovery move from the vicinity of mid-0.9900s, or the lowest level since December 2002 touched last week. The uptick was sponsored by some follow-through US dollar profit-taking slide, led by diminishing odds for a more aggressive policy tightening by the Federal Reserve. In fact, two of the most hawkish FOMC members - Fed Governor Christopher Waller and St. Louis Fed President Jim Bullard - said last Thursday that they were not in favour of the bigger rate hike at the upcoming meeting in July. The remarks forced investors to scale back their expectations for a supersized 100 bps increase in the benchmark rate. This was evident from a further decline in the US Treasury bond yields, which continued undermining the greenback. On the economic data front, the US Census Bureau reported on Friday that Retail Sales increased by 1% in June as against the 0.8% rise anticipated. Excluding autos, core retail sales also surpassed market expectations and climbed 1% during the reported month, up from the 0.5% increase in May. Separately, the New York Fed's Empire State Manufacturing Index rebounded sharply from -1.2 in June to 11.1 for the current month, beating expectations for a reading of -2. Furthermore, the Prelim Michigan Consumer Sentiment Index rose to 51.1 in July from the 50.0 previous, though did little to impress the USD bulls. The upbeat data was overshadowed by not-so-hawkish comments by Atlanta Fed President Raphael Bostic, noting that moving too dramatically could undermine positive aspects of the economy and add to the uncertainty. Adding to this, signs of stability in the financial markets exerted some downward pressure on the safe-haven buck and offered support to the EUR/USD pair. Despite the supporting factors, the pair lacked bullish conviction amid fears that a halt to gas flows from Russia could trigger an economic crisis in the Eurozone. This might curtail the European Central Bank’s ability to raise rates, which acted as a headwind for the shared currency and capped the upside for the major. Hence, the focus will remain glued to the ECB monetary policy decision, scheduled to be announced on Thursday. The ECB has signalled the start of the rate hike cycle and a 25 bps rate hike is fully priced in the markets. The question, however, is whether the central bank commits the size of the rate hike in September or leaves it open. This, in turn, suggests that investors will look for fresh clues from the accompanying monetary policy statement and ECB President Christine Lagarde's comments at the post-meeting press conference. Apart from this, the flash version of the PMI prints from the Eurozone and the USD should provide a fresh directional impetus for the EUR/USD pair. In the meantime, the USD price dynamics might influence spot prices amid absent relevant market-moving economic releases on Monday. The mixed fundamental backdrop, however, makes it prudent to wait for strong follow-through buying before confirming that the pair have formed a near-term bottom and positioning for any meaningful  recovery move. Technical outlook From a technical perspective, the recent leg down stalled near descending trend-channel support extending from May 25. The EUR/USD pair, however, has been struggling to make it through the immediate resistance near the 1.0120-1.0125 region, above which spot prices could aim to reclaim the 1.0200 round-figure mark. Any subsequent move up could still be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the 1.0275 region. The mentioned barrier marks the top end of the descending channel and should now act as a pivotal point. Sustained strength beyond would shift the near-term bias in favour of bullish traders and pave the way for additional gains. On the flip side, the 1.0000 psychological mark now seems to protect the immediate downside. Some follow-through selling would expose the multi-year low, around the 0.9950 region and the descending channel support, currently near the 0.9920 area. A convincing break below the latter would be seen as a fresh trigger for bearish traders and set the stage for an extension of the recent well-established downtrend.

Although US retail sales figures are often the more important news, their slight overshooting relative to expectations has, in our view, less impact on markets than the import price index. According to preliminary estimates, US sales rose by 1% in June against expectations of 0.9% and a 0.1% contraction a month earlier. Not too much better than expected, given that volume is not price-adjusted, which was higher than expected earlier in the week. The good news for market participants is the cooling of import price increases. For the month, the index added 0.2% vs 0.7% expected and to 10.7% y/y versus 11.6% a month earlier, with 12.1% forecasted. This deceleration results from the correction in commodity prices and the strengthening of the dollar in previous weeks. But most importantly, this index indicates that the peak of the rate of price increases is over. More signs of a bullish trend reversal in prices might ease the Fed’s pressure on the key rate. Market participants are now trying to weigh the chances of a one percentage point hike in a week and a half. A softening of their expectations could trigger a corrective pullback in the dollar and an attempted equity market recovery.

Inflation has made its appearance both in developed economies and developing economies after many decades and thus is now at the centre of debates for citizens and policymakers all over the globe. Though all economies suffer from inflation, there are significant differences in how the countries experience it. In each country, each region, and each sector, inflation is created in a different way, so its effects on the economy, the financial markets, interest rates, and currency needs to be evaluated in a different way. Therefore, in order to deal with it, policymakers of each country are required to provide different solutions for dealing with it. As a general rule, inflation is a condition that can be caused by a decrease in supply, that is, a decrease in the ability of an economy to provide goods and services, as well as an increase in the demand for goods and services. Or from a combination of the two above, which is the situation the world economy is currently experiencing. Decrease In Supply The reduction in supply, which led to increased inflation, was initially caused by the shutdown of business activity due to COVID-19. The closure of borders disrupted the supply chain and thus has reduced the supply of goods and services at a global level.  Moreover, supply was reduced because the continuous lockdowns due to the pandemic for about two years reduced labour supply. In fact, many people who lost their jobs due to the significantly reduced supply in certain job sectors changed their professional orientation, while others who were close to retirement opted for early retirement. , Also, due to the pandemic, migration in search of work in some industries and countries has decreased significantly, and therefore their participation in the labour force in these industries and countries has also decreased. The unfavourable situation created by the pandemic intensified even more after the Russian invasion of Ukraine, as the war has greatly affected supply chains and the supply of essential goods such as oil, gas, agricultural products, wheat and corn also fertilizers since these two countries have a large share of these goods in the global production. The reduction and disruption of the supply chain of essential commodities by these two countries led to a rapid rise in commodity prices and, consequently, a rise in inflation. Furthermore, a critical parameter concerns the fact that in the emerging economies, the transition to conditions of low inflation and low-interest rates in the last decades was incomplete, with the result that the disruption of the supply chain led to a rapid rise in interest rates, and a consequent reduction in the production capacity of these countries and thus reducing the supply of products on world markets from these countries. Increase in Demand Economic policymakers since the onset of the pandemic in their effort to support households and businesses in 2020 and 2021 implemented expansionary fiscal policy. This policy, combined with the capital surplus created by the reduction in investment and consumption during the pandemic period, later led to an explosion in demand for goods and services. The increase in demand has also been contributed by the easing of monetary policy since in some countries central banks lowered interest rates to stimulate economic growth. Indeed, low-interest rates have acted as an important driver for strengthening demand in the last years. Determining prices and growth Let us now see by illustrating the economic model of supply and demand the way in which the above two indicators worked to determine prices and growth in the economy and the market. The figure below shows the supply and demand curves for the entire economy (GDP). The demand curve slopes downward because lower prices encourage more spending and output while higher prices reduce spending and output. The supply curve is upward sloping because higher prices induce more production while lower prices discourage production. The vertical axis measures the price level and thus the increase or decrease of inflation while the horizontal axis measures real GDP and therefore the growth of the economy. The increase in demand (shown in green), is indicated by the shift in the demand curve from 2019 [solid line] to 2022 [dashed line] on the right side of the diagram. This shift of the demand curve to the right side of the diagram would indicate an increase in real GDP if it were accompanied by an increase in supply and, therefore, a corresponding shift of the supply curve (shown in orange) also to the right side of the diagram. That, if there had been a rightward shift in the dotted line defining the Optimum Supply Curve (shown in brown). However, this did not happen. Instead, the supply curve (shown in orange) shifted to the left from 2019 [solid line] to 2022 [dashed line] as supply, for the...

In the aftermath of their invasion of Ukraine, the US and its coalition partners agreed to isolate Russia by sharply restricting trade; and with Russia being among the largest exporters of crude oil and natural gas, the sanctions caused buyers of these products to face critical energy shortages. Prices for these commodities had been rising even before Russia’s invasion on February 24th, but they really spiked in the weeks following. Futures market price data offer the most transparent and reliable picture of market price history for these two commodities, generally; but pricing differences due to variations in quality and location certainly exist. In any case, before the invasion, the August crude oil futures contract had been trading in the mid-$80 range per barrel; but by early June, the price reached $120. Since then, the price has fallen back down into the mid-$90s. A similar story applies to natural gas. In February, the August natural gas contract was trading in the mid-$4 per mmbtu. The price more than doubled by early June, but it’s since settled back to the low $6 per mmbtu range. The history for both commodities certainly contributed to the still high pace of inflation we’ve experienced through June; but both prices have retreated from their recent highs starting in early July. The higher energy prices have benefited Russia, as they’ve still been able to sell energy to China and India — two huge customers that have not agreed to abide by the sanctions; and while the sanctions may be hurting Russia in terms of its ability to buy needed goods from abroad, elevated energy prices have bolstered demand for Rubles. After initially falling to its lowest value relative to the dollar in more than 10 years when Russia invaded Ukraine, the Ruble’s value has since fully recovered and then some. The latest response by the Biden administration to the apparent financial wellbeing that Russia has been experiencing has been to float the idea of capping the price of Russian-sourced oil. This prospect is currently being spearheaded by Treasury Secretary Yellen; but thus far it doesn’t appear to be gaining much traction. I’ve undertaken a complete turnaround on this proposal. Initially, when I first heard it, I couldn’t believe it. Why, in the face of energy shortages, would anyone think about imposing a price cap? Every economist understands that price caps simply induce shortages. They don’t eliminate them. It took some time, but I finally appreciated that the idea has merit — a lot of merit — and it’s worth pursuing. Generally, the problem with sanctions is that they won’t work unless a critical mass of market participants agree to the terms. In this case, China and India haven’t been willing to go along with the original proscriptions. Yellen is clearly hoping that while these countries haven’t been willing to abide by the original sanction terms, perhaps they would agree to join the coalition on a limited basis, by refusing to pay beyond some maximum price. Ultimately, Yellen is asking these energy purchasers to exert greater market authority, hoping that Russia will accommodate to the lower prices. This pricing dynamic is quite interesting. Russia needs to sell its oil and gas, and China and India need to buy it. Yellen clearly believes that China and India have ceded too much authority in the pricing of these products, and she’s prodding these and other purchasers to renegotiate the terms. What I had originally considered to be a silly idea at first glance I now understand to be one with virtually no down-side. In the worst case, nothing will happen; and we’d be left exactly where we are. Or, alternatively, China and India will collectively use their market power to reduce their energy costs at Russia’s expense. The behind the scenes work to be done is corralling those buyers currently not abiding by the sanctions and jawboning them to achieve a consensus as to the cap level that they’d be willing to sign onto. I wish Secretary Yellen luck.

In the aftermath of their invasion of Ukraine, the US and its coalition partners agreed to isolate Russia by sharply restricting trade; and with Russia being among the largest exporters of crude oil and natural gas, the sanctions caused buyers of these products to face critical energy shortages. Prices for these commodities had been rising even before Russia’s invasion on February 24th, but they really spiked in the weeks following. Futures market price data offer the most transparent and reliable picture of market price history for these two commodities, generally; but pricing differences due to variations in quality and location certainly exist. In any case, before the invasion, the August crude oil futures contract had been trading in the mid-$80 range per barrel; but by early June, the price reached $120. Since then, the price has fallen back down into the mid-$90s. A similar story applies to natural gas. In February, the August natural gas contract was trading in the mid-$4 per mmbtu. The price more than doubled by early June, but it’s since settled back to the low $6 per mmbtu range. The history for both commodities certainly contributed to the still high pace of inflation we’ve experienced through June; but both prices have retreated from their recent highs starting in early July. The higher energy prices have benefited Russia, as they’ve still been able to sell energy to China and India — two huge customers that have not agreed to abide by the sanctions; and while the sanctions may be hurting Russia in terms of its ability to buy needed goods from abroad, elevated energy prices have bolstered demand for Rubles. After initially falling to its lowest value relative to the dollar in more than 10 years when Russia invaded Ukraine, the Ruble’s value has since fully recovered and then some. The latest response by the Biden administration to the apparent financial wellbeing that Russia has been experiencing has been to float the idea of capping the price of Russian-sourced oil. This prospect is currently being spearheaded by Treasury Secretary Yellen; but thus far it doesn’t appear to be gaining much traction. I’ve undertaken a complete turnaround on this proposal. Initially, when I first heard it, I couldn’t believe it. Why, in the face of energy shortages, would anyone think about imposing a price cap? Every economist understands that price caps simply induce shortages. They don’t eliminate them. It took some time, but I finally appreciated that the idea has merit — a lot of merit — and it’s worth pursuing. Generally, the problem with sanctions is that they won’t work unless a critical mass of market participants agree to the terms. In this case, China and India haven’t been willing to go along with the original proscriptions. Yellen is clearly hoping that while these countries haven’t been willing to abide by the original sanction terms, perhaps they would agree to join the coalition on a limited basis, by refusing to pay beyond some maximum price. Ultimately, Yellen is asking these energy purchasers to exert greater market authority, hoping that Russia will accommodate to the lower prices. This pricing dynamic is quite interesting. Russia needs to sell its oil and gas, and China and India need to buy it. Yellen clearly believes that China and India have ceded too much authority in the pricing of these products, and she’s prodding these and other purchasers to renegotiate the terms. What I had originally considered to be a silly idea at first glance I now understand to be one with virtually no down-side. In the worst case, nothing will happen; and we’d be left exactly where we are. Or, alternatively, China and India will collectively use their market power to reduce their energy costs at Russia’s expense. The behind the scenes work to be done is corralling those buyers currently not abiding by the sanctions and jawboning them to achieve a consensus as to the cap level that they’d be willing to sign onto. I wish Secretary Yellen luck.

Gold stocks declined by about 31.5%, which perfectly fits my previous analogy to 2008. If history is to rhyme, we can expect a corrective upswing soon. 2008, is that you again? History tends to repeat itself. Not to the letter, but in general. The reason is that while economic circumstances change and technology advances, the decisions to buy and sell are still mostly based on two key emotions: fear and greed. They don’t change, and once similar things happen, people’s emotions emerge in similar ways, thus making specific historical events repeat themselves to a certain extent. For example, right now, gold stocks are declining similarly to how they did in 2008 and in 2012-2013. The Russian invasion triggered a rally, which was already more than erased, and if it wasn’t for it, the self-similarity would be very clear (note the head-and-shoulders patterns marked with green). Since the latter happened, it’s not as clear, but it seems that it’s still present. At least that’s what the pace of the current decline suggests. I used a red dashed line to represent the 2008 decline, and I copied it to the current situation. They are very similar. We even saw a corrective upswing from more or less the 200-week moving average (red line), just like what happened in 2008. We saw a breakdown to new short-term lows, which means that the volatile part of the slide is likely already underway. Moreover, last week, I commented on the above chart in the following way: On a short-term basis, we see a short-term (only) downside target of around 200. That’s about 10% below yesterday’s (Thursday’s) closing price. There are several reasons for it: 1. It’s a round number, and those tend to be more important psychologically than other numbers. 2. That’s where we have the rising medium-term support line based on the 2016 and 2018 lows. The temporary move below this line triggered a massive rally in 2020. 3. That’s where we have the 61.8% Fibonacci retracement level based on the entire 2016-2020 rally. Not every fall must be bearish The 200 target was just reached yesterday. In fact, what happened was even more bullish than that – we saw a tiny move below this level – to 199.22, and then a comeback and a close visibly above 200 – at 204.67. Ultimately, the HUI Index moved lower yesterday, and many will view this simple fact as something bearish. However, doing that would be a “rookie mistake” – after all, major bottoms can only form after declines, right? My point is that a move higher or lower is not bullish or bearish by itself. It’s the context that adds meaning to a certain price move. In this case, a major support level was reached while the HUI Index was already heavily oversold. In fact, based on the RSI, the gold stocks are even more oversold than they were at their 2020 bottom! Consequently, a rebound here is a likely short-term outcome. All right, let’s zoom in and see how mining stocks declined in 2008. Back then, the GDXJ ETF was not yet trading, so I’m using the GDX ETF as a short-term proxy here. The decline took about 3 months, and it erased about 70% of the miners’ value. The biggest part of the decline happened in the final month, though. However, the really interesting thing about that decline – that might also be very useful this time – is that there were five very short-term declines that took the GDX about 30% lower. I marked those declines with red rectangles. After that, a corrective upswing started. During those corrective upswings, the GDX rallied by 14.8-41.6%. The biggest corrective upswing (where GDX rallied by 41.6%) was triggered by a huge rally in gold, and since I don’t expect to see anything similar this year, it could be the case that this correction size is an outlier. Not paying attention to the outlier, we get corrections of between 14.8% and 25.1%. The interesting thing was that each corrective upswing was shorter (faster) than the preceding one. The first one took 12 trading days. The second one took seven trading days. The third one took 2 trading days, and the fourth and final one took just 1 trading day. Fast forward to the current situation. Let’s take a look at the GDXJ ETF. The GDXJ ETF declined by 32.4% and then corrected – it rallied by about 20.3%. The corrective upswing took 14 trading days. Now, it has declined by about 31.5%. The above is in perfect tune with the previous patterns seen in the GDX during the 2008 slide. I previously wrote the following: What does it tell us? It indicates that history can be rhymed, and while it will not be identical, we should pay...