EUR/USD softens as ECB hikes lag behind The euro hovers over parity as the ECB is expected to kick off its tightening cycle this week. The ECB will likely deliver a 25 bp increase next week but may have limited impact on the single currency. The modest hike is more of a concession that policymakers’ hands are tied given the energy price shock and the fragmentation risk. Traders might focus on how the central bank would support peripheral bonds to avert another debt crisis as borrowing costs rise. The euro may struggle to maintain the parity milestone as the ECB cannot afford to normalise in a decisive manner. 0.9800 could be next with 1.0400 as a fresh resistance. USD/JPY soars as BoJ sits on sidelines The Japanese yen fell to a 24-year low against the US dollar as the Bank of Japan vowed to stay dovish. Governor Kuroda has repeatedly shrugged off the idea of tightening and gone contrarian instead. The BoJ may even consider further easing to support the recovery. Inflation shot above 2% mainly due to soaring fuel costs, and unless wage growth gains a foothold, the central bank has leeway to leave its policy loose. After the SNB raised its interest rate for the first time in 15 years, the BOJ is the last major central bank still kicking the stimulus can down the road. The pair is climbing towards 140.00. 135.00 is a fresh support. GBP/USD weighed by growth concerns The pound weakens as Britain faces multiple economic and political headwinds. Hawkish signals from the Bank of England have had little effect as the market frets that inflation compounded by Brexit trade frictions could be persistent in the UK. Higher consumer price data this week would underpin the inflationary spiral and a strong economic slowdown in the country. To rub salt into the wounds, an uncertain political outlook may continue to cast a cloud on the currency. Volatility could be expected as the leadership race for a new prime minister goes on. The pair is heading to March 2020’s low at 1.1450. 1.2050 is the closest resistance. XAU/USD falls as dollar surges amid record inflation The gold market remains under pressure as record high US inflation sends the dollar index to a 20-year high. Consumer prices surged 9.1% in June to a four-decade high, cementing expectations of more aggressive moves from the central bank. A 75bp hike has become the base scenario, but speculations grow that the Fed may follow in the footsteps of the Bank of Canada and deliver a supersized 100 bps rate hike later this month. As traders pile into the greenback, roaring volatility may continue to take a toll on the precious metal. The price is ab August 2021’s low near 1682. 1750 has turned into a supply area.

The Chinese economy is experiencing a sharp slowdown, raising a reasonable doubt that GDP will be able to grow by the initially planned 5.5% this year. Fresh data showed that China’s economy was only 0.4% higher in the second quarter than a year earlier.  The half-year increase is 2.5% compared to the same period a year earlier. A new round of problems for property developers and an increasing boycott by mortgage borrowers to pay their debts is becoming a bigger problem. Government intervention with massive infrastructure stimulus, for example, through nationalising troubled properties, looks logical. The flip side of the stimulus is an increase in the money supply and a weaker exchange rate. Technically, we have been seeing pressure on the Chinese renminbi against the dollar since the end of last week, and an analysis of the fundamentals suggests that this downward momentum has just begun. This is not the first time China had had to deflect against the wind by tightening policy when the world economies softened in 2020-2021. The developed countries are quickly taking money off the table, and China is again trying to offset the external downturn with domestic consumption. And this is bad news for the Chinese renminbi. The technical analysis indicates the almost three-month period of consolidation of the yuan against the dollar after the growth impulse in April is over. During May, the USDCNH corrected its surge from the year’s lows in February, stopping it at the classic 61.8% Fibonacci level. A bullish scenario for UDSCNH implies a rise to the 7.13-7.15 area, this is near the highs of 2019 and 2020 and at 161.8% of the rally in the first months of the year.

Summary Consumer sentiment rose a scant 1.1 points from last month's all-time low, but the REAL takeaway is that inflation expectations cooled. That is welcome news for Fed policymakers and it makes the pressure to "go big" at the next meeting less intense after this week's scorching CPI report. Read the full report here

The massive monetary binge is over. The Fed is taking the punch bowl away. The hangover is coming. The best cure is – except for the broth – gold. No Longer Doves 75 basis points! This is how much the FOMC raised interest rates in June. As the chart below shows, it was the biggest hike in the federal funds rate since the 1990s. Due to this huge move, the target range for the federal funds rate returned to the pre-pandemic level of 1.50-1.75%. Given how dovish and gradual the US central bank normally is, we may conclude that the inflation threat is really serious. The Fed has been so far behind the inflation curve that it must raise rates at the fastest pace in more than a quarter of a century! Last month, the US central bank also started reducing the size of its enormous balance sheet. Until September, the Fed will be cutting $45 billion a month from its massive holdings, and it will increase to $95 billion, almost twice as much as it did in the previous episode of quantitative tightening. As the chart below shows, the value of the Fed’s assets has already peaked, reaching $8.95 trillion in mid-May 2022. What does it all mean for the US economy? Well, let’s start with the observation that although the Fed is tightening its monetary policy, its stance remains accommodative. According to the Taylor rule, the federal funds rate shouldn’t be just between 1.50% and 1.75%, but at least above 5% (see the chart below taken from the Atlanta Fed)! At such a level, the Fed will be “neutral”, but to beat inflation it should be restrictive, not merely neutral! It means that the US central bank remains behind the inflation curve and would have to raise interest rates much further to combat high inflation. However, it raises a very important question: could the Fed raise rates so decisively without triggering the next economic crisis? This is, of course, a rhetorical question. As a reminder, the previous Fed’s tightening cycle of 2017-2019 led to the repo crisis, forcing the US central bank to reverse its stance and cut interest rates. Given how fragile the financial system is and how much indebted the American economy is, it’s almost certain that the current monetary policy tightening will lead to a sovereign-debt crisis or another kind of financial crisis. Right now, the commercial banks seem to be in healthy condition and with ample reserves, so the risk of a liquidity crisis in the very near future is low. However, as the tightening continues, the debt-servicing costs and share of nonperforming loans will increase, worsening the financial situation. So far, Powell is flexing his muscles, but this is only because the labor market remains strong, but when faced with the choice between fighting inflation and stimulating a crumbling economy, I doubt whether he could withstand the pressure from both Wall Street and the government, which are heavily indebted and addicted to easy money. Implications for Gold What does it all imply for the gold market? Well, theoretically, monetary policy tightening should be negative for gold prices, as higher real interest rates usually lead to lower gold prices. However, gold has been generally very resilient during the current tightening cycle. It’s true that it didn’t rally despite the outburst of inflation, but its gave a stellar performance (even when we take July plunge in the account) in the face of rising rates and in comparison to plunging equities or cryptocurrencies, as the charts below show. By the way, it seems that the debate about whether gold or Bitcoin is a better store of value has been settled. Powell still believes in a soft landing, but he may be the only one. You see, after a gigantic binge, there is always a hangover. When the host of the great party is taking away the punch bowl, drunken guests loudly express their dissatisfaction, which can even translate into brawling. Similarly, after a massive increase in the money supply, there is high inflation that you cannot just wait out, lying in bed and eating broth. You have to hike interest rates, but then borrowing costs are increasing, which hits many excessively indebted companies and investors, and the economic boom translates into a bust. Busts are awful, but not for gold. The yellow metal rallied during both the Great Recession and the coronavirus crisis (and also during the repo crisis), and I believe that this time won’t be different. We just have to wait until deteriorating economic conditions force the Fed to deviate from its planned course. Initially, when the next crisis hits, there might be a panic sell-off in the precious metals market in order to raise liquidity, but after this short period, gold should rally,...

Overview: The higher-than-expected US CPI and the strong expectation of a 100 bp hike by the Fed in two weeks is propelling the dollar higher. It jumped to almost JPY139.40 and the euro is off more than a cent from yesterday's high (though holding above parity). Even where there has been favorable economic news, like the strong jobs report in Australia, it failed to dent the greenback. Most of the large bourses in the Asia Pacific regions advanced. Hong Kong is a notable exception, and the Singapore and Philippines' stocks fell after the surprise tightening moves. Europe's Stoxx 600 is extending yesterday's 1% slide and is off around 0.8% in late morning turnover. The S&P and NASDAQ futures are trading lower. They have fallen in the first three sessions this week. The US 10-year yield is a few basis points higher around 2.96%. European benchmark yields are 8-18 bp higher, with Italian bonds getting hit by political concerns. But the peripheral premium more generally is widening. Gold is returning to its lows after being turned back from around $1750 yesterday. August WTI is trading at its lowest level in three months near $93.40. Higher gasoline prices in the US have seen demand slump to around 8 mln barrels a day last week. In seasonally adjusted terms, it is the lowest since the mid-1990s. After surging 8.5% yesterday, US natgas is off around 1.2% today. Europe’s benchmark is off 2.5% today after rallying 10% in the past two sessions. Iron ore prices collapsed 8% today after rising 3.6% yesterday. September copper is giving back yesterday's 1% gain plus some. It fell more than 6.5% Monday-Tuesday. Lastly, September wheat is trying to snap a three-day decline. It is near five-month lows. Asia Pacific Australia's much stronger than expected employment report and news that China is considering lifting the almost two-year ban on its coal failed to lift the Australian dollar. After edging higher in the past two sessions, the Aussie is trading a little lower, though in yesterday's range. Australia created 88.4k jobs last month, almost three-times more than the median projection in Bloomberg's survey, and of them, nearly 53k were full-time posts. The participation rate rose to 66.8%, a new record high, while the unemployment rate tumbled to 3.5% from 3.9%.  The city of Tokyo has lifted its Covid alert to the highest level as cases surge. According to reports, Tokyo has around 3.5k infections on July 1. Yesterday, it reached around 17k. Separately, foreign investors, who sold a record amount of Japanese government bonds, returned in a big way last week. Ministry of Finance figures show foreign investors bought JPY2.07 trillion (~$15 bln) last week, the second highest since the time series began in 2005. And that shocking 7.2% contraction in May industrial output (month-over-month) was revised to a 7.5% drop. Capacity use fell a stunning 9.2%. The weakness in household spending and this dramatic weakness warns that Japan's recovery from the contraction in Q1 stalled. There were two surprise central bank moves in Asia today. First, the Monetary Authority of Singapore signaled tighter monetary policy by allowing the Singapore dollar to appreciate. The exchange rate is the main channel of monetary policy. Although the economy appeared to have stalled in Q2, inflation is rising, and MAS lifted its inflation forecast from 4.5%-5.5% to 5%-6%. Second, at an unscheduled meeting, the Philippines central bank announced a 75 bp hike of the key borrowing rate to 3.25%. After raising rates last month, the central bank was not due to meet until August 18. The US dollar slipped slightly against the peso, losing about 0.2% on the day. The US dollar has jumped to around JPY139.40. There were options for nearly $1.5 bln at JPY139 that expired today and may have spurred more dollar buying as the greenback rose through the figure. The JPY140 level is the next target, however, the frenzied buying appears to have dried up for the time being. Below JPY139, support is seen in the eJPY138.60 area. US Yellen and Japan's Suzuki's statement earlier this week downplayed the likelihood of material intervention. The Australian dollar is languishing in its trough. Yesterday's attempt to resurface above $0.6800 was greeted with fresh selling. It is holding above the week's low set on Tuesday near $0.6710. The Chinese yuan slipped to its lowest level in a month as the greenback's strength proved too much. The US dollar rose to almost CNY6.75. which it has not seen since June 14 when it briefly traded above CNY6.76. The high for the year was in mid-May closer to CNY6.8125. The PBOC fixed the dollar tightly near expectations (CNY6.7265 vs. CNY6.7267. The PBOC indicated that there was plenty of liquidity and the overnight rate fell to an 18-month low. Europe The Tory Party is in...

Overview: The higher-than-expected US CPI and the strong expectation of a 100 bp hike by the Fed in two weeks is propelling the dollar higher. It jumped to almost JPY139.40 and the euro is off more than a cent from yesterday's high (though holding above parity). Even where there has been favorable economic news, like the strong jobs report in Australia, it failed to dent the greenback. Most of the large bourses in the Asia Pacific regions advanced. Hong Kong is a notable exception, and the Singapore and Philippines' stocks fell after the surprise tightening moves. Europe's Stoxx 600 is extending yesterday's 1% slide and is off around 0.8% in late morning turnover. The S&P and NASDAQ futures are trading lower. They have fallen in the first three sessions this week. The US 10-year yield is a few basis points higher around 2.96%. European benchmark yields are 8-18 bp higher, with Italian bonds getting hit by political concerns. But the peripheral premium more generally is widening. Gold is returning to its lows after being turned back from around $1750 yesterday. August WTI is trading at its lowest level in three months near $93.40. Higher gasoline prices in the US have seen demand slump to around 8 mln barrels a day last week. In seasonally adjusted terms, it is the lowest since the mid-1990s. After surging 8.5% yesterday, US natgas is off around 1.2% today. Europe’s benchmark is off 2.5% today after rallying 10% in the past two sessions. Iron ore prices collapsed 8% today after rising 3.6% yesterday. September copper is giving back yesterday's 1% gain plus some. It fell more than 6.5% Monday-Tuesday. Lastly, September wheat is trying to snap a three-day decline. It is near five-month lows. Asia Pacific Australia's much stronger than expected employment report and news that China is considering lifting the almost two-year ban on its coal failed to lift the Australian dollar. After edging higher in the past two sessions, the Aussie is trading a little lower, though in yesterday's range. Australia created 88.4k jobs last month, almost three-times more than the median projection in Bloomberg's survey, and of them, nearly 53k were full-time posts. The participation rate rose to 66.8%, a new record high, while the unemployment rate tumbled to 3.5% from 3.9%.  The city of Tokyo has lifted its Covid alert to the highest level as cases surge. According to reports, Tokyo has around 3.5k infections on July 1. Yesterday, it reached around 17k. Separately, foreign investors, who sold a record amount of Japanese government bonds, returned in a big way last week. Ministry of Finance figures show foreign investors bought JPY2.07 trillion (~$15 bln) last week, the second highest since the time series began in 2005. And that shocking 7.2% contraction in May industrial output (month-over-month) was revised to a 7.5% drop. Capacity use fell a stunning 9.2%. The weakness in household spending and this dramatic weakness warns that Japan's recovery from the contraction in Q1 stalled. There were two surprise central bank moves in Asia today. First, the Monetary Authority of Singapore signaled tighter monetary policy by allowing the Singapore dollar to appreciate. The exchange rate is the main channel of monetary policy. Although the economy appeared to have stalled in Q2, inflation is rising, and MAS lifted its inflation forecast from 4.5%-5.5% to 5%-6%. Second, at an unscheduled meeting, the Philippines central bank announced a 75 bp hike of the key borrowing rate to 3.25%. After raising rates last month, the central bank was not due to meet until August 18. The US dollar slipped slightly against the peso, losing about 0.2% on the day. The US dollar has jumped to around JPY139.40. There were options for nearly $1.5 bln at JPY139 that expired today and may have spurred more dollar buying as the greenback rose through the figure. The JPY140 level is the next target, however, the frenzied buying appears to have dried up for the time being. Below JPY139, support is seen in the eJPY138.60 area. US Yellen and Japan's Suzuki's statement earlier this week downplayed the likelihood of material intervention. The Australian dollar is languishing in its trough. Yesterday's attempt to resurface above $0.6800 was greeted with fresh selling. It is holding above the week's low set on Tuesday near $0.6710. The Chinese yuan slipped to its lowest level in a month as the greenback's strength proved too much. The US dollar rose to almost CNY6.75. which it has not seen since June 14 when it briefly traded above CNY6.76. The high for the year was in mid-May closer to CNY6.8125. The PBOC fixed the dollar tightly near expectations (CNY6.7265 vs. CNY6.7267. The PBOC indicated that there was plenty of liquidity and the overnight rate fell to an 18-month low. Europe The Tory Party is in...