Outlook: Fed chief Powell made it clear yesterday that clamping down on demand is the only path for the Fed when supply shortages/blockages can’t be addressed by monetary policy. This is actually a cruel approach from the human point of view because it means imposing financial suffering on the lowest earners and dashing the hopes of the rising and younger middle class. The Fed doesn’t care and can’t care, because chopping demand through higher prices is The Tool—but we will soon be hearing from the lefty left. Powell points out the three channels of squashing demand—first, anything involving an interest rate, notably housing and autos. Second, letting asset prices dip if that’s where the market wants them to go, without concern from the Fed. The Fed “put” is a thing of the past. Powell also spoke of the dollar, pointing out that a strong dollar fights inflation in the form of import prices. You have to tell Congress this because they are all lawyers and missed Econ 101. At a guess, Powell was warning some in Congress not to talk about managing the currency because “a strong dollar is the best policy” and we like it that way, anyway. We have seen some stories recently about how the too-strong dollar means this or that and should be managed for this reason or that reason. We don’t bother rebutting because the stories are always so biased that you’d have to knock down he first assumption to get anywhere at all—and the first assumption is that “prices should be fair.” No, not so. Nowhere in the capitalist handbook does the word “fair” enter the story as a principle. Even Adam Smith pointed out in 1776 that if you want fair, you have to fiddle with institutions, especially banks. The other Big Story that is still building (and will have a currency effect in the next 3-6 months) is the European energy crisis. The FT reports “Ten EU states including Germany, Sweden and Italy have declared early warnings of a gas emergency after Russia reduced supplies in recent days, the European Commission said.” Trading Economics adds “A week ago Gazprom started curbing a large part of its supplies to Germany and Italy bringing to the total of affected member states to 12. As a result, Germany has now enacted the second stage of its emergency gas plan, which includes tighter monitoring of the market and the reactivation of coal-fired plants. On top of that, the region is expected to receive limited imports of US LNG cargoes until late 2022, due to repair works at a key export terminal in Texas after being damaged by an explosion. Adding to upside risks, the TurkStream pipeline has shut for maintenance until the end of the month, while flows from Norway, Europe’s 2nd largest supplier, also dipped due to a compressor failure.” As EC Commissioner Timmermans (Netherlands) puts it, Putin has “weaponised gas” in an attempt to “disrupt our societies.” This is the biggest challenge in the world today with economic and financial market consequences. (The second biggest, albeit without econ/fin consequences, is whether and for what crimes the US Justice Dept charges Trump. The wheels of justice grind exceedingly slow.) Bottom line, the looming energy crisis “should” be debilitating the pound and euro. We can’t mention the peso because Mexico holds a central bank meeting today and being an oil producer seems not to run the show there, anyway, apparently due to decades of mismanagement of Pemex. Also affecting the pound should be the weakening effects of Brexit. That tends to happen rarely these days but must be a background factor. We admit to not having a handle on risk appetite these days, mostly for lack of validating price moves in a world of ranginess. We saw risk assets sell off yesterday, but can’t count on it favoring the dollar. You’d think that Powell not dismissing the idea of a 100-point hike is wildly hawkish, but instead bong prices rose and yields fell. Go figure. The only explanation is the prosect of recession that should or might stay its hand down the road. We fail to understand this reasoning. It’s perverse. The man just said “tamp inflation back to normal whatever the cost” and the market doesn’t believe him? Accordingly, we recommend caution. This time the short-term trend is not your friend.  Tidbit: A bloodhound named Trumpet won best in show at Westminister. A bloodhound. Really, a bloodhound. Next will be the blend of hound and poodle, since everyone knows the poodle is the best dog ever but a colossal pain to groom in any way other than that stupid French cut. The bloodle (houndle?) will take over from the labradoodle, schnoodle, bidoodle, cavapoo, yorkipoo and all the rest—more than for any other dog breed, ever. ...

EUR/USD staged a solid intraday bounce on Wednesday amid the emergence of some USD selling. Aggressive Fed rate hike bets, recession fears acted as a tailwind for the USD and capped the pair. Investors now look forward to the flash PMIs from the Eurozone and the US for fresh impetus. The EUR/USD pair witnessed an intraday turnaround on Wednesday and rallied nearly 140 pips from the 1.0470-1.0465 region, or the weekly low. The momentum - marking the third straight day of a positive move - pushed spot prices to a one-and-half-week high and was sponsored by modest US dollar weakness. The Fed last week forecasted the rate to decline to 3.4% in 2024 and 2.5% over the long run from 3.8% in 2023. This, along with the global flight to safety led by concerns over a possible recession, dragged the US Treasury bond yields lower, which, in turn, acted as a headwind for the USD. Adding to this, less hawkish remarks by Philadelphia Fed President Patrick Harker exerted some downward pressure on the greenback. In an interview with Yahoo Finance Harker said that if demand softens quicker than expected, a 50 bps rate hike for July may be good. The shared currency drew additional support from expectations that the European Central Bank (ECB) would begin its tightening cycle in July and raise interest rates twice this summer. The bets were reaffirmed during ECB President Christine Lagarde's testimony before the European Parliament earlier this week. Lagarde said that the ECB plans to raise the policy rate by 25 bps next month and also left the door open for another hike at the September meeting. That said, the lack of details about the ECB's fragmentation tool held back bulls from placing aggressive bets. Furthermore, growing acceptance that the Fed would stick to its aggressive policy tightening path and hike interest rates at a faster pace to curb soaring inflation helped limit any deeper USD losses. In fact, the markets have been pricing in another 75 bps rate hike at the next FOMC meeting in July. Fed Chair Jerome Powell reaffirmed market expectations and said that the ongoing rate increases would be appropriate. Testifying before the Senate Banking Committee, Powell added that Fed is strongly committed to bringing inflation back down and the pace of future rate increases will continue to depend on incoming data. Apart from this, the prevalent cautious mood offered some support to the safe-haven greenback and kept a lid on any meaningful upside for the EUR/USD pair. Spot prices, so far, have struggled to find acceptance above the 1.0600 mark, though have managed to hold steady through the Asian session on Thursday. Market participants now look forward to the release of flash PMI prints from the Eurozone and the US for some meaningful trading impetus. Traders will further take cues from Fed Chair Jerome Powell's second day of testimony. This, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and produce short-term trading opportunities around the EUR/USD pair. Technical outlook From a technical perspective, sustained strength above the 1.0600 mark, leading to a subsequent move beyond the 50-day SMA will add credence to the formation of a bullish double-bottom formation near the 1.0360-1.0350 region. This, in turn, will set the stage for some meaningful upside. The EUR/USD pair might then accelerate the momentum towards the 1.0650 horizontal support breakpoint, now turned resistance, before aiming back to reclaim the 1.0700 round-figure mark. The next relevant hurdle is pegged near the 1.0745-1.0750 region ahead of the May swing high, around the 1.0780-1.0785 zone. On the flip side, the 1.0550 area now seems to protect the immediate downside ahead of the 1.0525 region. This is closely followed by the 1.0500 psychological mark and the overnight swing low, around the 1.0470-1.0465 zone. A convincing break through the said levels would shift the bias back in favour of bearish traders and make the EUR/USD pair vulnerable. Spot prices could then slide back to the 1.0400 round figure en-route the YTD low, around mid-1.0300s set in May and retested last week. Some follow-through selling would be seen as a fresh trigger for bearish traders and pave the way for a fall towards challenging the 1.0300 mark.

Sentiment has continued to ebb and flow this week, as stock markets continue to get buffeted by concerns about recession against a backdrop of central banks who appear determined to squeeze inflation out of the global economy. European markets gave back their early week gains, while US markets after initially opening lower, managed to reverse their early losses to push into the green, before closing marginally lower. One notable takeaway from yesterday’s price action was a bid into the bond market, which sent 10-year yields sharply lower in a sign that bond investors might be looking to generate a little recession insurance. A slide in oil and base metals prices speaks to a general concern about waning global demand, even against a backdrop of tighter supply due to Russia’s war against Ukraine. Brent crude prices hit a one month low of just above $107 a barrel, before recovering back above $110 a barrel, but have remained under pressure in Asia trading. As we look ahead to today’s European open the main focus is set to be on the latest flash PMIs for June from France, Germany, UK and the US with further weakness expected across the board in the face of higher prices and weakening demand. Ahead of that we have the latest UK public sector borrowing numbers for May which are expected to show a significant improvement on the April numbers due to a combination of higher tax revenues, as well as not having to spend huge amounts of money on NHS test and trace, which was wound up in April. Borrowing is expected to fall from £18.6bn in April to £12bn as the various higher VAT and business tax rates start to kick back in, along with the extra revenue from higher fuel prices. Today’s borrowing number will also be well below the £20.6bn we saw this time last year.   CBI retail sales for June is also expected to remain weak, slipping from -1 in May to -3, although we might see a pickup because of the Jubilee bank holiday weekend which could have translated into a bulge in spending at the beginning of the month. In the past few weeks, US weekly jobless claims have started to edge higher, hitting a 3 month high earlier this month. This has raised concerns that the US labour market might be slowing. Today weekly claims are expected to fall back modestly from 229k to 226k. Fed chair Jay Powell is due to give another day of testimony to US lawmakers, however it’s not likely to add to what we heard last week at the Fed press conference, or the partisan questioning we saw the Fed chief subjected to yesterday, which by and large was banal and uninteresting. The one key takeaway from yesterday’s comments was that Powell remained fairly upbeat about the US economy, and that any moves would be data dependant, while he also seemed to come across as much less hawkish than he did last week, in that he was much more even handed about the trade-offs between unemployment and inflation. Part of the reason for that was probably his audience, given politicians tend to be much more sensitive to the idea of a rise in unemployment levels just before midterm elections. This probably explains why the hawkishness of last week was tempered slightly yesterday. EUR/USD – Tried to push above the 1.0600 area, before slipping back. We need to see a sustained move above 1.0600, as well as trend line resistance from the highs this year, which comes in at 1.0680, to open up the 1.0800 area. Below 1.0330 targets parity. GBP/USD – Slipped briefly below 1.2200 before rebounding. The bias remains for a move higher after the failure last week to push below the 1.1950 area. We need to push above the 1.2450 area for this to unfold. Below 1.1950 targets the 1.1500 area. EUR/GBP – Currently holding above trend line support from the recent lows in April at 0.8520. We need to push through the 0.8630 area to open up 0.8700. A break below 0.8500 targets the 0.8420 area and 200-day MA.   USD/JPY – Slipped back from the 136.70 area but while above has pushed through the previous peaks at 135.60, putting the US dollar on course for a move towards 137.00 and ergo on towards 140.00. Support now comes in at 135.40. FTSE 100 is expected to open 17 points lower at 7,072. DAX is expected to open 14 points lower at 13,130. CAC40 is expected to open 10 points lower at 5,906.

AUD/USD Current Price: 0.6937 Australian consumer sentiment deteriorated in May, according to the Westpac Leading Index. Fed chair Powell's comments revived concerns about inflation and a potential recession. AUD/USD has room to weaken on renewed selling pressure below 0.6910. The AUD/USD pair fell on Wednesday and bottomed at 0.6880 but managed to trim most of its intraday losses to end the day at around 0.6930. A worsening market mood at the beginning of the day pushed the greenback higher, although demand receded ahead of US Federal Reserve Chair Powell. Powell testified on monetary policy before Congress, repeating the central bank is focused on taming inflation. Australia data did not help, as the May Westpac Leading Index resulted at -0.06%, signaling a significant economic slowdown amid a deterioration in consumer sentiment. On a positive note, higher commodity prices offset the sentiment's slide. Early on Thursday, the focus will be on the preliminary estimate of the Australian S&P Global PMIs. The services index is expected to have plunged into contraction territory to 49.1, while the manufacturing index is seen down to 54.7 from 55.7 in May. AUD/USD short-term technical outlook The AUD/USD pair is at risk of extending its slide, according to the daily chart. It continues to develop well below all of its moving averages, while technical indicators gained bearish momentum within negative levels. Furthermore, the pair settled below the 23.6% retracement of its latest daily slump at 0.6950, an immediate resistance level. For the near term, technical readings in the 4-hour chart also favor the downside. The pair met intraday selling around a mildly bearish 20 SMA, which currently converges with the aforementioned Fibonacci resistance. Technical indicators, in the meantime, lack directional strength but remain below their midlines. A lower low for the week will become more likely if the pair falls again below 0.6910, an immediate support level. Support levels: 0.6910 0.6880 0.6840 Resistance levels: 0.6950 0.6990 0.7030 View Live Chart for the AUD/USD  

MARKETS US stocks scrounged out gains on the back of lower yields as investors continued to flip flop between recession and inflation fears. For today, however, given how early we are in the rate hike cycle, investors are seemingly giving the benefit of the doubt to the Fed after Chair Powell suggested he can bring down inflation without levelling the economy. But lower oil prices also appear to be providing the ultimate inflationary soothing balm and possibly triggered hopes of a soft landing parachute amid pervasive bearishness among equity investors.  On a less hawkish note, Fed Chair Powell walked back the emphasis on headline inflation, acknowledging the Fed cannot impact food and oil, and core inflation is a better indicator of future headline inflation. When you plug headline vs core into the black box, things look incredibly more rate hike stormy on the horizon, so this is good news for risk markets.   Still, having listened to Powell's lengthy Senate testimony today, it is clear that inflation is the domestic issue at the top of the political agenda. Powell consistently bobbed and weaved his way through commenting on anything of fiscal nature but was focused on deploying the tools within the Fed's power to address their dual mandate. So we should still position for more rate hike fallout to occur. The risk-reward of being short has reigned supreme this year, but for the short seller to come back in earnest, they would want to have a lot more confidence that the earnings deterioration is happening now and that the consumer is faltering. Hence not only is the FED entirely in data-dependent mode but so are investors.  OIL  After another oil leak, the market is left grasping for straws again.  Commodity indexes have been super weak for a while – more broadly, and it has told us for weeks the market realizes that the economy is headed for lower growth; only oil had been a bit of an outlier on the lower supply higher demand outlook.  But I think it's a fallacy to think oil could stay this elevated given the amount of central bank-induced slowdown likely to be seen later in the year. The Fed and other inflation-fighting central banks want lower commodities, which is what they are explicitly trying to engineer. I would also argue that Brent near $120 is super sensitive regarding supply and demand inputs, so signs of Russian Crude still hitting the oil complex is a colossal negative.  Russia exported 3.75 mn bbl/day of oil via sea in the week of June 13 after dips in recent months. Russia's weekly oil export has increased 41% year to date. At the same time, China refineries continue to cash in on discounted Russian oil, which means more Middle East Crude for Europe.  There is also the Big Oil /Whitehouse meeting today following Biden's letter to them to boost their oil supply. That is one of those lingering uncertainties markets don't like, as is the OPEC+ meeting next month.  And with WTI-Brent spreads widening out, it seems the market is back pricing a potential oil export ban from the Biden administration. Indeed a lot of noise as usual amid an illiquid oil market primes the volatility agitator. FOREX There was relentless demand for USDJPY during the European and North American sessions on Tuesday, pushing it up to a high of around 136.70, from near 135.00. This served as a short-term top during the Tokyo session on Wednesday, as the usual Japanese demand for USD was not as robust. Lower US yields and oil tanking have slightly benefited the Yen.  Since last week's Bank of Japan meeting when they decided to keep policy unchanged, USDJPY has rallied from near 131.50 to a high near 136.70, an almost 4% move. Though Japanese officials have little recourse, short of intervention, to combat a weak JPY given the BoJ's policy, one thing that will stick out to them is the pace of the move (this likely means more to them than direction). As a result, consolidation after such a significant move makes sense. The Euro received a fillip from the US conference board of all places who said fears of a Eurozone recession are overdone. Our view is the bear market rally in stocks will be short-lived as sentiment will turn sour on survey data starting with Friday's closely watched University of Michigan sentiment index. At the same time, increasing debates on a potential US hard landing could spook US rates and FX investors. We also think the US bond markets will be more susceptible to short covering given the positioning, which could lead to a USD long reduction. With Bund/UST spreads tightening consistently over the last few weeks, I think traders feel more confident in long EURUSD. 

Markets US equities were stronger Tuesday, S&P up 2.4%, recovering after the steep losses last week. US10yr yields up 5bps to 3.28% The overnight calm would suggest that investors are giving the benefit of the doubt to the Fed, believing front-loaded monetary policy will be just that – providing scope for the looser policy later in the year if demand conditions subside. While selling pressures from last week have eased, it is hard for investors to shake the recession obsession vibes and the thought of more front-loaded rate hikes. With oil prices bouncing again, investors become increasingly jittery that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further.  Even more worryingly from a policy perspective is that virtually every recession in the past three decades has been a function of a demand shock, but this is a supply shock; hence monetary policy is less potent. Despite the uptick in risk sentiment, it still feels we are eons away from shaking the event-driven bear market blues due to prevailing recession obsession headwinds.  Indeed, with both the market and Fed in data-dependent mode, another slide in US home sales could eventually have the bears beating the recession drum as US housing affordability falls to 15-year lows due to the sharp rise in mortgage rates. Indeed, those higher short-term rates could easily trigger a downward housing market reset and could cause consumer spending power to hit the bedrock.  That the data was slightly better than expected, but also marking the 4th consecutive monthly decline, that downtrend is unsurprising, given that US 30yr mortgage rates have risen ~300bps over the past year. MBA mortgage applications are also down about 20% since the beginning of the year. Hence the market took that data in stride. The recession is only the beginning. It is sad when median-income couples or young first-time buyers cannot purchase a home because they do not meet the qualifications. That wealth inequality creates chips on many shoulders, And I think we have only seen the tip of the iceberg as the cost-of-living crisis is not confined to the UK. Nor, it seems, will a "summer of discontent." UK strikes could be a worldwide spreader choking off the global economy even further. Forget about a recession; the world could easily topple into a full-blown economic crisis.  Because the cost-of-living concerns have driven consumer confidence, the risk is an accelerating decline in business confidence. Hence the market is dialled in on Friday's University of Michigan consumer sentiment (50.2 final vs. 50.2 preliminary), which is now at the lowest level in the history of the series going back to 1952. The recent plunge in consumer sentiment is all the more remarkable given that unemployment is near a historic post-WWII low. Still, it does make sense when you start factoring in how inflation erodes consumer purchasing power. Oil Oil initially traded higher on the prospect of a US administration gas tax holiday which would likely put a smile on US travellers' faces hence increasing demand during the summer driving season. Indeed, this seemed to offset some of the market recession obsession angst, although with broader risk sentiment stabilizing, that also likely helped pull oil prices higher. Energy flows were much better to buy overnight in hopes for an eventual broadening out of the reopening in China and increased US demand due to the US gas tax moratorium.  I would note that those inflows were during the early part of the New York session. It has been pretty much a slow shift downhill since then. Even oil traders acknowledged that higher oil prices hence higher gasoline prices would lead to a more aggressive tag team onslaught from the Fed pushing rates higher and the Biden administration getting increasingly more creative on the political and fiscal front to tame the energy inflation beast.  Temporarily suspending the gas tax is one of the few remaining options the federal government has to cut gas prices; another option under consideration is allowing increased ethanol blending for the summer.