EUR/USD attracted some dip-buying on Monday amid recovered over 70 pips from the daily low. A positive risk tone undermined the safe-haven USD and remained supportive of the move up. ECB President Lagarde reaffirmed plans to hike rates and further extended support to the euro. Bets for a more aggressive Fed tightening helped limit the USD losses and acted as a headwind. The EUR/USD pair kicked off the new week on the backfoot in reaction to the risk of political gridlock in France after President Emmanuel Macron lost an absolute majority in a parliamentary election. The modest bearish gap down, however, was quickly bought into amid the emergence of fresh US dollar selling. Against the backdrop of the post-FOMC decline in the US Treasury bond yields, a generally positive tone around the equity markets turned out to be a key factor that undermined the safe-haven greenback. The shared currency drew additional support from the fact that the European Central Bank President Christine Lagarde reaffirmed plans to raise interest rates twice this summer. During her testimony before the European Parliament, 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. Furthermore, Lagarde defended the ECB’s decision, made at an emergency meeting last week, to accelerate work on a new policy tool to counter the recent surge in the borrowing costs for more vulnerable countries. Lagarde added that the fight against fragmentation risk is a precondition to the success of the monetary policy. It is worth mentioning that bond yields of highly indebted nations in the bloc like Italy have soared faster than those for more stable countries like Germany. Adding to this, ECB Governing Council member Martins Kazaks said he would support a 25 bps rate hike in July and 50 bps in September. This further contributed to the EUR/USD pair's intraday bounce of over 70 pips from the daily low, through the uptick lacked bullish conviction amid relatively lighter trading volumes on the back of the US holiday. Meanwhile, expectations that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation and hike again by 75 bps at its next meeting acted as a tailwind for the USD. This was seen as another factor that kept a lid on any meaningful gains for the major, which finally settled in the neutral territory around the 1.0500 psychological mark. The EUR/USD pair held steady above the said handle through the Asian session on Tuesday and remains at the mercy of the USD price dynamics. There isn't any major market-moving macro data due for release from the Eurozone, while the US economic docket features Existing Home Sales. This, along with the US bond yields and the broader market risk sentiment, might influence the USD demand and provide some impetus to the major. The focus, however, will remain on Fed Chair Jerome Powell's testimony on Wednesday and Thursday. Apart from this, the release of the flash PMI prints from the Eurozone and the US on Thursday should assist traders to determine the near-term trajectory for the pair. Technical outlook From a technical perspective, the 1.0540-1.0545 region now seems to have emerged as an immediate strong hurdle. This is followed by last week's swing high, around the 1.0600 round-figure mark and the 50-day SMA, near the 1.0620 region. Sustained strength beyond the latter would validate the formation of a double-bottom near the 1.0360-1.0350 area. This, in turn, would set the stage for a further near-term appreciating move and lift the EUR/USD pair beyond the 1.0650 horizontal support breakpoint, now turned resistance. The momentum could further get extended and allow bulls to aim back to reclaim the 1.0700 mark. On the flip side, immediate support is pegged near the 1.0470 area, below which spot prices could 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 make the EUR/USD pair vulnerable to challenging the 1.0300 mark.

Outlook: We have to wait for Friday to get any market mover days–Germany IFO, UK retail sales, Japanese CPI. We have very little fresh US data this week to impress anyone one way or the other, leaving room for Feds to try to dominate the narratives. This time it was Cleveland Fed Mester, who told us on TV yesterday that it will take a couple of years for inflation to return to 2%, the risk if recession is real but not imminent, and demand is easier to curb than getting the supply side back in line. This is so obvious and common-sense and drama-free that of course nobody wants to listen. More interesting is Fed Gov Waller backing another 75 bp in July if the data doesn’t behave itself. You can’t extrapolate from a sample of one but note that commodity prices are down pretty much across the board–see the chart on the last page. This is not so nice for CAD/AUD but if it keeps up, nice for inflation. Now to get those incompetent logistics guys to learn to read. The place where data could be a scale-tipper is the UK. So far we have Rightmove reporting UK house prices up 9.3% y/y to a record, if with a lesser monthly gain this time. A potential explosive is a railroad strike starting tomorrow, joined somewhat mysteriously by Underground workers. Shades of the 1970’s! Meanwhile, confidence in the FinMin and PM is somewhat shaky in part because the policy response has been ragged–nobody knows what to expect next. We feel the earth shaking under the UK’s feet. Now would be a good time for the EU to strike back against Boris’ hubris on shoving the deal (and the European Court of Justice) out the door. We can see no reason for the dollar to retreat except new positioning (because a ne0way street is just too boring). At risk are the commodity currencies if fear of recession keeps commodity prices on the defensive, and then the pound, The yen is at risk for a different reason–a stubborn MoF. Does anyone look at the dynamite in the box sitting right next to the C4–the JPY/CHF? We always say when in doubt, look at crosses but we wouldn’t touch that one with a bargepole. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!

Overview: Most equity markets in the Asia Pacific region lost ground today. China’s Shenzhen, Hong Kong, and India were notable exceptions. The MSCI Asia Pacific Index is at its lowest level since June 2020. Europe’s Stoxx 600 is forging a base ahead of 4000 and is trading quietly with a small upside bias. The French stock market lagging after Macron lost his parliamentary majority, is raising questions about his reform agenda. US equity futures are firm, but the cash market is closed today. European bond yields are narrowly mixed, though French bonds are underperforming, and the 10-year yield is around three basis points higher. The US dollar is trading with a lower bias against all the major currencies. Sterling is the weakest and is practically flat. The Norwegian krone’s 1.2% gain leads the majors followed by the Australian and New Zealand dollars. Most emerging market currencies are also firmer, led by central Europe. Gold is consolidating quietly around $1840. August WTI is in a narrow range below $110. US natgas is extending last week's 21.5% collapse. It is off another 2.3% today. Europe’s natgas benchmark exploded almost 48% last week and is up another 3.5% today. Iron ore's precipitous drop is also extending. It fell 14% last week and is off another 7.6% today, its eighth consecutive losing session. July copper is off for a third session. It is down about 1% today after falling nearly 10.5% over the past two weeks. Asia Pacific As widely expected, China's loan prime rates were held steady at 3.70% and 4.45% for the one-year and five-year rates, respectively. Meanwhile, China's recovery from the Covid lockdowns is spotty, but sufficient to embolden investors and helping Chinese stocks outperform lately. However, the first reported Covid cases in Macau in several months weighed on casino shares. Separately, reports suggest that around a third of China's oil refining capacity is off-line due to Covid restrictions. That said, some reports suggest a rebound in car sales, higher oil refinery run rates, and a rising in trucking transport suggest the nascent recovery remains intact.  The Bank of Japan bought a massive amount of Japanese government bonds last week to defend its 0.25% cap on the 10-year. The BOJ added almost $81 bln of bonds to its balance sheet. It disrupted both the cash and futures market last week. Reports suggest that a personnel shift has also bolstered its efforts and market contacts. For dollar-based investors, the paltry 10-year JGB yield of 0.24% can earn closer to 2.65% if the yen is hedged back into dollars. Still, foreigners have been sellers and year-to-date (through June 10) have sold about JPY2 trillion (~$14.8 bln) of Japanese bonds. The economic highlight of the week is the May CPI figures due first thing Friday in Tokyo. The Bloomberg survey shows a median forecast of no change, leaving the year-over-year rate at 2.5% and the core measure, excluding fresh food at 2.1%. Excluding fresh food and energy, a 0.8% gain is expected. April saw the first reading above zero since July 2020 as last year's cut in cell phone charges dropped out of the 12-month comparison. The dollar held below last week's high against the yen, seen around JPY135.60. It is in a tighter range than has been seen in recent sessions. It found support near JPY134.55. The consolidative tone may not persist as the divergence of monetary policy will likely intensify further next month. The Australian dollar is also consolidating. It is trading within the pre-weekend range (~$0.6900-$0.7050). It is firm but with the US holiday, the gains may be limited. The Chinese yuan reached seven-day's high today, extending its recovery that began last week. The dollar reached a high last week near CNY6.7610 and recorded a low today around CNY6.6735. The dollar's reference rate was set at CNY6.7120 compared with expectations (median from Bloomberg's survey) of CNY6.7126.  Europe French President Macron appears to have been denied a parliamentary majority in yesterday's election. It did not do the euro any favors initially, but the immediate policy implication is not clear. The center did not hold as the alliance on the left of Macron, Nupes, and the far-right National Rally gained ground. The left-green coalition may be the main opposition party, but Le Pen (National Right) is the big winner with around a 10-fold increase in the number of seats than five years ago. There is much speculation that Macron may reach out to the center-right Republicans and their allies, who appear to have secured around 80 seats. Alternatively, Macron could seek to govern as a minority government, cobbling together coalitions on an issue-by-issue basis (e.g., raising the retirement age. Still, it seems reasonable to expect the election results to be recognized with a cabinet reshuffle that may include a new prime minister. France's...

Despite attempts at a modest rebound on Friday, European markets still finished lower for the second week in succession, posting their lowest weekly closes since March. US markets also finished the week similarly mixed, but also sharply lower, with the S&P500 posting its worst week since March 2020, ahead of the Juneteenth long weekend. As we start a new week and the mixed finish last week, European markets look set to start the week on the back foot.   At the end of last month there had been some optimism that the US economy might be able to achieve some form of soft landing. This prompted a sharp decline in US treasury yields and a rebound in US markets from their lows, as markets started to price in the prospect of a rate pause in September. The May CPI numbers upended that mindset quite abruptly, sending yields sharply higher, and stock markets back down again, a trend that was exacerbated by a policy pivot by the Federal Reserve, as well as the Swiss National Bank last week. Not only did the US central bank hike rates by 75bps but more surprisingly the SNB hiked rates as well, choosing to hike by 50bps and move its headline rate from -0.75% to -0.25%. Last week’s events appear to have prompted a sharp re-evaluation by central banks that far from being a temporary phenomenon that inflation is becoming more entrenched, it is starting to be much more persistent than originally thought, and that radical action is needed to tackle it. It is clear from last week's Fed meeting, and with the shackles of the blackout period now lifted that many on the FOMC are in no mood to pare back their determination to send a message when it comes to rate guidance. At the weekend Fed governor Christopher Waller articulated his support for another 75bps rate move in July, saying that he doesn’t care what’s causing the current surge in inflation, it’s the Fed’s job to get it down, that the central bank is “all in” even if it means unemployment rises to 4.5%. He also said that the likely of going into a recession as “overblown” which probably means that a recession is coming. Even Atlanta Fed president Raphael Bostic, who had suggested a few weeks ago that he could have been persuaded about a September pause in rate rises, was unequivocal, saying that the Fed would do “whatever it takes” to bring inflation back to 2%. Later today St. Louis Fed President James Bullard will also be dropping his own two cents worth into the wider discussion. It is becoming even more clear now that the Federal Reserve was too slow in tapering its easing program, and the global economy is paying the price now in the form of runaway inflationary pressures. The risk now is that the Fed will need to be even more aggressive at its next few meetings to put the inflation genie back in its bottle. This in turn will have spill over effects as it becomes clear that in striving to rid its own economy of inflation the resultant rise in the US dollar will only exacerbate the inflationary impulse across the world. This in turn is likely to result in similar rate hiking measures from other central banks to support their own currencies.   With few signs that the Federal Reserve is likely to be done on the rate hiking front, it’s likely to be tough going for stock markets in the short to medium term, given the impact that will come from this tightening of monetary policy in terms of slowing the global economy. This fear also helps explain why crude oil prices suddenly experienced an air pocket on Friday, dropping sharply over concerns over weaker demand and a global slowdown, and posting its first week decline in four weeks. The European Central Bank is coming under increasing pressure to deal with its own inflation problem, with all the attendant risks that it has for countries like Italy whose borrowing costs have exploded higher since the beginning of June, with the 10-year yield briefly pushing above 4% before slipping back.   Today’s German PPI numbers for May are set to be a key case in point when it comes for more aggressive action from the ECB, with today’s numbers expected to edge higher again to a new record high of 33.8%. Later in the week, we also find out how much further UK inflation has risen in May against a backdrop of last week’s inexplicable decision by the Bank of England to only raise rates by 25bps, when it is becoming increasingly clear they are falling further behind the curve. By the time, the MPC next meets in August they could well be another...

Fundamentals in focus, but key risks remain US stock and bond markets are closed at the start of the week for the Juneteenth national holiday, which comes at a good time as markets have been on a rollercoaster ride in recent days. US equities finished mostly higher on Friday, however, that came after some steep losses post Wednesday’s Federal Reserve meeting, where the US central bank hiked interest rates by 75bps and revised down its growth forecasts for this year and next. The markets have been spooked ever since the May report for US inflation was released, which showed prices rising at a faster pace than expected. Combined with a Fed in an aggressive tightening mode and this has caused risk appetite to nose-dive. The bulk of the selling last week was in the growth and pro-cyclical sectors of the economy, such as tech and the travel sector, however, the move lower was broad-based as the Vix index, Wall Street’s fear gauge, rose to its highest level since early May. In a recent note, we pointed out that historically bear markets can last up to 9 months’, thus, since the current sell off started in January, we may still have 3-4 months’ left before the bulls regain control of the market narrative.  Why calm may pervade this week  We should caveat the above remark by saying that the market may not fall in a straight line, and we do not necessarily expect the ferocity of last week’s sell off to continue indefinitely. Instead, we expect further declines in risk assets, we predict the nadir for the S&P 500 to be around the 3,100 mark, punctuated by a few sharp sell offs in the coming months. The same drivers are likely to continue to weigh on the markets: stubbornly high inflation, recession concerns and fears that the Fed and other global central banks are not only behind the curve but are limited in what they can do when supply-side factors are driving price growth. These are the key fundamental factors that have the potential to drive markets lower, but what about this week? We think that the sell-off will stall somewhat this week for a few reasons, although any respite will be temporary.  1. The US markets are closed on Monday for a public holiday. This will give markets time to pause. A lot of selling took place last week, while there is still more out there in our view, we will need another major driver to push key risky asset prices below levels that are starting to look oversold.  2. A lot of recession risk has already been priced in, that is why stocks and other risky assets sold off so sharply last week. The US yield curve backed away from zero at the end of last week, however, it remains incredibly close to inversion territory at +8bps. This comes even though the US economy is not in an actual recession. Of course, the signs look bad: inventories are building up at a rapid rate and the consumer is pulling back, as evinced by the 0.3% dip in US retail sales last month. However, even if we get more negative economic data coming out of the US, this is now expected by the market. Thus, this week’s housing data, which is expected to moderate further for May, may not lead to a major sell off, and the market may also take the expected decline in US consumer sentiment in its stride. Likewise, even Fed President Jerome Powell’s two days of testimony to the US Congress on Wednesday and Thursday this week is unlikely to spook markets since we doubt that he will stray too far from his message at last week’s Fed meeting. Over the weekend, Fed Governor Waller said that he would support another 75bp rate hike at the July meeting, he also added that the Fed is “all-in” on re-establishing price stability. His most telling remarks came when he said that the Fed made a mistake by not hiking sooner after the pandemic as that made the Fed less flexible to adjust to the changing economic situation in 2021. If Chairman Powell hints that the Fed is basically impotent when it comes to tackling inflation when he addresses Congress this week, then it could trigger another market sell off. If Powell wants to lower market volatility, then his message should be that the Fed has everything under control, even if they started hiking rates a little late, and that the US economy remains resilient.  3. Technical factors could also prop up some risky asset prices this week. The S&P 500 is approaching a key level at 3,500, which many analysts are treating as key support. While we don’t think that this level will mark the end of the...

S&P 500 likely put in a short-term bottom, and the fresh long position is profitable from the get-go. Bonds offered the first promising signs, and so far only value has acted upon it – that provides more fuel to the upcoming relief rally. TLT performance was good, but seeing even higher volume would be more convincing regarding the rally‘s longevity. Especially since the dollar is rising again – the yen carry trade can go on. Even cryptos are having a good day today so far, meaning we have a bit more to run still. That bodes well for real assets too – both gold and silver caught a solid bid yesterday, and GDX lagging behind is balanced out by NEM outperforming. The precious metals skies are slowly brightening, and not even another 75bp hike looks being able to sink them. Deteriorating real economy data would underpin them more so than crude oil. All the demand destruction isn‘t yet in, and black gold would adjust to the arriving economy growth softpatch – but we haven‘t seen the spike yet. Anyway, it‘s worthwhile to tread cautiously with the whole portfolio because the tightening phase, the pressure on the Fed isn‘t relenting all that much. The greater shock would come from having to adjust the still overly rosy economic growth projections to the downside over the nearest months. That‘s keeping a lid on copper and base metals, which would have a chance of turning around only after gold truly obviously to everyone does. Let‘s get into the key charts. Stocks Bonds Crude oil