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Stock markets are back in the red on Thursday as further hawkish commentary from the Fed increases the odds of a recession over the next couple of years. The soft landing that the Fed so desires is easier said than done, especially in an environment when inflation is so high and energy prices are through the roof. And when you consider the kind of tightening that's being proposed, the economy is going to have to display incredible resilience to weather the storm. The central bank has quickly gone from fighting the market to standing shoulder to shoulder with it. The next few meetings are likely to deliver three super-sized rate hikes it seems and that could be ramped up further if we don't see some progress on inflation in that time. Policymakers are clearly spooked by the data we've seen over the last couple of months and when faced with dealing with soaring inflation and supporting the economy, there's only ever going to be one winner. They better hope any recession is mild and short-lived or the decision to drag their feet on starting the tightening cycle will look even more negligent. Oil below $100 after IEA and EIA Oil… Read More »Fed raises recession risks

EUR/USD – 1.0907 Euro's resumption of decline from last Thursday's 4-week peak at 1.1184 to as low as 1.0874 yesterday suggests correction from March's 22-month bottom at 1.0807 has possibly ended there and as 1.0937 has capped subsequent recovery in New York, consolidation with downside bias remains for re-test of said support, below would extend towards 1.0846 but 1.0807 should remain intact. On the upside, only a daily close above 1.0940/45 may risk stronger retracement of said fall towards 1.0988. Data to be released on Thursday: Australia AIG services index, exports, imports, trade balance, Japan leading indicator, coincident index, machine tool orders. Swiss unemployment rate, Germany industrial output, U.K. Halifax house price, EU retail sales. U.S. continuing jobless claims and initial jobless claims.

It will not happen today or this month, but there is a growing sense of foreboding regarding equity markets. After the free cash run of the past two years valuations hit unsustainable levels. We have had corrections before, but stocks are so far only gradually pricing in what is the predominant risk for the Untied States: An aggressive rate hike cycle as it enters recession? The prospect of rampant inflation that demands significant and aggressive hikes, while at the same time the global economy and the US enter a slow-down created as a hangover result of the massive stimulus of recent years, and added to by on-going supply chain disruption and now the conflict in Ukraine, do not a favourable investment environment make. Fresh record highs were seen in New York in the first week of the year's trading. Ever since then it has been quite the rollercoaster, but with a persistent heavy bias. There was talk of war, but few really expected it to happen. Now that it is here, the ramifications for Europe and the global economy are far worse than anyone could have predicted. Energy prices look set to stay stubbornly high for the foreseeable future, and… Read More »Serious stock market rout becomes a very real possibility

Those who’ve been long the US dollar index (DXY) since the middle of last year have done well for themselves. The DXY has gained 12% from its January 2021 swing low of 89.21 to trade close to 99.75 at the time of writing. Making similar gains from current levels will undoubtedly prove more challenging. Traders should be factoring this into their risk-reward assessments going forward for several reasons. First and foremost, as the DXY moves higher it’s likely to meet fierce resistance between the 100-103 range. In March 2020, dollar sellers were quick to step into the market when price attempted to breach the 103 level. Buyers may meet similar selling pressure on any re-attempt at these levels. Even more selling pressure is likely to arise toward the 103.8 level. Secondly, from a market structure perspective the uptrend in the DXY is a lot more recent than appears to the naked eye. The 94.74 September 2020 swing high of the previous downtrend was only breached in November last year. This alone would not be concerning if it weren’t for a bit of RSI divergence between the latest two swing highs raises questions about further momentum. Lastly, if indeed 99.418 represents… Read More »Don’t get too bullish on the DXY

Overview:  Federal Reserve Governor Brainard's suggestion of a rapid unwind of the Fed's balance sheet stoked a bond market sell-off that is continuing today, rippling through the capital markets.  The US 10-year yield is rising for the fourth consecutive session.  The six-basis point gain today puts the yield near 2.62%, which represents a little more than a 25 bp increase since the jobs data on April 1.  European benchmark yields are 3-6 bp higher.  Japan's 10-year yield is poking above 0.23% to again challenge the BOJ's Yield Curve Control.  Equity markets are taking it on the chin.  The major markets in the Asia Pacific region fell, led by a 2%+ sell-off in Hong Kong. China's markets re-opened after a two-day holiday, and although the Shanghai and Shenzhen markets posted minor gains, the CSI 300 slipped by 0.3%.  Europe's Stoxx 600 is off around 1.1% and US futures are about 0.75% weaker.  The dollar is mixed.  The Swiss franc, Norwegian krone, and Japanese yen are weaker.  The Swedish krona, sterling, and euro are posting small gains.  Among the emerging market complex, the South African rand leads the few currencies higher.  Poland, which is expected to lift rates 50-75 bp today has… Read More »Bond meltdown

A combination of factors dragged EUR/USD to a four-week low on Wednesday. The Ukraine crisis, uncertainty over the French elections weighed on the euro. Hawkish Fed expectations, the risk-off mood boosted the safe-haven greenback. Investors now look forward to the FOMC meeting minutes for a fresh impetus. The EUR/USD pair added to its recent heavy losses and dropped to a four-week low, just below the 1.0900 mark during the Asian session on Wednesday. The shared currency was weighed down by fading hopes for a diplomatic solution to end the war in Ukraine, which, along with a strong US dollar rally, exerted downward pressure on the major. In the latest developments surrounding the Russia-Ukraine saga, the European Union announced new sanctions against Russia over its alleged war crimes in the Ukrainian town of Bucha. The sanctions include a ban on Russian coals, access to EU ports and transactions of four key Russian banks. Apart from this, worries about the outcome of the French elections turned out to be another factor that undermined the euro. The latest opinion polls indicated that French President Emmanuel Macron's far-right Eurosceptic rival, Marine Le Pen, has been closing the gap ahead of the first round on… Read More »EUR/USD Outlook: Seems poised to challenge YTD low, around 1.0800 mark

FOMC will release the minutes of the March policy meeting on April 6. CME Group FedWatch Tool points to a more-than-70% probability of a 50 bps hike in May. US Dollar Index stays within a touching distance of multi-year highs. The greenback has started the month of April on a firm footing on the back of the latest data releases from the US and rising odds of a 50 basis points (bps) Federal Reserve rate hike in May. The US Dollar Index (DXY), which tracks the dollar’s performance against a basket of six major currencies, is already up nearly 1% since the beginning of the month. The Fed will release the minutes of the March policy meeting at 1800 GMT on Wednesday, April 6. On March 16, the Fed decided to hike its policy rate by 25 bps to the 0.25%-0.5% range as expected. The Summary of Economic Projections, the so-called dot plot, revealed that the median view of the Fed funds rate at the end of 2022 was raised to 1.9% from 0.9% back in December. According to the dot plot, policymakers see the Fed hiking its policy rate by 25 bps at every meeting for the rest of… Read More »FOMC March Minutes Preview: Will dollar rally pick up steam?

Overview: Watch the video for a summary of this week’s news releases, a review of the USD index, and a complete top down analysis of the EURUSD.

AUD/USD Current Price: 0.7546 The aussie outperformed its major counterparts, rallying against the greenback. The Reserve Bank of Australia will announce its decision on monetary policy on Tuesday. AUD/USD tested the 0.7555 resistance level and could break beyond it with the RBA. The AUD/USD pair peaked at 0.7555, a fresh 2022 high and matching October 2021 monthly top. The aussie outperformed its major counterparts against the dollar, as most major pairs held within familiar levels, but AUD/USD added roughly 80 pips on a daily basis. The positive tone of Wall Street, despite mostly modest gains, could have helped the pair. On the data front, Australia published March TD Securities Inflation, which rose 4% YoY from 3.5% in the previous month. The country will publish the March AIG Services PMI and the S&P Services PMI for the same month. Additionally, the Reserve Bank of Australia will announce its decision on monetary policy. The central bank is widely anticipated to maintain the cash rate on hold at 0.1%. Overall, market players are expecting policymakers to maintain their cautious stance amid the Eastern Europe crisis and the upcoming Federal election in the country. Most analysts expect the central bank to start normalizing the… Read More »AUD/USD Forecast: Poised to challenge a critical resistance level

In this article, we will examine the links between Russia, Ukraine and various European countries in order to evaluate the latter’s exposure to the economic repercussions of Russia’s military offensive in Ukraine since 24 February. To do so, we look at imports of goods from Russia and Ukraine and the weight of energy and food components in the consumer price index1. The first series of indicators on imports gives us an assessment of the direct trade exposure of European countries, particularly when it comes to energy and food products, which are widely imported from Russia and Ukraine. The second series, examining the weight of energy and food in consumer spending, offers insight into the potential inflationary effects from the price shocks on the global commodities markets, which the war has amplified. By presenting these indicators in the form of a heatmap, we can easily compare the level of exposure to Russia and Ukraine of all European countries. Where the data is available, we have also included the US, UK and China. Some indicators are broken down into sub-components to refine the comparison. For the six categories of trade in goods2, we distinguish between (i) the share of a given product… Read More »A heatmap of the dependence of European countries on Russian and Ukrainian imports