EURUSD fell almost to a three-month low after disappointing the German ZEW (63.3, 75.0 expected, 79.8 prior) showed that institutional investors and analysts believed the economic outlook for Germany had deteriorated strongly. Additionally, orders for goods manufactured in Germany had the sharpest decline since the first lockdown in 2020 as the demand from countries outside the euro area fell. Today’s main risk event is the release of Meeting Minutes from the Fed’s policy meeting in June policy. Traders hope the Minutes would offer new details on Fed’s policy outlook. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
CAD, AUD and NZD weakened against the USD as the price of oil suddenly fell. The sell-off was caused by the OPEC+ cancelling talks on how to reconcile the differences between the UAE and Saudi-Arabia. These two major producers couldn’t agree on production curbs. This has increased the concerns of more supply (than planned earlier) hitting the market. WTI Crude futures market dropped by 2.38%.
The S&P 500 (-0.20%) and the Dow Jones Industrial Average (-0.60%) lost some ground yesterday as the energy (-3.25%) and the financial (-1.57%) sectors lost ground. The Nasdaq Composite (0.17%) gained slightly with the yields dropping on a bond rally. The technology (0.38%), the utilities (+0.42%) and the real estate (+0.89%) sectors were the biggest winners in yesterday’s trading. Seven out of eleven S&P 500 sectors recorded losses yesterday. AMZN (4.69%) and DHR (1.71%) gained the most among the TIOmarkets equity CFDs, while JD (-5.04%), SLB (-4.94%) and BKR (-4.84%) suffered the most.
The yield on the 10-yr. US Treasury note dropped to the levels last seen in late February supporting technology stocks and gold (+0.61%). The ISM Services PMI release was a disappointment with a reading of 60.1. The analyst consensus had pegged the number at 63.4 which would have meant only a relatively small decline of 0.6 index points from the June reading (64.0). Now the data indicates that the service sector growth is suffering from labour shortages. Supply-side problems related to raw materials are also a likely reason for the deceleration in the sector expansion.
USDJPY is bouncing higher from a level we highlighted in the latest Bullish & Bearish Markets video. This confluence zone was important enough to bounce the price higher indicating significant interest in the pair. If this continues a move to the recent high at 111.65 (or whereabouts) is likely. A failure to continue the rally, however, would be medium-term bearish as then it would be more likely that the USDJPY breaks the channel low and the next significant support area is as low as 109.53 – 109.75 (50-day SMA and the 50% retracement level). The recent hawkishness from the Fed combined with the planned new stimulus in Japan should help the USDJPY bulls in lifting the currency pair higher.
The DJ (CFD) closed down 0.89% yesterday after it failed to rally above the 34848 resistance. The index was dragged lower by DOW (-2.49%), AMGN (-2.24%), CVX (-1.96%), CAT (-1.95%) and D (-1.93%). The index is in the overbought territory in short term and should it retrace further the key support levels and areas are at 33028 and 34125 – 34316 inside which several technical factors coincide. The key resistance levels are 34848 and 35091. A decisive close above the bearish channel top at 34690 and the swing high at 34848 would indicate the short term bearishness created by yesterday’s price action would be negated.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has now changed the tune and is moving away from the ultra-accommodative monetary policy. Currently, the expectation is that the first-rate hike would take place in the second quarter of 2022.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration is negotiating with the Senate Republicans to introduce a $1.2 trillion infrastructure stimulus plan.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways since March. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||Even though the June NFP report came in better than anticipated (+850K) the total is still 6.8 million jobs lower than at its peak in February last year. However, the Fed has said earlier recently that believes that the US is on a path to a very strong labour market as indicators of activity and employment continue to improve.|
|Inflation||The year on year headline CPI change was 5% but not all inflation gauges agree with such a high number. The trimmed-mean inflation CPI index published by the Cleveland branch of the Federal Reserve Bank, rose only 2.6% y/y (0.4% m/m)|
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Market News & Facts
- Japan’s extra stimulus estimated at $180 bn
- Westpac forecasts RBNZ will hike rates in November
- US ISM Services PMI for June 60.1 (63.5 expected)
- UK construction PMI for June: 66.3 (64.2 previous)
- PBOC: warns against institutions providing cryptocurrency services
- RBA’s Lowe is not considering rate increases in 2023
- The UK Prime Minister lifts Covid restrictions
- OPEC+ meeting postponed
- Central banks reportedly buying gold, moving out of the USD
- China June Caixin/Markit Services PMI 50.3 (55.7 expected)
- ANZ Australian Job Ads for June +3.0% m/m
- Australia to limit international arrivals by 50% due to the Delta strain
- Philadelphia Fed’s Harker: tapering should start later this year
- BOE ready to respond to signs of persistent inflation
- UK final manufacturing PMI for June: 63.9 (64.2 preliminary)
- Japan chief cabinet secretary Kato pondering new stimulus
- Australian exports to 6% in May from 3% in April
- Canada April GDP -0.3% m/m (-0.8% expected)
The Next Main Risk Events
- AUD – RBA Governor Lowe’s Speech
- EUR – ZEW Economic Sentiment
- EUR – German ZEW Economic Sentiment
- USD – ISM Services PMI
- EUR – EU Economic Forecasts
- USOIL – OPEC-JMMC Meetings
- CAD – Ivey PMI
- USD – JOLTS Job Openings
- USD – FOMC Meeting Minutes
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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