FX Daily: Technical vs Real – Hellenic Shipping News Worldwide | Omd Cialis

USD: It’s hard to get bored in the markets these days
July was a very eventful and volatile month for global markets and we doubt we will be navigating much calmer waters in August. The shift to a fully data-dependent approach by the Federal Reserve and European Central Bank means incoming data releases will have an increased impact on most asset classes, and there are still geopolitical and virus-related threats that can have a significant impact on the global outlook and should keep the uncertainty elevated.

After last week’s rather dismal US 2Q GDP numbers, markets are now actively looking for evidence of how much of this technical recession is “real”. The most important indicator to watch is the unemployment rate, as a full-blown recession must presuppose a weakening of the labor market. The US non-farm payrolls on Friday will therefore be the main highlight of the week. Our economics team is forecasting a 200k rise, with numbers still held back by labor shortages and the unemployment rate remaining at 3.6%. If a deteriorating outlook suggests that a 75 basis point hike is now off the table, a 50 basis point hike would still be warranted given this still benign labor market environment.

There will also be some focus on activity surveys starting with today’s ISM Manufacturing Index, which we expect to fall to 51.5 (consensus 52.0) from 53.0 last month. Once again, this should almost confirm the narrative of a slowing US economy, which should justify a slower but not halt to Fed tightening in the fall.

We will also be hearing from Fed spokesmen again this week and expect market sensitivity to be quite high on that one as well. While no FOMC members are scheduled to speak today, a dove (Charles Evans) and two hawks (Loretta Mester and James Bullard) are scheduled to make comments later this week.

On the FX side, the re-evaluation of lower interest rate expectations pushed equities higher and created the perfect environment to unwind some of last week’s rather sizeable dollar long positions. We do not expect the dollar to enter a broad-based downtrend in the coming days and we might instead only see some selective strength in G10 versus the greenback.

For example, the recent rebound in oil prices could support the Norwegian Krone and Canadian Dollar, while lower yields and the re-rating of lower interest rate expectations could help USD/JPY test 130.00. We suspect that European currencies (such as the euro and Swedish krona) may struggle to find sustained support given Europe’s gas issues and deteriorating outlook. The pound faces the risk of a dovish re-rating after the Bank of England meeting, while the Australian dollar may find some support (although external factors should still dominate) as the Reserve Bank of Australia could gain 50 basis points tonight.

In our view, the DXY should be able to hold above 105.00 by the end of the week. Although volatility is likely to remain quite high.

EUR: 1.0200 can remain the anchor
Amid a significant weakening in the dollar environment over the past week, the euro stood out by failing to stage a meaningful rally despite some GDP and CPI numbers beating consensus. Recent price action suggests that 1.0200 is becoming an anchor for EUR/USD and we see this as a level that signals markets’ reluctance to re-enter long euro positions amid what is still a very challenging and challenging environment uncertain external issues related to the eurozone outlook.

Our short-term fair value model seems to support this view as it shows a risk premium of around 2.8% versus EUR/USD. This means that the EUR is trading below what its short-term fundamentals would suggest as it faces significant downside risks not included in the model – in this case the risk of a complete disruption to Russia’s gas supply and its economic fallout. We note that while a high risk premium can usually indicate that a currency is on the verge of a recovery, in some cases where tail risks are quite high (like during the Greek debt crisis or the 2018 Italian political crisis ), however, a significant risk premium can remain contained a couple for months.

Given the ongoing uncertainty surrounding the Russian gas story, we believe EUR/USD could stay close to 1.0200 for at least this week. By the way, neither important data releases nor planned ECB speakers can be observed in the coming days in the euro zone. Another factor to watch is the emergence of the euro as an attractive funding currency in an environment where stabilizing risk sentiment is fueling some new carry searches. These dynamics could help keep the euro under control despite its pro-cyclical nature.

GBP: BoE’s 50bps hike may not be enough to lift the pound
Expect a wait and see approach to GBP price action heading into Thursday’s Bank of England interest rate announcement. Looking at interest rate expectations, the market is now fully pricing in a 50 basis point move, which is also our base case.

Nonetheless, we see a non-negligible risk of a pullback against the market’s hawkish prices, which could trigger some weakness in the pound. This means that EUR/GBP could struggle to end the week below 0.8300 despite the euro’s lack of bullish momentum, while GBP/USD could dip back into the 1.20-1.21 range.

CEE: The market will test the CNB’s will to keep the krone under control
We start this week with a heavy data load. Today we will see the region’s PMI for July, a key leader on recession fears, which should show a further drop into contractionary territory, particularly in Poland and the Czech Republic. On Wednesday, Hungary’s June retail sales will confirm the slowdown with a soft landing. On Thursday, the CNB board will meet for the first time under new leadership and we expect it to keep rates on hold at 7.00% for the first time since the first post-Covid hike in May last year. The central bank will also introduce a new forecast, which should be significantly more dovish than what we are used to from the CNB. The Romanian central bank, which is only just accelerating its rate hike cycle, will follow on Friday. We expect another 100bp rate hike this week to 5.75%, same as last month. Also on Friday we will see how Hungarian industrial production completes the second quarter picture and retail sales in the Czech Republic.

CEE currencies have not fully recovered from last week’s FOMC meeting impact, in our view. Although they have rallied late last week as expected, especially the Polish zloty, we believe there is scope for a bit lower. We currently see the most room for maneuver in the Hungarian forint, which is also supported by a renewed increase in the interest rate differential to new record levels. As such, we currently see scope to even go slightly below EUR/HUF 400, but geopolitical risks may continue to impede fresh gains. The Polish zloty is back below 4.750 EUR/PLN and there is still room to move lower towards 4.72. We believe the Czech koruna will test the CNB’s will to keep it below 24.60 this week. The dovish outcome of Thursday’s meeting will trigger a fresh wave of depreciation pressures in our view, but it’s still too early for the krone to escape central bank scrutiny.
Source: ING

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