Thursday July 14th, 2022

The US$ extends its rally, oil prices fall, equity markets are down while US yields rise as risk-off sentiment grows. The US$ index extends its bullish momentum fueled by safe-haven flows and a hawkish Fed with investors looking for a possible 1% interest hike in July. Euro tested US$ parity for the first time in 20-years on energy & recession concerns, while the collapsing JPY tests fresh lows not seen since 1998 vs US$. Today focus shifts to US jobless claims and US PPI data to provide some intraday direction. In other news. US Treasury Secretary Yellen says price cap on Russian oil can help address inflation. The EU hikes inflation forecast to 8.3% for 2022 as Russia-Ukraine war drives soaring prices. In Italy Mario Draghi’s government under threat as Italy’s Five Star threatens to pull out (FT). In the UK Sunak and Mordaunt become front runners in Tory leadership race. The currency markets. The US$ extends its rally up 17.3% (yoy July), its strongest level in 20-years and has potential to extend to its all-time high 120.24 (Jan2002) with a possible global recession and the potential of soaring Fed interest rates. JPY down 20.6% in 2022 at 24-year lows vs US$. Euro down 11.7% in 2022 at 20-year lows vs US$. CNY and Asian currencies fall 0.35% on average vs US$. Trading currencies are all under pressure vs US$ with JPY tumbling 1%, while ZAR falls 0.9%, MXN falls 0.65%, NZD & CHF weaken 0.5%, AUD slips 0.3% and NOK is down 0.1%.

Oil prices drop 2% as investors focused on the prospect of a large US rate hike that could stem inflation but at the same time stall oil demand. China says Yellen’s idea of Russian oil prices cap is a ‘very complicated issue’. C$ gives up its gains, falling over 1% after the BoC rate hike as oil prices fall and investors shift their focus to the prospect of a 1% interest rate hike by the Fed in July. The BoC raised rates by 1% to 2.5%, this was the biggest rate hike by the bank since 1998. The loonie is down almost 4% ytd vs US$, while Cad has rallied 8.6% vs Eur, rallied 9.2% vs GBP and has rallied almost 18% vs JPY in 2022. Support rises to 1.3030 resistance resets to 1.3180.

Euro bounces off parity but looks vulnerable for further weakness. The EU commission Economic Growth Forecast raised concerns saying Europe’s price shock will last longer with less growth. The EU Commission cuts 2023 growth projections to 1.4% from 2.3%, while inflation expectations rose to 8.3% in 2022 and 4% in 2023. The EU commission said that Europe’s economy now faces a ‘significantly slower’ outlook as well as bigger and more enduring cost-of-living shock than just 2-months ago. We remain bearish Euro over the summer with the potential of seeing .9725 vs US$. Support holds at 1.0000, if breached .9950 (Nov 2002) while resistance remains at 1.0085.

EURGBP holds steady as investors put equal pressure on the currency pair as investor focus remains on the US$ and the prospect of a 1% Fed hike in July. Support holds at .8435 (1.1855) while resistance remains at .8600 (1.1628).

GBP dips below 1.1850 amid a strengthening US$ and ongoing political uncertainty. Investors shifted their focus away BoE rate hikes after the BoC hiked interest rates by 1% which increased the prospect that Fed could now raise 1% at its next meeting. We expected the pound to remain on the back-foot with safe-haven US$ flows, ongoing energy price concerns, political uncertainty and increasing expectations of a UK recession in 2023. Today US Jobs & US PPI will be the primary drivers for the pound intraday. Support holds at 1.1807 (low 2020) while resistance remains at 1.1900.