GDP report

Fed likely to skip, but it's going to be close Market pricing has shifted massively over recent weeks, but we think the most likely outcome remains the Fed leaving policy rates unchanged on 14 June. There will be some dissent and a shock inflation reading could make it a very close decision. Either way, the Fed will leave the door open to further rate moves.   No change the most likely outcome Just over a month ago, Federal Reserve Chair Jerome Powell hinted that after 500bp of rate hikes over a 14 month period, interest rates may finally have entered restrictive territory and the Fed could pause at the June meeting to take some time to evaluate the effects. Markets took this as a signal that we may already be at the peak with the fear that the combination of high borrowing costs and tighter lending conditions could prompt a recession with inflation falling swiftly back towards target. On 4 May, Fed funds futures contracts were pricing in 86bp of interest rate cuts by year end and the target range heading below 4% at the January 2024 FOMC meeting.   Over the subsequent six weeks, activity has remained resilient, inflation continues to run hot, payrolls jumped 339,000 and the Australian and Canadian central banks surprisingly hiked rates. Hawkish comments from a few Fed officials have added to the sense that they may not be done. The result is that pricing for the June FOMC meeting is not far off a coin toss (just under 10bp priced) and July is looking a decent bet for a hike (21bp priced). Next Tuesday’s CPI report could see pricing move even further in favour of a hike – currently the consensus is for core CPI to come in at 0.4% month-on-month, but if we get a shock 0.5% that could be sufficient to convince enough FOMC members to vote for a hike.   That’s not our base case and we believe there will be a majority on the committee who think they have tightened policy a lot and it makes sense to wait. This was certainly the commentary from senior Fed officials such as Governor Philip Jefferson and Philadelphia Fed Governor Patrick Harker, that while “there is still significant room for improvement” the Fed is “close to the point where we can hold rates in place and let monetary policy do its work”. Moreover, recent data releases have been sending very mixed messages, which suggests it may make sense pause to evaluate.   Conflicting data makes life hard for the Fed Friday’s Labour report is a notable example. The establishment survey, which questions employers and generates the non-farm payrolls number, reported a jump of 339,000 in employment in May. However, the household survey, used to calculate the unemployment rate, showed employment declined 310,000 with unemployment rising 440,000. Then we have the manufacturing ISM reporting a rise in its employment survey yet the payrolls report stated there was a 2000 decline. Meanwhile, service sector payrolls rose 257,000 yet the ISM services employment index fell into contraction territory.   We see similar mixed messages within the GDP report. On an expenditure basis, GDP grew 1.3% annualised in 1Q 2023 and 2.6% in 4Q 2022. However, an alternative measure of US economic activity, Gross Domestic Income, which combines all the costs incurred and incomes earned in the production of GDP, contracted 2.3% annualised in 1Q 2023 after a 3.3% drop in 4Q 2022 and has declined in three out of the past four quarters. An average of the two series suggests the economy has flatlined since 3Q 2022.   Fed to leave the door open for further hikes Nonetheless, the Fed wants to see 0.2% month-on-month or below CPI readings to be confident inflation will return to 2%. We aren’t there yet so if they do hold rates steady, as we predict, it is likely to be a hawkish hold with the door left open to further rate hikes if inflation doesn’t slow – July is clearly a risk. We certainly acknowledge the risk that they hike rates 25bp, especially if Tuesday’s inflation data surprises to the upside, but doubt they will intensify the language on rate hikes so the “hawkish hike” scenario in the table above looks unlikely.

On Friday, the GBP/USD pair did not even try to extend its downward movement. Take note that there was an ascending trend line during the entire bearish correction period (already two weeks), and the British currency does not seem like it is going to fall anytime soon.   At the same time, a new descending trend line has formed on the hourly chart, causing the pair to be trapped between two trend lines. On Friday, the UK released its GDP report. If it did provoke a market reaction, it was minimal, as its value for the first quarter fully coincided with the forecasts. There were no significant reports in the US, and secondary data such as personal income and spending, as well as the Personal Consumption Expenditures Price Index with the Consumer Sentiment Index, were unlikely to add pressure on the dollar. Especially considering that the USD has started falling in the morning. Therefore, we tend to believe that the nature of the movements were more technical. It was almost impossible to predict the upward reversal in the morning. On the hourly chart, a new support area was formed at 1.2598-1.2605, from which the pair rebounded. Currently, it is located between the Senkou Span B and Kijun-sen lines, and has also tested the trend line. There's a high probability of a rebound and a new downtrend, but the movement is currently volatile. The only signal was formed at the beginning of the US session when the price broke through the Ichimoku indicator lines and the level of 1.2693. It was not the best signal, and traders could only gain 10 pips. But it's better than false signals or losses.     COT report: According to the latest report, non-commercial traders opened 2,800 long positions and closed 2,500 short ones. The net position increased by 5,300 in just a week and continues to grow. Over the past 9-10 months, the net position has been on the rise. We are approaching a point where the net position has grown too much to expect further growth. We assume that a prolonged bear run may soon begin, even though COT reports suggest a bullish continuation. It is becoming increasingly difficult to believe in it with each passing day. We can hardly explain why the uptrend should go on. However, there are currently no technical sell signals. The pound has gained about 2,500 pips. Therefore, a bearish correction is now needed. Otherwise, a bullish continuation would make no sense. Overall, non-commercial traders hold 52,300 sell positions and 104,400 long ones. Such a gap suggests the end of the uptrend. We do not see the pair extending growth in the long term.     1H chart of GBP/USD In the 1-hour chart, GBP/USD maintains a bullish bias, although it is correcting at the moment. The ascending trend line serves as a buy signal. However, we still believe that the British currency is overvalued and should fall in the medium term. The fundamental backdrop for the pound is getting weaker. The dollar also lacks a fundamental advantage but has already lost 2,500 pips over the past 10 months and requires a correction. On July 3, trading levels are seen at 1.2349, 1.2429-1.2445, 1.2520, 1.2598-1.2605, 1.2693, 1.2762, 1.2863, 1.2981-1.2987. The Senkou Span B (1.2737) and Kijun-sen (1.2674) may also generate signals when the price either breaks or bounces off them. A Stop Loss should be placed at the breakeven point when the price goes 20 pips in the right direction. Ichimoku indicator lines can move intraday, which should be taken into account when determining trading signals. There are also support and resistance which can be used for locking in profits. On Monday, manufacturing PMIs are scheduled for release in both the UK and the US. All the reports, except for the US ISM, will be released in the second estimate, which is unlikely to surprise traders. However, the ISM index may show an unexpected value and, accordingly, stir some market reaction.   Indicators on charts: Resistance/support - thick red lines, near which the trend may stop. They do not make trading signals.   The Kijun-sen and Senkou Span B lines are the Ichimoku indicator lines moved to the hourly timeframe from the 4-hour timeframe. They are also strong lines. Extreme levels are thin red lines, from which the price used to bounce earlier. They can produce trading signals. Yellow lines are trend lines, trend channels, and other technical patterns. Indicator 1 on the COT chart is the size of the net position of each trader category. Indicator 2 on the COT chart is the size of the net position for the Non-commercial group of traders.  

The EUR/USD pair has been caught in turbulence amid conflicting fundamental signals, causing the price to move sideways. Market participants still need to unravel this tangle of contradictions to determine the price's direction. Currently, traders are driven by emotions, experiencing a rollercoaster-like ride. The verdict of the Federal Reserve and the US GDP The results of the Federal Reserve's July meeting were not in favor of the greenback. Bulls returned to the 1.1150 resistance level (the Tenkan-sen line on the 1D chart) and tested it. However, when it comes to the overall outcome, it would be more accurate to say otherwise: the market interpreted the results of the July meeting against the US currency, while the Fed's verdict can be viewed from different angles. The US central bank avoided specifics, especially regarding the future prospects of tightening monetary policy. According to Fed Chair Jerome Powell, everything will depend on what new economic data shows: the September meeting may end with either a rate hike or keeping rates unchanged. Such rhetoric disappointed dollar bulls, as recent inflation reports came out in the "red," reflecting a slowdown in inflation in the US. It is logical to assume that if July's inflation follows the trajectory of June's, the September rate hike will be in question. These conclusions put significant pressure on the greenback – the US dollar index hit a weekly low, declining towards the 100 level. However, the situation changed drastically. Dollar bulls once again saw a "light at the end of the tunnel" thanks to the latest US GDP report. The data significantly surpassed forecasts.   According to preliminary calculations, US GDP increased by 2.4% in the second quarter, with a growth forecast of 1.8%. It is worth mentioning that the first quarter's result was recently revised upwards: the initial estimate showed a 1.3% growth in the US economy, while the final data showed a different result of 2.0%. The Bureau of Economic Analysis report (US Department of Commerce agency) indicates that this growth was driven by increased consumer spending, government and local government spending, growth in non-residential fixed investment, private investment in equipment, and federal government spending. Consumer spending, which accounts for two-thirds of the economy, increased by 1.6% in the second quarter, while government spending increased by 2.6%. EUR/USD sellers are back in action In addition to the GDP report, dollar bulls were also pleasantly surprised by another indicator.   Durable Goods Orders in the US increased 4.7% in June, compared to forecasts of 1.3%. This reading followed the 2.0% increase recorded in May. Orders for durable goods excluding transportation also rose by 0.6% last month. This component of the report also showed a positive outcome, as most experts expected a more modest growth of 0.1%.   As a result, hawkish expectations regarding the Fed's future actions have increased in the market. According to the CME FedWatch Tool, the probability of a 25 basis points rate hike in September is nearly 30%, whereas after the announcement of the July meeting's outcome, this probability fluctuated in the range of 19-20%. Such an information background contributed to the "revival" of the greenback.   The US dollar index fully recovered all lost positions, rising to the middle of the 101 level. Consequently, the EUR/USD pair plummeted and hit two-week price lows.       The European Central Bank also played its role in this. Following the July meeting, the ECB raised interest rates by 25 basis points but did not announce further steps in this direction.   Similar to the Fed, the ECB indicated that one additional rate hike from the central bank would now depend on key economic data, primarily inflation. According to ECB President Christine Lagarde, the central bank has "turned off the autopilot" – decisions on interest rates will be made from meeting to meeting and will be based on "inflation forecasts, economic and financial data, and the underlying inflation dynamics."   It is worth noting that after the previous meeting, Lagarde had directly announced the rate hike at the July meeting. Conclusions The latest US reports, as well as the outcomes of the ECB's July meeting, "redrew" the fundamental picture for the EUR/USD pair. There is one more important piece of the puzzle remaining: the core PCE index, which will be published at the start of the US session on Friday, July 28th. However, for another upward reversal, this indicator must deviate significantly from the forecasted value (naturally, in a downward direction), with experts predicting a declining trend to 4.2% (following the May increase to 4.6%).   From a technical perspective, you can consider short positions on the pair after sellers overcome the support level of 1.0950 (Tenkan-sen line on the weekly chart). In such a case, the next bearish target for EUR/USD would be at 1.0850 – the upper band of the Kumo cloud on the 1D chart.  

Canada’s GDP expected to ease in Q2 US nonfarm employment payrolls expected to dip to 177,000 The Canadian dollar is calm in the European session, trading at 1.3500, down 0.07%. I expect to see stronger movement from USD/CAD in the North American session, as Canada releases second-quarter GDP and the US publishes the July employment report. Canada’s GDP expected to slow in Q2 Canada usually releases employment reports on the same day as the US, but Canada’s July jobs report won’t be released until next week. Instead, today we have Canada’s GDP, a key release, along with the US employment release. Canada’s economy rebounded in the first quarter, as GDP rose 0.8% q/q. This beat the consensus estimate of 0.4% and added support to the case for the Bank of Canada raising rates at the September 6th meeting. However, today’s GDP report could chill rate hike expectations if the economy took a step backward in the second quarter. The consensus estimate for Q2 GDP stands at 0.3% q/q, which would indicate weak economic growth. If GDP is stronger than expected, the odds of a rate hike will likely increase. The GDP report is the final key release out of Canada prior to the rate meeting, which adds significance to the GDP release. Investors will also be keeping a close eye on the July US employment report, highlighted by nonfarm payrolls. On Wednesday, ADP Employment Change fell sharply to 177,000, down from a revised 371,000. The nonfarm payroll report is expected to decline slightly to 170,000, compared to 187,000 in the previous reading.   If nonfarm payrolls is within expectations, it will mark the third straight month of gains below 200,000, a clear sign that the US economy is cooling. This would not only cement an expected pause by the Federal Reserve next week but would also bolster the case for the Fed to hold rates for the next few months and possibly into 2024. . USD/CAD Technical USD/CAD tested resistance at 1.3523 earlier. Above, there is resistance at 1.3580 1.3444 and 1.3377 are providing support  

While the euro is actively trying to find some kind of bottom against the US dollar, the speeches of European politicians are coming to an end. Perhaps after that, the pressure on the single currency will somehow decrease, but personally, I have strong doubts about this, as there are absolutely no reasons for it. And if we also consider the first possible pause in the cycle of interest rate hikes from 2022, as well as the actively shrinking European economy, then we can deduce that there will be fewer reasons to buy risky assets.   However, some hawkish European politicians continue to "stick to their guns." According to a member of the Executive Board, Klaas Knot, investors betting against the European Central Bank raising interest rates next week may underestimate the likelihood of it happening. While a slowdown in the eurozone's 20-nation economy is sure to damp demand, updated inflation projections won't differ much from the last round in June, the Dutch central bank chief said. "I continue to think that hitting our inflation target of 2% at the end of 2025 is the bare minimum we have to deliver," said Knot.   As I mentioned earlier, he made such statements before a week-long period of calm preceding the September meeting of the ECB Governing Council. Knot also noted that the markets are currently experiencing difficulties, which are also experienced by the central bank. Just recently, the central bank governors of Germany, Belgium, Austria, and Latvia expressed support for another quarter-point rate hike, likely the last in this cycle. However, their colleagues from Italy and Portugal are among those emphasizing that economic risks are starting to emerge. Recent eurozone PMI data and today's revised downward GDP report for the eurozone in the 2nd quarter clearly indicate this. ECB President Christine Lagarde, speaking earlier this week, also did not make any commitments, simply stating that inflation is too high, and the central bank is determined to tame it, with decisions based on appropriate data. Obviously, it's also challenging to assess the current progress in inflation. Underlying pressure has decreased, but the overall reading has increased due to a sharp spike in non-oil prices. European politicians have also recently discussed this, lamenting issues with the energy market. Wage negotiations and corporate price behavior will be crucial in determining how quickly inflation returns to the target level. As for today's technical picture for EUR/USD, the bears have slightly eased their grip. To maintain control, bulls need to stay above 1.0700. This will allow them to break back to 1.0750. From there, they can climb to 1.0770, but it will be quite difficult to do so without support from major players. In the event of a downtrend, I only expect significant action from major buyers around 1.0700. If there's no significant support there, it would be a good idea to wait for a new low at 1.0665 or open long positions from 1.0635. Regarding the technical picture for GBP/USD, the pound will continue to fall. We can only bet on a recovery once traders take control of the level at 1.2530. Returning to this range will restore hope for a recovery towards 1.2560, after that we can talk about a more significant surge towards 1.2700. In case the pair falls, bears will try to take control below 1.2484. If they succeed in doing so, breaking through the range will hit bullish positions and push GBP/USD towards the low at 1.2440 with the potential to reach 1.2400.

The European Central Bank kept all three key interest rates unchanged. The market's reaction was altogether surprising, strange, expected, and logical. The euro initially rose by 25 pips but then it also lost the same amount in three hours. So the market's response to this significant event can be characterized by a 25-pip move. However, while the event itself was important, its results were not. As mentioned, the rates remained the same, and ECB President Christine Lagarde was quite neutral during the press conference. Here's what she talked about.   First, Lagarde said that she believed the current rates are at levels that will make a substantial contribution to returning inflation to the Bank's 2% target. Rates will need to be kept at their current levels for a sufficiently long duration, but eventually, the ECB will achieve its goal. Decisions on rates will be made based on incoming economic and financial data, and the dynamics of underlying inflation. The APP and PEPP programs (monetary stimulus programs) continue to reduce the ECB's balance sheet at a moderate pace, following the general plan. Lagarde also said that rate decisions will be made from meeting to meeting. This suggests that Lagarde keeps the door open for further rate hikes but the chances of seeing new tightening in the near future are extremely slim. I believe that the results of the meeting turned out to be neutral. I previously mentioned that there were no other options besides keeping rates at their current levels. However, I allowed for the possibility that Lagarde might hint at future rate hikes "if necessary" or, conversely, announce when policy easing would begin. Neither of these scenarios was mentioned. Based on this, I conclude that the market's 25-pip reaction was quite in line with the meeting's outcomes. However, the trading instrument could and should have shown much greater movement, given that two important reports were published in the United States, which turned out to be significantly stronger than market expectations. However, it seems that even these reports were ignored. Thus, the market's reaction to the ECB meeting was logical but if we look at the bigger picture, it actually wasn't. We expected the lack of market activity with such results, but it was quite strange to see such an outcome in conjunction with the GDP and durable goods orders reports in the United States. Based on the analysis, I conclude that a bearish wave pattern is still being formed. The pair has reached the targets around the 1.0463 level, and the fact that the pair has yet to break through this level indicates that the market is ready to build a corrective wave. A successful attempt to break through the 1.0637 level, which corresponds to the 100.0% Fibonacci level, would indicate the market's readiness to complete the formation of Wave 2 or Wave b. That's why I recommended selling. But we have to be cautious, as Wave 2 or Wave b may take on a more complex form.  

Canada’s job growth expected to expand by 15,000 US ISM Manufacturing PMI projected to accelerate to 47.6 The Canadian dollar continues to gain ground against a slumping US dollar. In the European session, USD/CAD is trading at 1.3529, down 0.23%. The Canadian currency is poised to post a third straight winning week against the greenback and soared 2.25% in November. It is a busy Friday, with Canada releasing the employment report, the US publishing the ISM Manufacturing PMI and Fed Chair Powell speaking at an event in Atlanta. Canada’s labour market has softened but remains in good shape and has shown expansion for three straight months. The economy is expected to have added 15,000 jobs in November, slightly lower than the 17,500 reading in October. The market consensus for the unemployment rate stands at 5.8%, compared to 5.7% in October. Canada’s GDP posts negative growth This week’s GDP report was another reminder that the economy remains weak. Third-quarter GDP declined by 0.3% q/q, below the revised o.3% gain in Q2 and the first decline since the second quarter of 2021. High interest rates have cooled the economy and exports were down in the third quarter as global demand remains weak. On an annualized basis, GDP slid 1.1% in the third quarter, compared to a revised 1.4% gain in Q2 and shy of the market consensus of 0.2%. The US wraps up the week with the ISM Manufacturing PMI. The manufacturing sector has been in a prolonged slump and the PMI has indicated contraction for twelve consecutive months. The PMI is expected to improve to 47.6 in November, compared to 46.7 in October. A reading below 50 indicates contraction.   Investors will be listening closely to Jerome Powell’s remarks today, looking for hints about upcoming rate decisions. Powell has stuck to his script of a ‘higher for longer’ rate policy, but the markets have priced in a rate cut in May at 84%. . USD/CAD Technical USD/CAD tested resistance at 1.3564 in the Asian session. Above, there is resistance at 1.3665 1.3494 and 1.3434 are providing support    

CEE: The market is losing patience with PLN Yesterday's PMIs in the CEE region confirmed continued weakness in industry in December, especially in the Czech Republic where the leading indicator fell to its lowest reading since September last year, sinking hopes of a recovery at the end of the year. The calendar is empty in the region today, but it should get more interesting in the days ahead. On Thursday, the Czech Republic will release the state budget result for last year. The Ministry of Finance is already indicating that the resulting deficit could be lower than projected (CZK295bn), which would be good news for Czech government bonds (CZGBs). At the same time, MinFin is expected to publish a funding plan for this year by the end of this week, the last one in the CEE region, which we believe should also point to a positive picture for CZGBs this year. Then, on Friday, the final 3Q GDP report in the Czech Republic will be published, while in Poland, December inflation will be released. We expect a small increase from 6.6% to 6.7% year-on-year, slightly above market expectations. However, the wide range of estimates suggests an interesting print here. In the FX market, most of the region started the year with gains except the Polish zloty. The general picture for the CEE region seems mixed with a stronger US dollar on the one hand and higher market rates across the board on the other. Although PLN should benefit the most from higher rates across the region in our view, it is the weakest since November last year. Heavy long positioning and just a lazy move down in EUR/PLN in recent weeks seems to have triggered some selling in PLN. Yesterday's paying flow in the rates market seems to have stopped the sell-off around 4.360 EUR/PLN, however, it is hard to say if we are at the end for now. We still expect a stronger PLN given the macro and monetary policy outlook, however for now we will have to experience a moment of weakness. Elsewhere in the region, higher market rates seem to have supported FX and CZK and HUF are enjoying new gains. In Hungary in particular, we could see more in this direction over the coming days, in our view.