hawkish stance

On Tuesday, the demand for the pound was significantly higher than that for the euro. As soon as this happened, many analysts began to pay attention to the report on prices in UK stores, as shop price inflation accelerated to 9% this month. This indicates that UK inflation is decreasing slowly or not decreasing at all, despite the benchmark interest rate being raised to 4.5%.   The consensus forecast for the Bank of England's rate currently suggests two more quarter point rate hikes in June and August.   This would bring the rate to 5%. Any further tightening without alternatives would push the British economy into a recession, and even the current rate could potentially cause it, despite the BoE's optimistic forecasts. But how can inflation be combated if it hardly responds to the actions of the central bank?     I believe there can only be one disheartening answer: it cannot. If further rate hikes lead to a recession, the Brits, clearly dissatisfied with recent events within the country, may start a new wave of mass strikes. Take note that in the past year, many Brits have openly criticized the British government for the sharp decline in real incomes and high inflation.   If the rate increases further, the economy will contract, leading to an increase in unemployment. If the rate is kept as it is, it might take years for inflation to return to the target level. The BoE is in a deadlock. BoE Governor Andrew Bailey expects inflation to start decreasing rapidly from April. He noted the decline in energy prices, which will somewhat dampen inflationary pressure on all categories of goods and services. However, the April inflation report was unusually contradictory. While headline inflation showed a significant slowdown, core inflation continues to rise.   Therefore, it is not possible to conclude that inflation is slowing down in the general sense. We can only wait and observe. If Bailey turns out to be right, then the BoE will not need to raise the rate to 5.5% or 6%, which currently seems like a fantasy.   However, if inflation continues to hover around 10%, the BoE will need to devise new measures to address it without exerting serious pressure on the economy. It might require patience for several years. It is entirely unclear which option the central bank will choose.   The demand for the British pound may increase as market expectations of a hawkish stance grow. But will these expectations be justified? The pound may rise based on this, but fall even harder when it becomes clear that the BoE is not ready to raise the rate above 5%. I believe that wave analysis should be the primary tool for forecasting at the moment.     Based on the analysis conducted, I conclude that the uptrend phase has ended. Therefore, I would recommend selling at this point, as the instrument has enough room to fall. I believe that targets around 1.0500-1.0600 are quite realistic.   A corrective wave may start from the 1.0678 level, so you can consider short positions if the pair surpasses this level. The wave pattern of the GBP/USD pair has long indicated the formation of a new downtrend wave. Wave b could be very deep, as all waves have recently been equal.   A successful attempt to break through 1.2445, which equates to 100.0% Fibonacci, indicates that the market is ready to sell. I recommend selling the pound with targets around 23 and 22 figures. But most likely, the decline will be stronger.    

EUR: Don't look at the eurozone, look at the US We have published the ECB Cheat Sheet ahead of Thursday’s policy announcement in Frankfurt. A 25bp outcome has already been priced in by markets and looks like a done deal based on recent ECB communication, so the focus will be on the commitment to future tightening. Arguably, the grounds to retain a hawkish stance have become scarcer since the softening of the inflation and growth story in the eurozone, and the chances of a hawkish surprise have therefore decreased.   From an FX perspective, we do not see the ECB risk event this week as big as anything happening in the US. The recent EUR/USD decline was caused by a deterioration in the EUR-USD short-term rate differential, but that was overwhelmingly driven by a jump in the more volatile USD rates while EUR rates remained stable. US CPI numbers and the Fed decisions are what will matter the most for EUR/USD this week, and more generally, US data and the Fed’s future path are what will primarily determine the direction of EUR/USD moving ahead.   If we are right about a 0.4% core US CPI print today, there may be some moderate upside risks for EUR/USD, should investors see that as enough to price out the remaining 23% implied probability of a hike tomorrow. But we are not convinced of that and some cautious trading ahead of key central bank risk events may keep the pair capped.

Rates Spark: Raising the hawkishness bar A hawkish pause from the Fed, but the higher dots add to its degree. Market rates have reason to rise more. The bar for the ECB to surprise to the hawkish side today and move longer rates sits high, with the market apparently well-priced already.   Market rates have enough here to push higher, and the front end will feel tighter even without a hike The Fed has latched on to the theme that has dominated the market mindset in the past number of weeks, namely that the US economy continues to refuse to lie down. This has helped risk assets, as by implication default risks that would typically evolve from a recession have been kept at bay, helping credit spreads to tighten and equity markets to perform. There has also been an easing in measures of system risk, especially as immediate banking sector angst has been downsized. This overall combination has allowed market rates to ease higher, driven by higher real rates, which in turn are a sign of strength.   Initial comments from the Fed do not negate these themes, and in fact push for more of the same. While this is more reflective of the new “dots” than anything else, it in any case pushes in the direction for higher market rates ahead. We continue to position for the 10yr to head to the 4% area, and it would not look wrong if it were to drift above for a period, at least until the illusive macro slowdown is a tad more clear-cut than now. We still expect the 10yr to be much closer to 3% by the end of the year but for now we see yields rising higher first.   There was no particular mention of the changing liquidity circumstances. Currently there is amble liquidity, with bank reserves on the rise (up from US$3trn to US$3.4trn), and still over US$2trn going back to the Fed on the reverse repo facility. The US Treasury has only slowly rebuilt its cash balance at the Fed since the debt ceiling was suspended, so the impact of less prior bills issuance and more bank support has dominated the ongoing quantitative tightening programme. Ahead, some US$500bn off liquidity will get drained out of the system as the Treasury rebuilds its balance through net bills issuance. We expect from that a combination of lower bank reserves and lower cash on the reverse repo facility.   This will make it feel like there has been some tightening in conditions, even if not in levels (as the Fed has not hiked).   Still hawkish, but harder to regain traction further out

In our conversation with an FXPRO analyst about the current market situation, several key topics were discussed. Regarding the recent FOMC decision, it appears that markets are underestimating the Fed's hawkish rhetoric. Despite leaving the Fed Funds rate unchanged, the FOMC's published forecasts suggest two more rate hikes this year and an extended period without policy easing. However, investor confidence in Powell's economic assessment is at a record low. This disparity between market expectations and the Fed's projected scenario is evident in the bond market pricing, with the most likely FOMC scenario priced at a mere 8.4%.   Interestingly, this misplaced investor confidence in a less hawkish Fed is driving equity gains, reminiscent of a similar scenario in January when regional banking issues dashed market optimism. The market's detachment from reality is leading to a disregard for the Fed's rate guidance and the tightening measures already implemented.   FXMAG.COM: Could you please comment on the FOMC decision? FXPRO analyst: Markets continue to underestimate the Fed's hawkish rhetoric. After leaving the Fed Funds rate unchanged, the FOMC has published forecasts suggesting two more 25 basis point hikes this year and an extended period without policy easing. However, investors' confidence in Powell's economic assessment is at a record low (36% vs. 74% for Greenspan in 2001). The most likely FOMC scenario - two more rate hikes before the end of the year - is priced by the bond market at only 8.4%, according to the FedWatch tool. Indeed, this investor confidence that the Fed will be less hawkish than it promises is fueling equity gains. We saw something similar in January when regional banking problems dashed market optimism. Markets have become too detached from reality, ignoring both the Fed's direct rate guidance (which is within its power) and the economic logic and the policy tightening that has already occurred.     FXMAG.COM: Could you please comment on the ECB decision?  FXPRO analyst: Despite six months of economic contraction, the ECB is quite open about its intentions to fight inflation. We expect another 25-point hike on Thursday, and the tone supports at least a couple more. This is a more hawkish stance than that of the Fed. Moreover, we do not rule out hawkish surprises from the ECB today and in the coming weeks. It should not be forgotten that continental Europe is historically less inflation-tolerant than the US and the UK. This could be fuel for a stronger euro in the coming months.     FXMAG.COM: Could you give your point of view about how the gold prices would behave in the next weeks? Is there a chance that there will be new ATH? FXPRO analyst: Gold retreated to $1930, a level not seen since March when the US regional banking crisis triggered a rally in precious metals and major cryptocurrencies. A pullback on the shoulders of rising equities has forced gold to give back more than half the amplitude of the March-May rally. Despite the retreat, gold still has the potential to grow from current levels to $2100 by the end of the year. A central argument against this bullish scenario would be a break below $1920 in the coming days, a significant reversal area.  

Monday was uneventful. There are no significant economic reports scheduled for Monday and Tuesday, and all the fundamental events are of secondary importance. Monday was a low volume trading day and both pairs had a slight inclination to correct after a strong rally last week.   The same situation will probably persist today. Among the economic events, the only one worth mentioning is the report on the number of building permits issued in the United States. Even with an empty events calendar, such a report can still provoke a market reaction. But what kind of reaction exactly?   For example, on Friday, when volatility was also quite low, the US Consumer Sentiment Index triggered a 30-point reaction (approximately). We might witness the same reaction today. The main point is that volatility is still low, which makes it difficult to trade, regardless of whether there are reports or not.   Analysis of fundamental events: Among today's fundamental events, the speeches by European Central Bank representatives Andrea Enria, Luis de Guindos, and Elizabeth McCaul stand out. De Guindos has already spoken earlier, and Enria and McCaul clearly carry less weight in the eyes of traders compared to Schnabel and Lane.   Therefore, if traders did not react to yesterday's speeches, it is even less likely that they would today. In the US, you can look forward to the speeches of Federal Reserve officials John Williams and James Bullard. However, Bullard does not have voting rights this year, so his hawkish stance (which is expected) is unlikely to affect morale. As for John Williams, the US central bank held a meeting just last week and we have already heard all the necessary information.   Furthermore, on Wednesday and Thursday, Fed Chairman Jerome Powell's speeches in Congress will attract much more attention. General conclusions: There are few important fundamental and economic events.   You can pay attention to the report on the number of building permits issued in the United States, as it is the only event that can truly provoke a reaction on a potentially low volume trading day. Basic trading rules: 1) The strength of the signal depends on the time period during which the signal was formed (a rebound or a break). The shorter this period, the stronger the signal. 2) If two or more trades were opened at some level following false signals, i.e. those signals that did not lead the price to Take Profit level or the nearest target levels, then any consequent signals near this level should be ignored. 3) During the flat trend, any currency pair may form a lot of false signals or do not produce any signals at all. In any case, the flat trend is not the best condition for trading. 4) Trades are opened in the time period between the beginning of the European session and until the middle of the American one when all deals should be closed manually. 5) We can pay attention to the MACD signals in the 30M time frame only if there is good volatility and a definite trend confirmed by a trend line or a trend channel.  

Monday was uneventful. There are no significant economic reports scheduled for Monday and Tuesday, and all the fundamental events are of secondary importance. Monday was a low volume trading day and both pairs had a slight inclination to correct after a strong rally last week.   The same situation will probably persist today. Among the economic events, the only one worth mentioning is the report on the number of building permits issued in the United States. Even with an empty events calendar, such a report can still provoke a market reaction. But what kind of reaction exactly? For example, on Friday, when volatility was also quite low, the US Consumer Sentiment Index triggered a 30-point reaction (approximately). We might witness the same reaction today.   The main point is that volatility is still low, which makes it difficult to trade, regardless of whether there are reports or not. Analysis of fundamental events: Among today's fundamental events, the speeches by European Central Bank representatives Andrea Enria, Luis de Guindos, and Elizabeth McCaul stand out. De Guindos has already spoken earlier, and Enria and McCaul clearly carry less weight in the eyes of traders compared to Schnabel and Lane. Therefore, if traders did not react to yesterday's speeches, it is even less likely that they would today. In the US, you can look forward to the speeches of Federal Reserve officials John Williams and James Bullard. However, Bullard does not have voting rights this year, so his hawkish stance (which is expected) is unlikely to affect morale.   As for John Williams, the US central bank held a meeting just last week and we have already heard all the necessary information. Furthermore, on Wednesday and Thursday, Fed Chairman Jerome Powell's speeches in Congress will attract much more attention. General conclusions: There are few important fundamental and economic events.   You can pay attention to the report on the number of building permits issued in the United States, as it is the only event that can truly provoke a reaction on a potentially low volume trading day. Basic trading rules: 1) The strength of the signal depends on the time period during which the signal was formed (a rebound or a break). The shorter this period, the stronger the signal. 2) If two or more trades were opened at some level following false signals, i.e. those signals that did not lead the price to Take Profit level or the nearest target levels, then any consequent signals near this level should be ignored. 3) During the flat trend, any currency pair may form a lot of false signals or do not produce any signals at all. In any case, the flat trend is not the best condition for trading. 4) Trades are opened in the time period between the beginning of the European session and until the middle of the American one when all deals should be closed manually. 5) We can pay attention to the MACD signals in the 30M time frame only if there is good volatility and a definite trend confirmed by a trend line or a trend channel. 6) If two key levels are too close to each   

The Czech National Bank fights dovish market expectations The vote split indicates that inflation risks have diminished, but the governor continues to favour hawkish messages. Disinflation in the summer months will be a problem for the central bank in combatting the market's dovish expectations. Later, however, disinflation is set to slow significantly, which may lead to a delay in rate cuts.   Vote split more dovish, hawkish threats remain The CNB board left rates unchanged yesterday, in line with expectations. The vote split moved from 4:3 to 5:2 in favour of stable rates. Two members voted for a 25bp rate hike. We suspect that newcomer Jan Prochazka may have joined the majority this time - names will be confirmed on Friday, in next week's Minutes. From this perspective, it would appear that the hawkish story is over.   During the press conference the governor indicated that he intends to continue the hawkish stance. He reiterated that the CNB is ready to intervene in the FX market if needed and that rates are high enough. He also highlighted that, despite weaker-than-expected economic numbers, including inflation, upside risks to inflation remain. Thus, if wage growth, household consumption, inflation or fiscal policy surprises to the upside, he said the entire board is prepared to hike rates in the coming months. Putting threats of rate hikes aside, the main message we think the CNB is trying to send is that rates will remain stable for longer than the market and CNB currently forecast.

Norges Bank turns hawkish in fight against weaker krone Norges Bank has not only hiked rates faster than expected this month, but is also signalling plenty more tightening to come. We suspect the newly forecasted peak rate of 4.25% will be hit by the end of the third quarter. This puts NOK in a stronger position, especially against its closest peer SEK.   Norway’s central bank has hiked rates by 50 basis points, more than the 25bp that was expected – although in truth the consensus was pretty divided. What really stands out is the new interest rate projection, which is the output of Norges Bank’s model and shows where policymakers expect rates to go over the coming months. Back in March, that pointed to a peak rate of 3.5%, which implied the bank would have hiked by 25bp this month before pausing. Not only has the central bank gone further than that at this meeting, but it is now signalling a peak rate of 4.25% later this year – some 60bp higher than previously anticipated. By historical standards, that's a pretty big revision. To some extent that’s not surprising, given that the last set of forecasts came amid the US banking crisis. Global interest rate expectations have since recovered, which mechanically pushes up Norges Bank’s forecast for its own policy rate. NOK was as much as 5.5% weaker at the end of May on a trade-weighted basis, relative to what the central bank had been assuming back in March, though that difference has narrowed over recent days. That weakness also requires higher rates, according to the bank's model.   Norges Bank has increased its interest rate projection – again   But the central bank also says that higher-than-expected inflation and wage growth will also force it to do more – and interestingly it’s this which accounts for most of the upward revision to interest rate projections this year, according to a chart in the Monetary Policy Report. The bottom line is that the central bank expects another 50bp of rate hikes from here, and whether we get that in one burst or two 25bp increments probably depends on whether the krone depreciates further from here. It’s worth noting that the new forecasts assume a gradual appreciation over the coming quarters. Either way, we suspect the newly-forecasted terminal rate of 4.25% will probably have been reached by the end of the third quarter. Further hikes over and above that can't be ruled out.     One more reason for NOK outperformance over SEK The blowout hawkish surprise by Norges Bank today – both in the magnitude of the hike and the rate projection revisions – puts NOK in a relatively strong position against other high-beta peers. That is because monetary policy divergence has become an increasingly more relevant driver for FX, and if indeed we see the Federal Reserve cycle coming to an end and FX volatility decline, the search for carry will reward currencies with more attractive implied rates.   Looking at EUR/NOK, it is still too early to call for a sustained downward trend, despite Norges Bank’s ultra-hawkish turn. That is because the ECB is keeping the euro idiosyncratically strong, NOK is still the least liquid G10 currency (so the most exposed to corrections in risk sentiment) and because Norges Bank has been less NOK-supportive on the FX purchase side (July announcement next week) than it has been on the monetary policy front.   We see NOK outperform SEK for now, considering the Riksbank should struggle to deliver a similar hawkish surprise given domestic economic woes. We might see a jump to 1.03 and even 1.04 in NOK/SEK in the near term, should the Riksbank fail to offer a floor to SEK. EUR/NOK remains, in our view, vulnerable to some upward corrections in the coming weeks, but if Norges Bank delivers on its plans to take rates to 4.25% (i.e. above our estimated ECB peak rate), then EUR/NOK can trade below 11.00 before the end of this year.

Stocks tumble on fears monetary tightening will trigger a recession Fed rate hike bets still only pricing in one last rate increase European bond yields plunge on downbeat global sentiment   US stocks are sliding as the global growth outlook continues to deteriorate following soft global PMI readings.  The risk of a sharper economic downturn is greater for Europe than it is for the US, so that could keep the dollar supported over the short-term.  This has been an ugly week for stocks and that is starting to unravel a lot of the mega-cap tech trades. The Nasdaq is getting pummeled as the AI trade is seeing significant profit taking.      Europe Brief: European stocks got rattled after France posted a surprise contraction with their Services PMI.  Almost all the European PMI readings disappointed and that is bursting the euro trade. Stubborn UK inflation is forcing the BOE to become a lot more aggressive with their rate hiking campaign, which will pile on significantly more pain on people with mortgages. UK Chancellor Hunt needed to do something for homeowners and this year-long break before repossessions is a step in the right direction. Over 2 million UK mortgage holders are going to see skyrocketing monthly mortgage bills and right now it seems it will steadily get worse.     Bostic The Fed’s Bostic delivered a dovish message today after favoring no more rate hikes for the rest of the year. Bostic is optimistic that the Fed will bring down inflation without tanking the job market.  Bostic is in the minority as other members will need to see a significant deterioration in the data.  Today, the service sector PMI declined not as much as expected and is still trading near pre-pandemic levels. The June preliminary Services PMI fell from 54.9 to 54.1, a tick higher that 54.0 consensus estimate. The economic resilience for the US will likely keep the majority of Fed officials with a hawkish stance.       

The monetary policy dilemma when markets won't listen The second, related, point is that it is debatable how much central banks can really tighten monetary policy on their won in a data-dependent regime. There has clearly been a reappraisal of global central banks’ reaction functions in June, but the result has been much flatter yield curves. To the extent that this is a symptom of higher short-end rates and unchanged long-end rates, this is a net tightening of financial conditions, an albeit a disappointingly limited one. The problem arises when, even as short-end nominal rates rise, long-end real rates drop. Taking EUR 5Y5Y real rates as an example, they have dropped 40bp since their peak a month ago, hardly a tightening of financial conditions.   What’s more, risk assets have taken the recent change of central bank tone in their stride, see for instance the spectacular tightening of sovereign spreads. The ECB may well gush that its policy stance is well transmitted, tighter sovereign and credit spreads suggest the cost of funding remains affordable for the economy. This is good news, but also suggests that a more hawkish stance is needed to yield results, but with increasing downsides. This is the choice faced by central bankers at this week’s Sintra conference: chase the diminishing returns of a hawkish stance, or accept that a lot of the financial variables responsible for ultimately supressing inflation are beyond their control.     Risk assets have taken the more hawkish central bank tone in their stride   Today's events and market view The data calendar this morning is dominated by Italian sentiment indicators, followed in the afternoon by US durable goods orders, house prices, new home sales, conference board consumer confidence, and the Richmond Fed manufacturing index. The ECB’s Sintra conference is underway with interventions scheduled by President Lagarde, and Dhingra and Tenreyro from the Bank of England. More curve flattening is on the cards if central banks continue to push the hawkish envelope, at the expense of a slowing economy. This may take the form of a bear-flattening, however, given the recent fall in rates. The weekly ECB MRO allotment will be in focus as the facility might be used by some banks to finance the repayment of TLTRO loans. Bonds supply will come from the Netherlands (30Y), Italy (3Y/7Y), and the UK (10Y Linker). The German federal state will publish its third quarter funding update.

Equity markets are cautiously higher in Europe while the US is poised to open relatively flat as we await appearances from the heads of the Fed, ECB, BoE and BoJ.   Fed Chair Jerome Powell, ECB President Christine Lagarde, BoE Governor Andrew Bailey, and BoJ Governor Kazuo Ueda are due to take part in a panel discussion at the ECB Forum on Central Banking around the opening bell in the US and their comments could set the tone for the rest of the day. Often in these situations, policymakers will stick to the script, preferring to leave big announcements for meetings and certain high-profile events. But with so many heads appearing at the same time, there’s every chance at least one says something that will either rattle or stimulate the markets. To make this event more intriguing, they’re all contending with very similar issues and yet their individual situations are quite different, which could make the discussion all the more interesting. The Fed is arguably closest to the end of its tightening cycle and will probably be the first to cut rates, the ECB appears to be making some progress but is also more pessimistic than many on how much more is needed, the BoE is in a mess, frankly, and the BoJ may simply watch as the whole thing passes it by.   It really is quite fascinating and it will be interesting to hear what each has to say about the current environment. Especially with the Fed and ECB until now adopting a more hawkish stance than most, the BoE coming across less hawkish but recently being forced to pivot back to larger hikes, and the BoJ pushing back against any hawkish expectation in the markets.   Is bitcoin going to take off from here? Bitcoin has steadied between $30,000 and $31,000 in recent days after surging on the back of encouraging ETF filings. The SEC lawsuits against Binance and Coinbase have not been forgotten but they’ve certainly drifted into the background and been overtaken by far more promising news flow. It would appear the cryptocurrency has good momentum once more and the community may well be wondering if this could be the kind of development that sees enthusiasm for cryptos surge again. It’s obviously been a fantastic year for bitcoin so far but the sell-off since mid-April was another reminder that it doesn’t come without major setbacks.  

Rates Spark: ISM is a dancer It's very much glass half full for inflation risks, and the latest Fed minutes voice concern that has been echoed by the ECB (and BoE). This plus supply pressure and rising deficits is placing ongoing upward pressure on market rates. Despite survey evidence pointing down, we think pressure remains for even higher market rates.   Fed minutes sounds suitably hawkish – in tune with the market mood of late Fed minutes are sustaining the hawkish tilt that has been dominating policy discussion of late. The Fed paused in June, but some participants would have preferred a hike. There was acknowledgement of ongoing firm GDP growth and high inflation, with core inflation in particular showing no tendency to show any material fall this year so far. The balance is one of a hawkish Fed, with some seeing the possibility of avoiding a material downturn. Staff still see a mild recession ahead. The Fed also noted that credit remains available to highly rated borrowers, but that lending conditions had tightened further for bank-dependent borrowers. Apart from obviously higher borrowing costs, the Fed also notes a tightening in lending standards in the commercial real estate space. There was also a tightening in credit conditions for lower rated borrowers in the residential mortgage market. But overall vulnerabilities to funding risks are deemed moderate by the Fed.      

Domestic tightening stories remain key across the G10 Since the dollar is overvalued against all G10 currencies except for CHF, according to our BEER model, the same reasoning can be applied to the more general spectrum of USD crosses. Incidentally, we could see domestic stories – especially on the central bank side – dominate before a clearer dollar trend emerges later in the year. In the UK, the Bank of England’s aggressive fight against ultra-sticky inflation should keep the GBP curve highly inverted, which can ultimately keep a reserve currency like the pound supported for longer. Japanese authorities look once again on the brink of FX interventions, as USD/JPY trades close to the 145.00 mark, but some help for the yen might actually come from a hawkish tweak to the yield-curve-control policy by the Bank of Japan this summer. In Europe, Scandinavian central banks are deploying FX-supportive tightening packages. We favour NOK over SEK thanks to a more hawkish Norges Bank stance and elevated domestic risks in Sweden.    

BoK likely to extend pause but stay hawkish The Bank of Korea will have a rate decision meeting next Thursday. As inflation slows to the 2% range, the central bank is expected to keep its policy rate at the current 3.50% level. We think the BoK continues to remain hawkish in order to not give market participants a premature easing signal.   Singapore GDP growth to see slight bounce Singapore’s second-quarter GDP is set for release next week. First quarter GDP showed the economy contracted from the previous quarter but still managed to eke out a 0.4%YoY gain. Singapore faces twin challenges of contracting exports and industrial production as global trade slows. One bright spot is retail sales, which have provided some support with the resurgence of visitor arrivals helping to offset softer demand caused by still high inflation.  We expect second quarter GDP to bounce back into expansion, albeit a shallow one of 1.4%YoY with growth likely stuck in these ranges until global trade prospects improve.   Key events in Asia next week

The Norwegian krone, except for the Japanese yen, has faced a challenging start in 2023 as it emerged as the worst-performing G10 currency. This downward trend continued from the previous year, resulting in disappointments for the Scandinavian currency. However, experts have argued that the krone was undervalued given Norway's robust macroeconomic fundamentals. Now, with the help of a hawkish Norges Bank, which recently increased rates by 50 basis points in June, the currency is showing signs of recovery. The Norges Bank's decision to adopt a more hawkish stance should not come as a surprise. Core inflation, a key indicator of price dynamics, reached new highs in May. Additionally, the latest report from the Norges Bank indicates that Regional Network contacts expect wage growth to reach 5.4% in 2023, marking its highest level since 2008. These developments provide further support to the notion that price pressures in Norway may be more persistent than previously anticipated. FXMAG.COM: How would you comment on the latest data from the Norwegian economy and the actions of the central bank there, and what about the Norwegian krone as a result?   Michal Jozwiak: Aside from the Japanese yen, the Norwegian krone has been the worst performing G10 currency so far in 2023 - last year was also marked by disappointments for the Scandinavian currency. For a while, we have argued that the krone was deeply undervalued, particularly given Norway’s excellent macroeconomic fundamentals, and it seems that, with the help of a hawkish Norges Bank, which hiked rates by 50bps in June, the currency is beginning to recover.  Norges Bank’s recent hawkish pivot should come as no surprise. Core inflation, our preferred measure of price dynamics, rose to new highs in May. Furthermore, based on the recent report from the Norges Bank, Regional Network contacts expect wage growth to reach 5.4% in 2023 – its highest level since 2008. This gives further backing to the argument that price pressures in Norway may be more stubborn than previously thought.   The market is currently pricing in about 50bps of rate hikes in the next six months, however, we do not rule out an even more hawkish stance should we see further increases in core inflation and wages, possibly at the expense of lower growth in 2023. The possibility of higher central bank rates, and a degree of normalisation in the exchange rate that moves it closer to values justified by its fundamentals should, we believe, allow NOK to recover some of its earlier losses in the coming months.

In light of the latest data from the Eurozone, market participants are keen to gain insights into the future forecast for the euro (EUR). We turn to Roman Ziruk, Senior Analyst at Ebury, to provide valuable perspectives on the current economic landscape and the potential trajectory of the EUR. Despite a marginal downside surprise in core inflation figures for June, the Eurozone's core inflation remains persistently high. This, coupled with the tightness of the labor market and the European Central Bank's (ECB) hawkish stance, as reiterated by President Lagarde, supports the view that the bank's tightening cycle will be extended. Ziruk predicts that there will be at least a couple more interest rate increases and no rate cuts in the near future.  In this article, we delve into the factors supporting Roman Ziruk's outlook for the EUR and explore the potential implications for the Eurozone's economy and the EUR/USD exchange rate in the foreseeable future.   FXMAG.COM:  In light of the latest data from the Eurozone, what forecast can you make for the EUR? Roman Ziruk, Senior Market Analyst: Although core inflation in the Eurozone surprised marginally to the downside in June, it remains stubbornly high. This, combined with the tightness of the Eurozone’s labour market and the ECB’s hawkish stance, reiterated by President Lagarde at Sintra last week, supports our view that the bank’s tightening cycle will last longer, rates will be increased at least a couple more times and no rate cuts are in the offing anytime soon. Although some of the recent economic data, particularly the PMIs, have been disappointing, we maintain our view that the scale of the slowdown in the Eurozone need not be very significant, nor do we expect a full-year recession in 2023. Therefore, we continue to pencil in a gradual EUR/USD appreciation in the coming quarters to 1.12 at year-end and 1.15 at the end of 2024       Informacje zawarte w niniejszym dokumencie sÅ‚użą wyÅ‚Ä…cznie do celów informacyjnych. Nie stanowiÄ… one porady finansowej lub jakiejkolwiek innej porady, majÄ… charakter ogólny i nie sÄ… skierowane dla konkretnego adresata. Przed skorzystaniem z informacji w jakichkolwiek celach należy zasiÄ™gnąć niezależnej porady. Ebury nie ponosi odpowiedzialnoÅ›ci za konsekwencje dziaÅ‚aÅ„ podjÄ™tych na podstawie informacji zawartych w raporcie.   Ebury Partners Belgium NV / SA jest autoryzowanÄ… i regulowanÄ… przez Narodowy Bank Belgii instytucjÄ… pÅ‚atniczÄ… na mocy ustawy z dnia 11 marca 2018 r., zarejestrowanÄ… w Crossroads Bank for Enterprises pod numerem 0681.746.187.  

Recent macroeconomic readings, including wages, GDP, and industrial production, have provided valuable insights into the current state of the British economy. These key indicators have prompted discussions about the depth of the potential recession and the future actions of the Bank of England (BoE). To gain a better understanding of these developments, we turn to Antreas Themistokleous, an expert in the field. The release of major economic data from the UK this week shed light on the condition of the British economy. The unemployment rate for May saw a 0.2% increase, reaching 4%, and the number of unemployment claims surpassed expectations, indicating a higher demand for unemployment benefits. On the other hand, average earnings experienced a 0.2% growth, while year-over-year GDP showed a decline of -0.4%. Although the GDP figure was not as dire as anticipated, it still reflects a subpar performance compared to the same period last year. Industrial production also fell by 2.3%, aligning with market forecasts.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?   Antreas Themistokleous:  This week we saw major economic data from the UK being released that could help in determining the state of the British economy. Unemployment rate for the month of May increased by 0.2% pushing the figure to 4% while the Claimants came out to be worse than expected, missing expectations of negative 22,000 claims to a positive 25,700. This means more people claimed for unemployment benefits in May and that was reflected in the official unemployment rate.  On the other hand average earnings have increased by 0.2% while the year over year GDP growth came out at -0.4%. Even though the GDP was expected to be worse , at -0.7% , it still shows that the British economy did not perform very well compared to the same month last year. Industrial production recorded a negative 2.3% perfectly aligned with market expectations.    Inflation rate for the month of June is expected to be published on the 19th where the market expects a further decline of around 0.4%. If this is confirmed it would be the yearly low and could potentially boost the quid against its pairs, especially USD and the Euro at least in the short term.    Even though inflation might be coming down, it does so at a very slow pace so the Bank of England could still have a hawkish stance at their next meeting on the 3rd of August. In June, the Bank of England increased interest rates for the 13th time in a row, by 50 basis points to 5% while some analysts argue that they could peak around 5.75% by the end of this year.    By paying attention to the labor market and the economic growth we will be able to gauge the consequences of the rate hikes by the central bank and how it could affect the overall economy. Recession fears are still hovering above the heads of the British since they are not “out of the woods” just yet but the stance of the central bank in regards to their monetary policy will be closely monitored by market participants.       

Recent industrial production data from the Eurozone paints a concerning picture for the European economy and industry. According to Eurostat data, industrial production in Europe declined by 2% year over year in May, exceeding expectations of a 1% decrease. This raises questions about the broader impact on the European economy. The industrial sector plays a crucial role in any economy as it encompasses the processing and transformation of raw materials into finished and semi-finished products. This sector significantly influences other parts of the economy, including the housing market, retail sector, consumer spending, and ultimately, inflation. Changes in industrial production directly affect the supply and availability of products, which can have broader implications for the overall economic landscape.     FXMAG.COM: What does the industrial production reading from the Eurozone tell us about the state of the European economy and European industry?   Antreas Themistokleous: The industrial production in Europe for the month of May has declined by 2% year over year according to Eurostat data. This came out to be worse than the expectations of only 1% so how does that affect the European economy?    First of all the industrial sector is a major component of an economy since it's responsible for the processing and the transformation of natural products (raw materials) into other finished and semi-finished products which in turn assist in other parts of the economy such as the housing market, the retail sector. In addition it affects the consumer spending and inevitably inflation since it directly affects the supply and availability of products to be consumed.    Inflation data is another major component that affects an economy and the European inflation rate has shown some steady decline since the high of 10.6% in October 2022. Currently the rate is at 6.1% and on the 19th the official rate for the month of June will be published. Expectations are for a further decline of around 0.6% which if confirmed could influence the decisions of the European Central Bank in regards to their monetary policy and inevitably their interest rate decision on their next meeting on the 27th of July.    The interest rate set by the ECB is currently at 4% while the market is expecting the central bank to proceed with another step hike , 0.25%, at their meeting in late July. If the expectations are correct then we might see some boost for the Euro against its pairs while unemployment is holding stable at 6.5% for the last two months.   All in all the European economy seems to be at a stagnant phase. Inflation seems to be stickier than expected resulting in continued hawkish stance by the central bank to increase interest rates in an effort to discourage economic activity in the market. On the other hand unemployment is near a 25 year low adding to the buying power of consumers pushing inflation figures to the upside creating what temporarily seems to be a never ending cycle when it comes to fighting inflation.   

In our conversation with Alex Kuptsikevich, an analyst from FXPro, we delve into the Bank of England's recent decision on interest rates and its implications for the British economy and the GBP. The central bank's move to raise its key interest rate by 25 basis points to 5.25% is a significant step, marking the highest rate since 2008. This decision comes as Britain grapples with one of the highest inflation rates among developed nations, leaving little room for inaction. Unlike the Federal Reserve and the European Central Bank, the Bank of England cannot afford to take a wait-and-see approach. The soaring inflation necessitates swift action, and indications suggest that the central bank may not stop raising interest rates until it reaches 5.75%, matching the peak of monetary tightening seen in 2007.   FXMAG: What is your assessment of the Bank of England's decision on interest rates? Should we still expect a hike in the Isles? And what's next for the GBP in the context of the BoE's decision? The Bank of England is expected to raise its key interest rate by 25 points to 5.25%, the highest since 2008. Britain's inflation rate, one of the highest in the developed world, makes it impossible to pause and look around - a privilege the Fed has used and the ECB may do in September. It is worth bracing for indications that the BoE will not stop raising interest rates before the end of the year, taking the rate to 5.75% - the peak of monetary tightening in 2007.   The Bank of England's hawkish stance is also likely to attract buyers to the Pound, which has weakened over the past three weeks. An appreciating currency will suppress imported inflation and dampen consumer demand, helping to bring CPI back to the 2% target. With explicit hawkish comments from the central bank, GBP can avoid breaking the upward trend of recent months and accelerating its decline.  

Bank of England hikes by 25bps, keeps options open for September By Michael Hewson (Chief Market Analyst at CMC Markets UK)     As expected, the Bank of England raised rates by 25bps to a new 15-year high of 5.25%. This was the baseline assumption given an expectation that we could see further sharp falls in the CPI headline rate in just under 2 weeks' time when we get July CPI numbers, and the lower energy price cap kicks in. There was a 3-way split on the voting with Catherine Mann and Jonathan Haskell voting for a 50bps move, while external MPC member Swati Dhingra maintained her no change stance. The bank also downgraded its expectation for GDP growth for this year to 0.5% from 0.75%. They also downgraded their end of year inflation forecast to below 5%. The pound had already been trading lower in the leadup to the decision and has remained weak as markets price in the prospect that the terminal rate could be lower. This has softened below 5.7%. New MPC member Megan Greene, who replaced dove Silvana Tenreyro adopted a more hawkish position, going with the majority of a 25bps move.     It was also noteworthy that the bank said that rates would need to stay sufficiently restrictive for longer to be able to return inflation to its 2% target, which reading between the lines suggests that rates could be close to their peak. Deputy Governor Ben Broadbent more or less admitted this with his comments that UK policy was restrictive already, and that UK rates are now likely above the neutral rate. Time will tell, but with another 2 CPI reports to come before the September meeting there is a chance that today's hike could well have been the final one of this cycle. UK gilt yields appear to be pricing that prospect already with 2-year yields below 4.9% and down 10bps on the day.     Today's decision by the central bank has prompted a modest rebound in housing and banking stocks off the lows of the day, as traders take the view that the Bank of England is close to calling a pause on further rate hikes. There are some important caveats to a possible pause, with the governor warning that services price inflation has been much more persistent, but with the long and variable lags that monetary policy operates in, the bank needs to be careful about pushing its luck when it comes to further rate hikes, given the fragile nature of the UK economy as well as the housing market. The central bank needs to look more carefully at PPI in terms of the likely direction of headline CPI where we have already seen negative readings in both output and input prices.  

'Significant upside risks to inflation'  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  FOMC minutes released yesterday showed that most Federal Reserve (Fed) officials see 'significant upside risks to inflation that may require more tightening'. Policymakers cited a range of scenarios that included the rising commodity prices that could lead to 'more persistent elevated inflation'. Two of them favoured halting rate hikes, but the minutes showed no official dissenters. The Fed economists also expect a small rise (only) in jobless rate in the US, but they warned that commercial real estate fundamentals could worsen.   The regional banks are under a rising pressure, as a Fitch analyst warned that dozens of US bank credit ratings are at risk – just a week after the rating agency downgraded the US' credit rating, and Moody's downgraded 10 US small and mid-sized banks.   The US 2-year yield remained little changed at around the 5% mark, while the 10-year flirts with the 4.30% level, approaching last October's peak, raising questions among investors on whether levels above 4% are a good entre point in the US 10-year papers, or could it go higher? Looking at the net speculative positions, the rising US treasury yields attract investors. Asset managers' combined treasury positions hit a record in August, but that also means that these positions could be unwound and give way to a deeper selloff. The conclusion is, even though the actual levels look appetizing for US long-dated papers – especially with the Fed's nearing the end of its tightening cycle and trouble brewing in China. risks prevail. Activity on Fed funds futures gives less than 15% chance for a September rate hike in the wake of the latest FOMC minutes. That's slightly higher than around 10% assessed to a 25bp hike before the release of the minutes yesterday. But the pricing for a potential 25bp and even 50bp hike in November meeting are in play.   The US dollar extends gains, and the dollar index is now marching above its 200-DMA, into the overbought market territory, with little reason for investors to step back given the Fed's decided hawkish stance on its rate policy. The S&P500 extended losses below its 50-DMA yesterday and is preparing to test the 4400 support to the downside, while Nasdaq 100 closed below the 15000 level for the first time since end of June. Tesla dropped another 3% yesterday on news that it cut its car prices in China for the second time this year, and the shares closed the session at a spitting distance from the major 38.2% Fibonacci retracement, which should distinguish between the positive trend building since the beginning of this year and a bearish reversal.   Elsewhere, Target jumped nearly 3% yesterday after beating profit expectations when it released Q2 earnings yesterday. Lower costs boosted profit margins, and gross margins jumped 27% last quarter compared to 21.5% printed a quarter earlier, net income more than quadrupled. Shiny results helped investors overcome the 11% drop in online sales – vs. 5% growth nailed by Amazon, and the slashed sales and profit outlook. Again, despite the risk that US consumers may not spend much in the next few quarters, what we see in most data is that... they continue spending – and the resilience of spending starts weighing more on Fed expectations than the risks that don't materialize. 

Slowing Europe  In Europe, the latest data released yesterday showed that growth and industrial production slowed, but slowed less than expected, while employment deteriorated less than expected – giving the European Central Bank (ECB) a good reason to continue its fight against inflation. But on a microscopic level, the Ifo said that Germany's skilled worker pool is worsening. The Netherlands unexpectedly slipped into recession after showing two straight quarter contraction, and Eastern Europe continues feeling the pinch of Ukrainian war; the Polish economy printed a 3.7% contraction. Plus, Europe's got a China problem. The European luxury goods have been supporting a rally in the European stocks as a result of higher Chinese purchases of the luxury products. But the souring economic conditions in China, falling home prices, rising unemployment and deteriorating sales growth weigh on valuations of companies like LVMH and Hermes. The Stoxx 600 is getting ready to test the 200-DMA, near 453, to the downside, and trend and momentum indicators hint that a deeper selloff could be on the European stocks' menu this quarter.   On the currency front, the weak data – even though it was stronger-than-expected, combined with a broad-based surge in the US dollar, kept the EURUSD below the 100-DMA yesterday, near 1.0930. The pair fell to the lowest levels since the beginning of July and the strengthening bearish momentum calls for a deeper downside correction. The next natural target for the EURUSD bears stands at 1.0790, the 200-DMA. The ECB will likely keep its hawkish stance unchanged, but when the Fed hawks step in, the other central bank hawks just need to wait before their hawkishness is reflected in market pricing

Philippines central bank carries out another hawkish pause Bangko Sentral ng Pilipinas kept policy rates unchanged amid slowing growth momentum.   BSP extends pause The Bangko Sentral ng Pilipinas (BSP) kept policy rates untouched at 6.25% today. Governor Eli Remolona was likely mindful of the slowing growth momentum after second-quarter GDP dropped to a disappointing 4.3% year-on-year pace (the market consensus was 6%). BSP expects inflation to slow further in the coming months with headline inflation expected to settle within target by the fourth quarter.  Remolona however retained his hawkish stance, reiterating his readiness to hike policy rates if necessary while remaining data-dependent. The BSP pushed up its inflation forecast, likely due to the developments in global energy and food prices. BSP now sees inflation settling at 5.6% (from 5.4% in June) for 2023 and 3.3% (2.9%) for 2024.   BSP keeps rates steady for third consecutive meeting   Despite pause, BSP retains its hawkish bias This was the first policy meeting of the newly-minted Governor Remolona. He decided to extend BSP’s pause for a third consecutive meeting, looking to balance out the need to support fragile growth momentum while also keeping rates at restrictive levels to fend off budding price pressures.  Despite the pause, Remolona made sure to retain his hawkish bias, vowing to quickly resort to potential rate hikes in order to help anchor inflation expectations. BSP will likely be monitoring the upside risks to the inflation outlook such as potential wage hikes, rice price adjustments and the rising cost of imported energy for future policy moves. Furthermore, we expect Remolona to be monitoring the spot market, given its potential pass-through impact on inflation.  We expect BSP to retain policy rates at these levels for the remainder of the year as the central bank looks to balance the risks to growth and inflation. However, we could see BSP considering a rate hike down the line should the US Federal Reserve opt to increase policy rates before the end of the year, in order to maintain interest rate differentials    

The latest weekly gold survey shows Wall Street analysts are bearish for the current week, while sentiment among retail investors is roughly balanced. Analysts believe that the rise in U.S. bond yields, which reached a new 15-year high on Thursday, remains a significant restraining factor for gold.   The slowdown in China's economy also deters investors. According to Edward Moya, Senior Market analyst at OANDA, the yield on Treasury bonds is at a level that supports the Federal Reserve's monetary policy, and this is a difficult environment for gold. However, his opinion on gold prices for the current week is neutral, as he believes that bond yields are likely close to their peak, and gold sales dynamics are probably slowing down. For selling pressure on gold to persist, bond yields would need to continue rising. But most analysts believe a decline in gold prices is more likely.   Presumably, Federal Reserve Chairman Jerome Powell, speaking at the annual central bank meeting in Jackson Hole on Friday, will maintain his hawkish stance. And rates will remain high going forward. Last week, 16 Wall Street analysts participated in a gold survey. Among the participants, ten analysts, or 63%, were bearish for the current week. Two analysts, or 13%, were optimistic, while four analysts, or 25%, took a neutral stance. In online polls, 941 votes were cast. Of those, 415 respondents, or 44%, expect price increases. Another 386, or 41%, favor price decreases, while 140 voters, or 15%, voted for a neutral position.       Despite this, Adrian Day, president of Adrian Day Asset Management, is bullish on prices for the next few months. He believes that investors should not ignore short-term price dynamics, as it is rare to see such a drop without any continuation, adding that this week may see a decrease in prices, but this will not affect long-term growth. James Stanley, market strategist at Stone X, said even if Powell takes a neutral stance in Jackson Hole, gold will find it hard to change its bearish technical outlook. Likely, the technical support level will remain at $1875.  

FX Daily: Low vol environment continues US jobs numbers continue to cause ripples in a becalmed summer FX market. Expect more of the same today as the market focuses on the weekly initial claims ahead of tomorrow's big NFP report. In Europe, the focus will be on the eurozone's August CPI release. Expectations of a further hike from the ECB are firming up and justify EUR/USD trading at 1.09-1.10.   USD: Thrashing around in a low vol environment Second-tier US jobs data (JOLTS and ADP) have seen the dollar soften a little this week. However, the data have yet to prove the smoking gun that can mark the end of the Federal Reserve's hawkish stance. Stronger trends will only start to develop should we see a large downside miss on tomorrow's release of the August NFP jobs data or a sharp rise in the unemployment rate. That would undermine the thesis that strong employment consumption can keep the Fed in hawkish mode for a lot longer than most think.  For today, the focus will again be on some second and third-tier jobs data in the form of the weekly initial claims read. We will also see personal income, spending, and the core PCE deflator for July. Consensus actually sees the core PCE deflator rising to 4.2% year-on-year from 4.1% – so hardly a reason for markets to add to dollar short positions. In general, cross-asset market volatility remains low and there is not much to argue against the Japanese yen or Chinese renminbi-funded carry trade. As we have noted before, 5.30% overnight rates mean the dollar can hold gains in a carry trade environment. Currencies outperforming remain the EM high-yielders, such as those found in the CEE3 region and also Latam. Here, the Mexican peso continues to hold gains and offer near 12% implied yields. The peso should also be helped by the latest remarks from Banxico that, unlike Brazil and Chile, it is not considering rate cuts anytime soon. Unless we see a sharp spike in the weekly initial claims data today, we suspect DXY does not break too far from a 103.00-103.50 range.

FX Daily: Peso too strong, renminbi too weak, dollar just right FX markets await today's release of the August US jobs report to see if we've reached any tipping point in the labour market. Probably not. And it is still a little too early to expect the dollar to embark on a sustained downtrend. Elsewhere, policymakers in emerging markets are addressing currencies that are too weak (China) and too strong (Mexico).   USD: The market seems to be bracing for soft nonfarm payrolls data Today's focus will be the August nonfarm payrolls jobs release. The consensus expects around a +170k increase on headline jobs gains, although the "whisper" numbers are seemingly nearer the +150k mark. Importantly, very few expect much change in the 3.5% unemployment rate. This remains on its cycle lows, continues to support strong US consumption, and keeps the Fed on its hawkish guard. We will also see the release of average hourly earnings for August, which are expected to moderate to 0.3% month-on-month from 0.4%. As ING's US economist James Knightley notes in recent releases on the US economy and yesterday's US data, there are reasons to believe that strong US consumption cannot roll over into the fourth quarter and that a recession is more likely delayed than avoided. But this looks like a story for the fourth quarter. Unless we see some kind of sharp spike higher in unemployment today, we would expect investors to remain comfortable holding their 5.3% yielding dollars into the long US weekend. That is not to say the dollar needs to rally much, just that the incentives to sell are not here at present. If the dollar is at some kind of comfortable level, policy tweaks in the emerging market space over the last 24 hours show Beijing trying to fight renminbi weakness and Mexico City trying to fight peso strength (more on that below). We suspect these will be long, drawn-out battles with the market. DXY can probably stay bid towards the top of a 103-104 range.

FX Daily: Resistance to dollar strength is futile The dollar remains well-bid across the board as a relentless run of above-consensus US data suggests the Federal Reserve will be in no mood to relax its hawkish stance. Resistance to the strong dollar is crumbling - most notably in China where a higher USD/CNY fixing suggests the People's Bank of China is becoming more tolerant of renminbi weakness.   USD: No reason to unwind dollar longs The dollar is consolidating near the highest levels since March as US data continues to surprise on the upside. Following the above-expected ISM Services index on Wednesday, yesterday it was the turn of the weekly initial jobless claims to drop back to the lowest levels since February and question the narrative that tightness in the US labour market is easing. With activity data staying strong, it seems the market may be more minded to buy into the idea of another 'skip' - i.e. the Fed not hiking in September but hiking again later in the year. Clearly, this pushes the idea of a Fed easing cycle later and keeps the dollar stronger for longer. As has been the case so often, the dollar is the United States currency and everyone else's problem. Here, both Japanese and Chinese officials are fighting against dollar strength - with limited degrees of success. Japanese officials are sounding like we could well see intervention shortly - e.g. in the 148-150 window in USD/JPY. The highlight of the overnight session, however, has been the People's Bank of China (PBoC) allowing a higher fixing in the onshore USD/CNY. They have maintained the spread of the fixings to the model-implied fixings of around 1100 CNY pips, but the higher fixing has put paid to ideas that Chinese officials have some kind of line in the sand for USD/CNY at 7.35. USD/CNH is currently trading above that level. Low Chinese CPI next week and a PBoC rate decision with the one-year lending rate will keep expectations alive of further rate cuts too. The weaker CNY/CNH will continue to keep EM FX broadly offered and the dollar bid. There is very little in the way of US speakers or US data today. The weekend sees a G20 meeting in New Delhi, with much focus on how new alliances develop following the recently announced expansion plans of the BRICS.  We cannot see investors wanting to offload dollar balances anytime soon. This suggests DXY stays bid near 105.00.

UK Services PMI accelerates, Manufacturing PMI declines Bailey’s dampens rate cut expectations The British pound is steady on Friday, after posting gains of 1.1% a day earlier. In the European session, GBP/USD is trading at 1.2767, up 0.03%. UK PMIs a mix British PMIs were a mixed bag in December. The Manufacturing PMI eased to 46.4, down from 47.2 and shy of market expectations of 47.5. Manufacturers are pessimistic as the UK economy is struggling and demand for UK exports has weakened. The services sector is in better shape, as the PMI rose to 50.9, up from 53.7 in November, which marked the strongest level of growth since May. Services providers continued to show optimism about business conditions, despite the squeeze from the cost of living and elevated borrowing costs. Bailey pushback sends sterling soaring It’s been a dramatic week, with central bank rate decisions in the spotlight. On Wednesday, Fed Chair Powell shifted his hawkish stance and projected that the Fed would trim rates three times in 2024. This sent the US dollar lower against the majors. The Bank of England took the opposite approach on Thursday in its decision to hold rates at 5.25%. Governor Bailey stuck to his script of “higher for longer”. Bailey acknowledged that inflation was moving in the right direction but said in his rate statement that “there is still some way to go” and kept the door open to further rate hikes to bring inflation back down to 2%. Bailey was crystal clear in comments to reporters after the meeting, reiterating that “it’s really too early to start speculating about cutting interest rates”.   There was no mistaking Bailey’s hawkish message and the pound responded with massive gains. Still, Bailey’s view was far from being unanimous, as the MPC vote was 6-3, with three members in support of raising rates. The markets are marching to their own tune and expect a flurry of rate cuts in 2024, despite Bailey’s pushback. The markets trimmed rate-cut bets following the BoE decision but have still priced in around 100 basis points in easing in 2024. Clearly, there is a deep disconnect between the markets and Bailey & Co. with regard to rate policy.     GBP/USD Technical There is resistance at 1.2835 and 1.2906 1.2727 and 1.2653 are providing support    

On Thursday, the EUR/USD pair continued its strong upward movement, reaching the Murray level "2/8" (1.0986) on Friday and bouncing off it. We expected the start of a downward correction (at least) on Thursday, but the outcomes of the ECB and Bank of England meetings influenced our plan.     The ECB and BoE took a rather hawkish stance on Thursday, triggering a new strengthening of the European currency and the pound. However, on Friday, with a weakened macroeconomic background and a complete absence of fundamentals, the pair showed volatility no less than on Wednesday and Thursday, but in the opposite direction. The correction we witnessed is not just regular; it can and should be the beginning of a prolonged decline. Of course, the pair can move in the opposite direction for quite some time, completely contradicting fundamentals, macroeconomics, and common sense. We have repeatedly listed all the reasons why the euro has no grounds to continue rising. Have we witnessed a two-month appreciation of the euro? This should be the end of it. This is if we talk about justified movement. If we talk about inertia, the euro can rise to $1.50 or even higher. Why is that impossible? The market can continue buying European currency for any reason, even if there is none because the market is made up of people. And people are not obliged to follow technicals, macroeconomics, or fundamentals. So, what we are warning about is that, in a more logical scenario, there is still a decline in the pair. This remains true despite Powell being less hawkish than desired and despite Lagarde's more hawkish stance than desired. Nothing changes because of that. Also, note that a "double top" pattern has formed on the euro at the moment, which is visible on almost any chart. Such a pattern is a sign of a trend reversal. Adding to this, there have been four entries into the overbought territory for the CCI indicator. What does this result in? It means that the euro has no other choice but to continue falling. Lane's speech is the most interesting event of the week in the EU. What can we expect next week? It can be said right away that all the most interesting things in December have already passed. The market is preparing for the Christmas and New Year holidays, so volatility may decrease again, although sharp emotional spikes and volatility are still possible in a "thin" market. In the EU, there will be a few important events next week. On Monday, the IFO Institute indices in Germany will be noteworthy. Business expectations, the current situation index, and the business climate index will be published. We do not consider these indices important, and the market's reaction to them may be extremely limited. On Tuesday, the EU will release the second, final assessment of inflation for November. We all understand that the second assessment rarely differs from the first, so traders are likely to have nothing to react to. On Wednesday, ECB Chief Economist Philip Lane will speak, but what can he tell the market after Christine Lagarde spoke first last week, and on Friday, both Holzmann and de Guindos spoke? Nothing is interesting in the events calendar in the EU and Germany on Thursday and Friday. It turns out that there will be no really important macroeconomic or fundamental events this week. Of course, there will be American events and reports, but even there, things are quite scarce. Therefore, we expect a correction against the rise on Wednesday and Thursday, as well as low volatility. The average volatility of the Euro/USD currency pair over the last 5 trading days as of December 17 is 97 points and is characterized as "high." Thus, we expect movement between levels 1.0797 and 1.0991 on Friday. The reversal of the Heiken Ashi indicator back upward will indicate a possible resumption of the upward movement. Nearest support levels: S1 - 1.0864 S2 - 1.0742 S3 - 1.0620 Nearest resistance levels: R1 - 1.0986 R2 - 1.1108 R3 - 1.1230 Trading recommendations: The EUR/USD pair has settled above the moving average line, but we do not believe that the rise can continue. The price perfectly reached the targets of 1.0974 and 1.0986, after which it began to fall. Buying the pair can be done on a bounce from the moving average, but we believe that a further decline is more likely. The new overbought condition of the CCI indicator indicates a much more probable decline. Short positions can be opened with a re-fixing below the moving average with a target of 1.0742. Explanations for the illustrations: Linear regression channels - help determine the current trend. If both are pointing in the same direction, the trend is strong. The moving average line (settings 20.0, smoothed) - determines the short-term trend and direction in which trading should currently be conducted. Murray levels - target levels for movements and corrections. Volatility levels (red lines) - the likely price channel in which the pair will spend the next day, based on current volatility indicators. CCI indicator - its entry into the overbought area (below -250) or the oversold area (above +250) indicates that a trend reversal in the opposite direction is approaching.  

Spanish CPI lower than expected at 3.1% Chicago PMI expected to decelerate to 51.0 The euro is calm in Friday trade. In the European session, EUR/USD is trading at 1.1053, down 0.08%. Spanish CPI dips to 3.1% Spain released the December inflation report today, with CPI dipping to 3.1% y/y, down from 3.2% in November. This was better than expected as the consensus estimate stood at 3.4%. The reading was the lowest rate since August, with the drop attributed to lower prices for fuel, food and electricity. Monthly, CPI rose from -0.3% to 0.0%, but this was lower than the consensus estimate of 0.3%. Core CPI dropped to 3.8% y/y, down from 4.5% in November. Germany, France and the eurozone will follow with their inflation releases next week. If the data shows that inflation eased in December, it will put pressure on the European Central Bank to cut rates in the first half of 2024. The ECB has not followed the Federal Reserve and continues to push back against rate-cut expectations. The markets have priced in 150 basis points from the ECB next year, with an initial cut expected in April. ECB President Lagarde has poured cold water over rate-cut fever, saying that the ECB should “absolutely not lower its guard”. Lagarde may have to shift her hawkish stance or risk tipping the weak eurozone economy into a recession. If next week’s inflation report indicates that inflation is falling, we can expect the voices in the ECB calling for looser policy to get.   The US releases Chicago PMI, an important business barometer, later today. The PMI shocked in November with a reading of 55.8, which marked the first expansion after fourteen straight months of contraction. The upward spike may have been a one-time blip due to the end of the United Auto Workers strike as activity rose in the auto manufacturing industry. The consensus estimate for December stands at 51.0, which would point to weak expansion.   EUR/USD Technical EUR/USD continues to put pressure on resistance at 1.1086. Above, there is resistance at 1.1171 1.1116 and 1.1031 are providing support  

The EUR/SEK pair ended last week largely unchanged, although the krona did briefly slip to its lowest level on the euro since mid-December. Swedish activity data released last week was mixed. On the one hand, retail sales fell by 1.7% YoY in November, compared to a decline of 1% in the previous month, the nineteenth consecutive month of annual declines in retail trade. On the other hand, the more important GDP data unexpectedly rebounded in November (+0.2% vs. 0.6% consensus), easing fears that the ongoing recession could extend into Q4. The above data imply a significant divergence from the Riksbank's forecast, which warned of an economic decline of 0.4%. This will undoubtedly be a relief for the Riksbank and should make for an easier task in controlling inflation without damaging the economy. If the good data materialises into a more hawkish stance by the central bank, the krona could receive some support.

Asia Morning Bites The PBoC announced a larger-then-expected required reserve rate (RRR) reduction late Wednesday. South Korea reported stronger-than-expected GDP numbers today.   Global Macro and Markets Global markets:  The upcoming cut in China’s reserve requirement ratio (RRR) gave Chinese markets some much-needed support. USDCNY has dropped back to 7.1580 and the Hang Seng index rose 3.56% while the CSI 300 gained 1.4%. US stocks were more muted, and the S&P 500 was virtually unchanged despite opening higher - flagging in the latter part of the session. The NASDAQ eked out a 0.36% gain. US Treasury yields rose yesterday, despite the lack of much macro news as the 5Y auction tailed badly. 2Y yields rose 5bp to 4.38% and the 10Y rose a similar amount to 4.176% as the March rate cut hypothesis got priced out further. There is still a bit more room for this to run, according to our rates strategists, though the March cut is now only 36.4% priced in. A US refunding announcement on Monday could also push yields up a bit more. EURUSD rose back up to 1.0883 despite the moves in bond yields. The AUD rose strongly yesterday, pushing above 0.6620 but couldn’t hold on to its gains and dropped back to 0.6577. Cable did better and is up to 1.2719 now, and the JPY has also held on to most of yesterday’s gains and is down to 147.55. In the rest of Asia, the SGD and KRW were both boosted by the CNY moves, though the IDR lost almost half a per cent, rising to 15710. Moves elsewhere were modest. G-7 macro:  The G-7 calendar is a lot more exciting today after a very quiet day yesterday. The ECB is meeting, and while they will not cut rates today, the press conference will as ever be scrutinised for hints as to the timing of the first cut. Later on, the US releases its advance estimate for 4Q23 GDP, which, on an annualized basis is expected to slow from 4.9% in 3Q23 to 2.0%. Weekly jobless claims round off the day’s macro releases. China: The PBOC announced that it will cut the Required Reserve rate (RRR) by 50bp from Feb 5, after which the RRR for large institutions will drop from 10.5% to 10%, and the weighted average RRR will drop from 7.4% to around 7%. The 50bp RRR cut was larger than the 25bp cuts that the PBOC elected for in 2022-2023, and was the largest RRR cut since Dec 2021. The RRR cut will in theory provide around RMB 1tn of liquidity to markets. Furthermore, the PBOC also broadened access for property developers to commercial loans by allowing for bank loans pledged against developers’ commercial properties to be used to repay other loans and bonds until the end of the year. It also cut the refinancing and rediscount rates for rural and micro-loans by 0.25 ppt to 1.75%. We expect a relatively limited positive impact on the economy from the RRR cut and supplementary measures. There remains a question of whether there is sufficient high-quality loan demand to fully benefit from this theoretical liquidity injection; we saw that new RMB loans were down -10.6%YoY in 4Q23 despite the previous RRR cut in September 2023. With that said the size and timing of the RRR cut will contribute toward market stabilisation efforts. Overall, the announced RRR cut was mostly in line with our expectations, although the size of the cut surprised on the upside, and the timing of the announcement was a little unexpected given the PBOC left interest rates unchanged in January. Moving forward, we see room for an interest rate cut to come in the next few months as well. The base case is for a conservative 10bp rate cut, but the larger-than-expected RRR cut does flag a possibility for a slightly larger rate cut as well.  South Korea: Korea’s GDP expanded 0.6% QoQ sa in 4Q23 (vs 0.6% in 3Q23, market consensus). 4Q23 GDP was somewhat higher than the monthly activity data had suggested. The difference mainly came from a gain in private consumption (0.2%). According to the BoK, residents overseas spending increased, more than offsetting the decline in domestic goods consumption. Other expenditure items mostly met expectations. Exports (2.6%) grew solidly thanks to strong global demand for semiconductors, while construction – both residential and civil engineering- plunged (-4.2%), dragging down overall growth.  We expect the trend of improving exports vs softening domestic demand to continue at least for the first half of the year. In a separate report, BoK’s business survey outcomes support our view. Manufacturing outlook improved for a third month (71 in January vs 69 in December) while non-manufacturing stayed flat at 68.   The GDP path will vary depending on how well global semiconductor demand will be maintained and how well Korea’s construction soft-landing will go. We expect exports to improve further at least for the first half of the year. Yet, GDP in the first and second quarters is expected to decelerate (0.4% and 0.3% QoQ sa respectively) from last quarter as sluggish domestic demand weighs more on overall growth.  Today’s outcomes will give the Bank of Korea some breathing room to maintain its current hawkish stance. We pencilled in one rate cut in May, under the assumption of a slowdown of GDP and inflation in 1Q24, but if the construction sector restructuring carries out more smoothly, then the BoK’s first rate cut may come in early 3Q24.   What to look out for: South Korea GDP South Korea GDP (25 January) Japan department store sales (25 January) ECB policy meeting (25 January) US GDP, durable goods orders, initial jobless claims, new home sales (25 January) Japan Tokyo CPI inflation (26 January) Philippines trade (26 January) Singapore industrial production (26 January) US PCE deflator, pending home sales and personal spending (26 January)