The main story this week was the reversal lower in the US Dollar. The Dollar Index closed out its first losing week since the final week of March as recession fears took hold. The reversal was seemingly fuelled by comments from Fed chairman Powell midweek suggesting a more aggressive course of action from the Fed. Powell warned that the central bank is prepared to raise rates above the neutral level, if necessary, to bring inflation down and will not stop until inflation is back at target.
With inflation still at elevated levels and with interest rates higher and expected to rise materially in coming months, traders are concerned over the impact on growth. These fears were well reflected this week in the sharp reversal lower in USD.
UK inflation was seen hitting 40-year highs last month at 9%, putting BOE rate hike expectations back into focus. The SNB was seen making a U-turn on monetary policy with SNB chairman Jordan warning that the SNB is ready to act on inflation, which is travelling well above the SNB’s target. The release of the ECB meeting minutes this week highlighted the hawkish shift taking place among members, with the market now increasingly pricing in a July rate hike.
It was a volatile week for equities with the FTSE ending the week roughly flat (as of writing) after plenty of two-way action. The ASX200, the DAX and the Nikkei ended the week higher while the S&P and the Nasdaq were firmly in the red as Fed rate-hike expectations overtook USD weakness.
It was a better week for precious metals with both gold and silver rallying on USD weakness. Oil prices were unable to capitalise on USD weakness, however, as focus remains on the ongoing EU negotiations regarding potential sanctions on Russian oil. While many EU leaders are pushing for an EU-wide ban on Russian oil by year end, the chances of achieving this look unlikely given fierce opposition from Hungary and Greece among others.
Coming Up Next Week
US, Eurozone, UK PMIs
Traders will get the latest insight into the performance of the factory and non-factory sectors in the US, eurozone and UK. With inflation surging in all three economies and with supply-chain issues remaining a real problem there is a very real threat that these readings highlight weakness. Given the recessionary concerns which have taken centre stage recently, if these readings underperform asset markets are likely to come under pressure over the week.
RBNZ Rate decision
The RBNZ meeting this week is expected to see the bank hike rates by a further .5%. 20 out of 21 economists polled by Reuters are calling for such a move. Given these hawkish expectations, if the bank hikes by less than .5% NZD will likely come under heavy selling pressure. If a .5% hike is announced, the focus will then be on forward guidance with NZD likely to rally if the RBNZ points to further hikes incoming.
FOMC Meeting Minutes
The May FOMC minutes this week are expected to highlight the uptick in Fed hawkishness recently. There’s potentially some reduced impact in the wake of recent comments from Fed’s Powell suggesting that the Fed has turned more aggressively hawkish since that meeting. Nonetheless, the details are likely to be firmly hawkish and market volatility can be expected in response to them.
Forex Heat Map
Coming up This Week
Our favourite chart this week is GBPCHF
GBPCHF has been moving lower in a well-defined channel over the correction from 2021 highs. Recently price has been underpinned by support along the 1.2114 level. This has been a major support area since late last year. If price can breach below this level on a weekly closing basis, this would suggest a continuation of the downtrend towards the next big support at the 1.1687 level.
Economic Calendar – High Impact
Another busy data week coming up, key highlights include: US, eurozone and UK PMI readings on Tuesday, US GDP on Thursday and US trade data on Friday. See the calendar below for full schedule.