[Market Review].
The US dollar index maintained its strength. Just this past week, the dollar index broke through the 91 and 92 levels one after another. Global inflation is raging, and the central banks’ views and responses to inflation are of great concern to the market.
Last week, a number of central banks led by the Federal Reserve announced monetary policy decisions, the Fed unexpectedly made a hawkish stance, suggesting consideration of early interest rate hikes, most Fed policymakers expect at least two 25 basis point rate hikes in 2023, and still believe that inflation is temporary.
The dollar index was boosted by this and jumped to multi-month highs, posting a weekly gain of 2%, the largest weekly gain in nearly fourteen months.
After the Fed’s interest rate resolution, Fed officials Bullard, Kashkari re-emphasized the possibility of discussing tapering the size of bond purchases. As for Biden’s stimulus plan, he said he would evaluate the bipartisan infrastructure plan on Monday.
Gold continues to be under pressure to the downside. After the Fed turned hawkish, boosting the dollar and weakening the appeal of safe-haven gold, gold prices had a bad week, falling from $1,870 to near $1,770 currently.
Technically, gold’s fall below the important psychological barrier of $1,800, as well as other major support levels including the 100- and 200-day averages, is usually seen as a bearish signal. Macquarie Group strategists wrote in a report that gold will struggle to return to a bull market without runaway inflation expectations. The bank expects gold to slide to $1,600 by the end of the year.
However, the chief market strategist at SIA Wealth Management said that technically speaking, gold prices are overbought ahead of the Fed’s interest rate resolution. Meanwhile, the dollar was oversold. He sees this price action as a major adjustment to the excessive positions in all financial markets, and gold prices will fall further, but a drop to $1,700 will attract many buyers.
Meanwhile, the world’s largest gold position decreased by 3.79 tons on June 17; however, by June 18, the position increased by 11.07 tons, the most in a single day in almost five months, which means there are still a large number of institutional investors buying gold on the low side.
Silver maintains weakness. In addition to gold, silver has fallen a lot recently, from $28 to below $26, a weekly decline of 7.8%.
The euro suffered a sell-off. In addition to precious metals, non-U.S. currencies are also largely under pressure. The euro fell more than 200 points against the dollar last week. Traders were reluctant to buy the euro against the dollar as the dovish European Central Bank appeared to lag far behind the Fed in its monetary policy cycle.
Sterling weakness extended. In the British pound, the pound fell 300 points against the dollar last week. On the one hand, the strong U.S. dollar weighed on the pound; on the other hand, the pound was also weighed down by an unexpected drop in U.K. retail sales data, as well as an epidemic caused by the Delta strain in the U.K., which delayed the final phase of the easing of restrictions on epidemic prevention.
For the pound’s after-market, market participants are assessing the relative speed of the Bank of England and the Federal Reserve in terms of monetary policy tightening.
U.S. oil is trading above $70. Finally, let’s look at the oil market. U.S. oil has been trading mainly in the $70-73 range recently.
In Iran, hardline candidate Leahy was elected president of the country. Public opinion is concerned that the ongoing talks on the Iran deal may have a bleak future after Leahy takes power. Therefore, the next six weeks, the period before the president-elect takes office, will be a golden window for the six countries and the current moderate government to reach a deal. Uncertainty in the crude oil market may also increase as a result.
However, Goldman Sachs’ latest says that supply constraints and a sharp rebound in the global economy have set the stage for a sharp rise in oil prices. Global crude oil demand could rise to 97 million barrels per day in recent days from 95 million barrels per day a few weeks ago, amid positive signals from Europe and India.
[Risk Warning].
Europe and the U.S. have policy differences euro gains may be limited
The European Central Bank’s chief economist recently said that it is too early to discuss the end of the emergency anti-epidemic bond purchase program. The Federal Reserve, on the other hand, has brought forward the expected time of interest rate hikes to 2023. In this regard, Dutch International analysts believe that the policy divergence between the ECB and the Fed may lead to continued weakness of the euro against the dollar.
The euro against the dollar is difficult to stand in the 1.1950-1.1980 range. If any recent data show that the Fed will reduce the size of asset purchases, the euro against the dollar will likely fall to 1.1835 or even 1.17.
British economy continues to rebound European pound will fall to 0.83
Nomura Securities’ foreign exchange strategists are considering selling the euro and buying the pound. While the bank believes that this week’s Bank of England interest rate resolution is unlikely to see significant changes, the rebound in the British economy in the post-epidemic era will continue to provide support for the pound, so the euro is expected to fall to 0.83 against the pound.
Strong performance of the U.S. dollar can be sold high New Zealand U.S.
ANZ says there is a growing belief that the Fed will soon adjust interest rates in response to the economic expansion and to curb ballooning inflationary pressures. This will support the dollar. In addition, inflation expectations have fallen back as the Fed issued its latest guidance. This is also a positive factor for the dollar.
The US dollar is likely to move further higher in the near term. This provides a selling opportunity for the New Zealand dollar against the US dollar. Despite the strong performance of the New Zealand economy in the first quarter, the New Zealand dollar remains under pressure due to the dominance of the strong US dollar. The rally in NZDUSD is a selling opportunity. From a technical point of view, NZDUSD support is at 0.6950 and resistance is at 0.7130-0.7160.
[Key Outlook].
Monday 22:15 Lagarde is expected to maintain a dovish stance
First, pay attention to the upcoming speech by ECB President Lagarde. In the last month, the ECB left three key interest rates unchanged and expects rates to remain at current or lower levels until the inflation outlook is close enough to but below 2%. The ECB confirmed that it will significantly accelerate the pace of purchases under its emergency anti-epidemic bond purchase program this quarter, which will last until at least the end of March 2022.
Lagarde, on the other hand, said that economic growth in the eurozone will accelerate in the second half of the year, and although inflation will pick up, it is still a long way from achieving the final target for inflation. On the issue of fiscal stimulus, Lagarde believes that the premature end of fiscal stimulus will harm the economic recovery, pointing out that it is not time to discuss the withdrawal of the emergency anti-bond purchase program.
Taken together, we believe that Lagarde is likely to maintain a dovish stance, stressing that inflation is far from the target and requires a sustained easing stimulus program. Combined with Lagarde’s recent statements, her comments are likely to drag on the euro.
Wednesday 02:00 Powell may mention tapering of bond purchases
On Wednesday, Federal Reserve Chairman Jerome Powell will speak. Last week, the Fed brought forward its rate hike expectations and said it would raise rates twice in 2023. Fed Chairman Powell said the outlook for economic recovery remains risky, inflation may remain high in the coming months before moderating, and factors affecting job growth should weaken in the coming months.
Officials and debated on when and how to start tapering its massive bond-buying program. Fed officials have begun to release news of an exit from super-easy monetary policy, and they have also hinted that the pace of this tightening could accelerate. On Friday, the Fed’s Bullard said Powell officially began discussions on tapering this week, and the Fed will hold several meetings to discuss tapering the size of its bond purchases.
In summary, Powell may indicate that inflation will continue to move higher in the short term, and may assess, based on economic and inflation data, whether it is possible to gradually reduce the size of bond purchases in an orderly manner. Relatively speaking, Powell’s attitude may be slightly more dovish than the Fed’s resolution. If Powell delivers a more dovish speech, you need to beware of the risk of a dollar pullback and a gold price rebound.
Thursday 19:00 the Bank of England or release the signal to continue tapering bond purchases
On Thursday, the Bank of England will hold an interest rate resolution. Like other central banks, the Bank of England eased monetary policy at the beginning of the epidemic last year, lowering interest rates to a record low of 0.10% and restarting its quantitative easing program.
Over the past few months, the BoE has slowed the pace of asset purchases and hinted at further scaling back purchases. The pace of the recent U.K. economic recovery has been quite remarkable, with the monthly GDP rate showing a massive recovery in economic activity following the easing of epidemic restrictions. Wells Fargo expects the Bank of England to provide an update on the progress of the economic recovery, as well as the latest views of members on inflation. Whether the rise in prices is temporary or material will require additional attention. The BoE is likely to signal that the scale of asset purchases will be cut further in the coming months. And Wells Fargo believes that a new round of cuts will begin after the August meeting.
Also, according to a Reuters poll, 67 analysts surveyed all expect no rate adjustment when the Monetary Policy Committee meets on June 24, with the median estimate showing that the BoE will not raise rates until 2023, but a growing number of analysts expect the BoE to act sooner as inflationary pressures increase and growth prospects improve.
Friday 20:30 U.S. May PCE data may shine
Finally, come focus on the U.S. will release PCE data. The data released in recent months have continued to climb, with the PCE price index in April recording an annual rate of 3.1%, a new high since July 1992; the core PCE price index recorded a monthly rate of 0.7%, a new high since October 2001. Some agencies commented that these data suggest that even if the impact of the third round of stimulus measures wanes, consumers still have enough money to continue spending at a steady pace, providing more support for economic growth.
Currently, the market expects the U.S. core PCE price index for May at an annual rate of 3.8%, if the published value is better than expected, or positive for the dollar; if the published value is less than expected, or negative for the dollar.
At the same time, we should also pay attention to the monthly rate of PCE price index published at the same time, the market is expected to be 0.6%. You need to consider the impact of these two sets of data on the dollar index.
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