Powell triggers gold bulls, crude oil shorts coming on strong?

[Market Review].

Powell continues to put doves. Early this morning, Fed Chairman Jerome Powell said the labor market is improving, but there is still a long way to go. He believes that this week’s inflation data exceeded expectations, and the Fed is also eager to see inflation fall and will discuss the timing and composition of tapering its bond purchases at its July meeting. Because Chairman Powell dispelled expectations that the Fed will soon reduce the size, traders cut long positions in the dollar, the dollar index on Wednesday hit the biggest drop since June 21. However, U.S. economic data remained beautiful, with U.S. PPI data hitting a record high in June and the Fed’s Brown Book showing that the U.S. economy strengthened further from late May to early July. Separately, U.S. Democrats reached consensus on a $3.5 trillion spending and tax plan, a bill designed to advance most of Biden’s jobs and family initiatives without Republican support.

Gold pulled strongly higher. Gold prices were boosted by Powell’s dovish comments that sent the dollar and Treasury yields lower. Meanwhile, inflation concerns spurred investor demand to buy gold to preserve asset value.

The euro stopped falling and rebounded. The dollar weakened and the euro was strong against the dollar, touching its highest since April 5 during the session. Some analysts suggest that the euro’s drop back below 1.18 yesterday may have been a bit too much, so a rebound in the euro would have happened even without Powell’s speech.

UK inflation data moved sharply higher. UK CPI rose 2.5% year-on-year in June, the highest level since August 2018, and beat expectations for the second month in a row, while also rising further above the Bank of England’s inflation target. Bank of England Deputy Governor Cunliffe said inflation will be reassessed in August. The BoE’s view that the spike in inflation is temporary may be challenged, and the market further expects the BoE to be forced to raise interest rates as soon as next year.

Crude oil dived sharply. U.S. oil fell nearly 3%, the biggest drop since May. News that Saudi Arabia and the UAE have reached a compromise on an oil production deal means the OPEC+ agreement will be extended until the end of 2022. Although the UAE has come out to deny it, negotiations are continuing, pushing up expectations of increased crude supply. In addition, OPEC representatives said that Iraq is seeking to raise the OPEC+ production baseline. This is also detrimental to oil prices.

[Risk Warning].

The pound may continue to consolidate, fearing that it will be difficult to recover 1.40

Credit Suisse Bank believes that the pound against the U.S. price will continue to consolidation trend after the market, both upside and downside will be limited by strong resistance and support levels. The agency pointed out that the pound further rally will be at the 1.40 mark, while encountering the 60-day SMA cut-off level, in the absence of certainty of major fundamental news to boost, the difficulty of breaking this point is huge. On the downside, after losing the 1.38 handle, support will be seen below the previous low at 1.3733, while further key support is at 1.3670, below which will mean confirmation of a medium-term head and the opening of a deeper retracement.

New Zealand to end QE or raise interest rates next month

Yesterday, the New Zealand Fed said it would end quantitative easing this month, reinforcing expectations for a rate hike in 2021. Subsequently, ANZ Bank believes that the New Zealand Fed’s policy stance is more hawkish than expected, thus bringing forward the timing of the New Zealand Fed’s interest rate hike expectations, further to the August meeting. ANZ pointed out that New Zealand’s inflation and employment data both show that the country is ripe for a tightening of monetary policy. If and when ANZ expects the same, the New Zealand dollar may continue to move higher.

U.S. inflation continues to be high Fed may raise interest rates next year

Canadian Imperial Bank pointed out that the U.S. CPI data for June showed that price pressures were very high, with soaring demand combined with supply chain problems causing prices to move all the way higher. The unexpected rise in inflation suggests that the impact of U.S. supply chain problems is more widespread, and there is no way to know how quickly these factors will disappear in the face of strong demand. With expectations of economic weakness abating in the second half of the year, price pressures should become more pronounced, and Canadian Imperial Bank expects the Fed to raise rates in the second half of 2022.

[Key Outlook].

TBD OPEC crude oil production expected to increase in June

Let’s focus first, OPEC will release its monthly report. Last month, OPEC published its monthly report showing that OPEC crude oil production increased by 390,000 barrels per day to 25.46 million barrels per day in May. Meanwhile, OPEC expects oil demand recovery to be strong in the second half of the year.

By this month, an agency survey showed that OPEC oil production increased by 855,000 barrels per day to 26.47 million barrels per day in June.

Last week, OPEC + production increase agreement talks collapsed, but oil-producing countries should not let international oil prices shake dramatically for their own interests, in order to avoid market panic, OPEC + is expected to restart talks again in the short term, and the parties are more likely to reach a compromise. OPEC+ sources said Saudi Arabia and the UAE reached a compromise on the oil production agreement, which means the OPEC+ deal will be extended until the end of 2022. But then the UAE Ministry of Energy said no agreement had been reached with OPEC+ on a supply deal and that discussions were continuing. In addition, OPEC representatives said that Iraq is seeking to raise the OPEC+ production baseline. The likelihood of a deal is gradually increasing as the UAE and OPEC+ continue to negotiate.

20:30 U.S. Initial Claims expected to decrease

Next, take a look at the initial jobless claims that will be released in the US. Last week’s figure was recorded at 373,000. Agencies commented that US initial jobless claims rose slightly, but are still close to the lows seen since the outbreak. Despite the rebound in numbers, weekly initial jobless claims have fallen by more than half since the beginning of the year as the epidemic crisis eased and pent-up demand spurred hiring at businesses such as hotels and restaurants. Economists expect the labor market to improve further in the second quarter of this year, with the unemployment rate expected to fall below 5% in the fourth quarter.

Currently, the market expects that the number of initial jobless claims in the United States to the week of July 10 is 360,000. If the published value is much higher than expected, the dollar index may be under pressure; conversely, if the published value is less than expected, the dollar index may be stronger.

With the gradual recovery of the labor market, the number of initial jobless claims will gradually decrease, which will have some support for the dollar index.

21:30 Powell or continue dovish stance

Finally, pay attention to the testimony statement that Fed Chairman Jerome Powell will make in Congress. Early this morning, he said that this week’s inflation data exceeded expectations and will remain high for the next few months before slowing down; if inflation data remains high, the Fed’s description of inflation will “reverse”. But even if high inflation persists, the Fed will not act soon.

On bond purchases, the Fed is considering tapering, will discuss the timing and form at the July meeting, and Okinawa Fed will give notice before starting to reduce the size of the bond purchases.

On the labor side, he still believes that there is still a long way to go to achieve full employment, and even after the wave of labor supply arrives, full employment will probably still not be achieved. He also stressed that monetary policy should remain highly accommodative. The current quantitative easing policy is very necessary for the labor market.

Tonight, Powell may continue his dovish stance. In addition, it is also necessary to pay attention to whether the Senate will discuss Powell’s re-election and other issues. Powell’s term will end in a little more than six months, and the Biden administration has yet to send a definitive signal recommending his re-election.