Important calendar events
The dollar plummeted last week, with the dollar index dipping to the 103.5 level. US Treasury yields also declined, with the US 10-year bond yield touching 3.72%.
Economic activity and health indicators released last week for the US were overall pessimistic, putting pressure on the dollar. US jobless claims missed expectations last week, indicating that unemployment levels in the US are rising. Unemployment claims came in at 261K this week, exceeding expectations of 136K. The unexpectedly high unemployment claims pushed the dollar down on Thursday.
US Trade balance data showed that the difference in the value of imported versus exported goods in the US continues to increase. The value of imported goods exceeded that of exported goods by 74.6B in April from 60.6B in March, against expectations of a 75.8B print.
The ISM Services PMI index dropped to 50.3 in May from 51.9 in April, against expectations of 52.6. The index remained above the threshold of 50, indicating that the US Services sector is expanding but at a slowing pace.
The U.S. Federal Reserve is holding its next policy meeting this Wednesday, June 14th. The Federal Reserve raised interest rates by 25 basis points at its latest monetary policy meeting, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%.
Markets are pricing in an 80% chance that the Fed will not raise interest rates at its meeting this week, for the first time in well over a year. Fed officials have signaled that the central bank will forego a rate hike. US Federal Reserve Chair Jerome Powell has also indicated that the US Central Bank may pivot towards a more dovish direction.
However, the big question right now is, will the Fed stop hiking rates altogether, or just skip a rate hike at the coming meeting? There is growing speculation that, even though the Fed may not raise interest rates this week, that does not necessarily mean an end to its tightening cycle. The purpose of suspending rate hikes is to give policymakers time to assess the pace of cooling inflation. Many economists believe that the Fed may resume rate hikes as early as July if inflation remains sticky.
US Headline inflation dropped to 4.9% year-on-year in April, decelerating from a 5.0% print in March. US Inflation cooled more than expected in April, as markets were anticipating a 5.0% print. US CPI data for May are scheduled to be released on the 13th, just a day before the Fed is due to announce its interest rate. This week’s CPI data may affect the Fed’s decision, especially if inflation exceeds expectations. Headline CPI is expected to ease to 4.1% on-year in May from 4.9% in April and core CPI to stay flat at 0.4% every month.
US Core PCE Price Index, however, rose 0.4% every month in April versus a forecast of 0.3%. Core PCE, which is the Fed’s primary inflation gauge, went up by 4.7% year-on-year in April, having gained by 4.6% in March. Inflationary pressures in the US remain sticky, suggesting that the Fed may have to persist on its policy of monetary tightening to restore price stability.
The US economy expanded by 1.3% in the first year of 2023 against predictions of a 1.1% growth. The preliminary GDP Price Index, which is an important inflation gauge, exceeded expectations, rising by 4.2% in Q1 of 2023 versus the 4.0% anticipated.
The Euro gained strength against the dollar last week and EUR/USD ended the week near the 1.074 level. If the currency pair goes up, it may encounter resistance near 1.078. If the EUR/USD pair declines, it may find support at 1.063.
The ECB will announce its main refinancing rate this week on the 15th, just a day after the Fed’s interest rate announcement. The ECB raised interest rates by 25 bp at its latest monetary policy meeting, bringing its main refinancing rate to 3.75%. The ECB had raised interest rates by 50 bp in previous meetings and is slowing down the pace of rate hikes. The ECB has left the door open for further rate hikes as inflationary pressures in the EU remain high.
The ECB is widely expected to hike its benchmark rate by 25 bps at its meeting on Thursday. ECB President Christine Lagarde has warned that inflationary pressures in the Eurozone remain high and that borrowing costs will be raised further to tackle them. Lagarde’s comments point to further rate hikes up ahead, while the US Fed has signaled a pause in rate hikes.
Market participants will follow closely the ECB Monetary Policy Statement and Press Conference after the conclusion of the meeting for hints on the central bank’s future policy direction. Many analysts anticipate that the ECB’s hawkish policy will continue and that the central bank will not signal a pause in its tightening path after Thursday’s meeting.
Headline inflation in the Eurozone cooled to 6.1% year-on-year in May from 7.0% in April, beating expectations of 6.3%. Core Inflation, which excludes food and energy, also slowed to 5.3% annually in May versus 5.6% in April and the 5.5% forecast. The latest inflation print is showing that the ECB’s efforts to bring inflation down are paying off, but it will likely not be sufficient to induce the central bank to abandon its hawkish policy just yet.
On the data front, revised GDP data for the first quarter of the year released last week showed that the Eurozone is technically entering a recession. Revised GDP showed a contraction of 0.1% for Q1 of 2023, in contrast to the Flash GDP data released earlier which showed an expansion of 0.1%. Deteriorating economic conditions in the Eurozone may force the ECB to rethink its hawkish monetary policy.
German industrial production data missed expectations, heightening recessionary fears. German Industrial Production expanded by only 0.3% in April against predictions of a 0.7% growth. French Trade Balance data were also pessimistic for the French economy. The value of imported goods exceeded that of exported goods by 9.7B in April, versus an 8.4B difference in March and expectations of a 7.7B print. Retail sales in the Eurozone remained stagnant in April, against expectations of 0.2% growth. German factory orders declined by 0.4% in April, falling below expectations of a 2.7% growth.
Services PMI data for Spain, Italy, France, and Germany fell below expectations, showing decreased sector growth in May compared to April’s print. Eurozone Services PMI dropped to 55.1 in May from 55.9 in April, against expectations of 55.9. The index, however, remained firmly above the threshold of 50, indicating that the services sector continues to expand, even though growth has slowed.
The Sterling benefitted from the dollar’s weakness last week, with GBP/USD climbing to 1.257 on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.268, while support may be found near 1.230.
The Sterling gained strength last week on expectations of UK interest rates continuing to increase in the coming months as the BOE fights to bring inflation down. BOE governor Andrew Bailey has warned that inflation in the UK is persistent and will require further tightening to bring inflation to target. The BOE raised interest rates by 25 basis points at its latest meeting in May, bringing the bank rate to 4.5%. Market odds are in favor of more BOE rate hikes up ahead and many analysts predict no rate cuts at all within the year. The BOE has been following an aggressively hawkish monetary policy, aiming to bring inflation down. As the US has signaled a pause in rate hikes, BOE interest rates may soon catch up with Fed rates, boosting the Sterling.
Headline inflation in the UK dropped below 10% on an annual basis in April for the first time since August 2022. Inflation in the UK is starting to cool, although not as rapidly as anticipated. Headline inflation rose by 8.7% year-on-year in April from 10.1% in March, surpassing expectations of 8.2%. Core CPI, which excludes food and energy, however, rose to 6.8% on an annual basis in April from 6.2% in March.
UK fundamentals last week were mixed, indicating that the British economy is still struggling. RICS house price balance data released last week for May indicated a fall in prices, mainly due to prolonged monetary tightening. RICS pricing data registered that 30% of British surveyors registered a drop in housing prices in May, which, however, was lower than the expected 39%.
Halifax HPI data also confirmed the decline in the housing sector, showing the first annual drop in UK house prices in more than a decade due to an increase in mortgage rates. The index, which reflects the change in the price of homes showed no change in May, against expectations of a 0.2% increase in prices.
BRC Retail Sales expanded by 3.7% in May but fell below expectations of a 5.7% growth. Construction PMI data came in at 51.6 in May, above the 50 mark which signals growth. May’s data exceeded expectations of a 50.9 print and went up from 51.1 in April. Final Services PMI data rose slightly to 55.2 in May from 55.1 in April, against expectations of 55.1. The Services sector in the UK keeps expanding, with the PMI index remaining above the threshold of 50, indicating growth.
The British economy contracted by 0.3% in April, after registering stagnation in March. The International Monetary Fund, however, upgraded the UK’s growth prospects stating that a recession was now unlikely. The IMF had previously forecasted that the British economy will contract by 0.6% this year.
The UK’s weak economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.
GDP data and other economic indicators on the 14th may provide information on the economic outlook of the US and may cause volatility in the price of the Sterling.
The Yen traded sideways against the dollar last week and USD/JPY oscillated around the 139.5 level. If the USD/JPY pair declines, it may find support near 137.4. If the pair climbs, it may find resistance at 141.
The BOJ is holding its monetary policy meeting this week on Friday, the 16th. The BOJ maintained its dovish monetary policy at the bank’s previous meeting in April. This was the first meeting with the newly-appointed BOJ Governor Kazuo Ueda at the helm. Ueda has stated that monetary policy would remain accommodative until the bank’s 2% inflation target became sustainable. He also predicted that price pressures would fall sharply in the next year.
Japanese policymakers are expected to maintain the bank’s ultra-low interest rates on Friday, keeping the central bank’s refinancing rate at -0.10%. The BOJ is also not expected to make any adjustments to its yield curve control program. The BOJ Monetary Policy Statement and Governor Ueda’s post-meeting news conference are expected to attract traders’ attention. Japanese policymakers may take into account rising inflation rates. Increased price pressures raise the chance of the BOJ upgrading its inflation forecast in July, which may lay the groundwork for a change in policy down the road.
BOJ Core CPI rose to 3.0% year-on-year in April from 2.9% in March. April’s print exceeded expectations of a 2.8% growth, indicating that price pressures in Japan continue to rise. Tokyo Core CPI for April was also hotter than expected, at 3.5% on an annual basis, against expectations of a 3.2% print. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households.
Final GDP data for the first quarter of the year released last week showed that the Japanese economy expanded by 0.7%, against a preliminary GDP print of 0.4%. The GDP data exceeded expectations, alleviating recession concerns for Japan. The final GDP Price Index printed showed a 2.0% annual expansion, versus 1.2% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
Other economic activity and health indicators released last week for Japan were mostly pessimistic about the state of the country’s economy. Leading Indicators, which is a composite index based on 11 economic indicators, fell below expectations. The index dropped to 97.6% in April from 97.7 in March, against expectations of a rise to 98.3%. Average Cash Earnings expanded by 1.0% on an annual basis in April, against a 1.3% growth in March and expectations of 1.7% growth. Household spending contracted by 4.4% year-on-year in April, falling below expectations of a 2.2% drop and a smaller decline of 1.9% in March. Consumer spending is one of the most important gauges of economic health and its decline indicates a poor economic outlook.
Gold prices were volatile last week, ranging from $1,939 per ounce to $1,972 per ounce. If gold prices increase, resistance may be encountered near $1,983 per ounce, while if gold prices decline, support may be found near $1,931 per ounce.
Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar plummeted last week, with the dollar index dipping to the 103.5 level. US Treasury yields also declined, with the US 10-year bond yield touching 3.72%.
Major Central Banks continue to raise interest rates, causing economic uncertainty, which provides support for the safe-haven gold. Last week, the Reserve Bank of Australia and the Bank of Canada raised interest rates by 25bps. This week, the US Federal Reserve, the ECB, and the BOJ are holding their policy meetings, although only the EU is expected to hike rates this month.
The Federal Reserve has signaled a pause in rate hikes, weakening the dollar, and boosting gold prices. The U.S. Federal Reserve is holding its next policy meeting this Wednesday, June 14th and its outcome is expected to affect gold prices.
Markets are pricing in an 80% chance that the Fed will not raise interest rates at its meeting this week for the first time in well over a year. Fed officials have signaled that the central bank will forego a rate hike, boosting gold prices. Expectations of a shift to a more dovish policy provide support for gold prices.
Oil prices dipped last week, with WTI price ending the week below $70 per barrel. If the WTI price declines, it may encounter support near $70 per barrel again, while resistance may be found near $74.6 per barrel.
Reports of U.S.-Iran talks on a nuclear deal, caused volatility in oil prices last week. The deal would eventually allow Iran to export more crude, but both sides rebutted the rumors, causing uncertainty in markets.
Chinese data last week showed that crude oil imports jumped by 12.2% year-on-year in May. China, which is the world’s top oil importer, imported a total of 12.11 million barrels per day of crude oil in May. In addition, the Energy Information Administration reported last week an inventory decline of 500K barrels for the week of June 9, compared with an inventory build of 4.5 million barrels for the previous week.
Global economic concerns have been weighing oil prices down, raising concerns about further oil production cuts. OPEC+ members, however, opted to keep production cuts unchanged for the remainder of 2023. This includes the 2 million barrels-per-day cut announced last October. Saudi Arabia, on the other hand, announced substantial voluntary cuts in its oil output. Saudi Arabia will reduce production by an additional one million barrels per day, starting in July for a month that can be extended. This will reduce Saudi Arabian production to 9 million barrels per day. The Kingdom will also extend a production cut of 500,000 barrels per day, which was announced in April, through 2024. Supply concerns drove oil prices up after the announcement.
Oil prices are boosted by diminishing rate hike expectations. The U.S. Federal Reserve is holding its next policy meeting this Wednesday, June 14th and its outcome is expected to affect oil prices. Markets are pricing in an 80% chance that the Fed will not raise interest rates at its meeting this week. The US Central Bank has signaled a pause in its hawkish policy, providing support for oil prices. As major central banks are winding down their hiking cycles, the oil demand outlook rises.
Crypto markets exhibited high volatility last week. Crypto bulls and bears are wrestling for control, causing volatility in cryptocurrency prices. The Securities and Exchange Commission filed 13 charges against Binance and its CEO, Changpeng Zhao. Reports that the US regulator is formally moving against Binance put pressure on crypto markets last week, causing volatility in cryptocurrency prices.
Bitcoin price was volatile last week, trading below $26,000 over the weekend. If the BTC price declines, support can be found near $25,400, while resistance may be encountered near $28,400.
Ethereum price plummeted last week, dropping to the $1,720 level, but recouped some of its losses over the weekend, climbing to $1,740. If Ethereum's price declines, it may encounter support near $1,720; if it increases, resistance may be encountered at $1,914.
Signs that major central banks are starting to wind down their hiking cycles provide support for risk assets. The U.S. Federal Reserve is holding its next policy meeting this Wednesday, June 14th. Markets are pricing in an 80% chance that the Fed will not raise interest rates at its meeting this week. A pause in the Fed’s rate hikes this week may boost risk assets.
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