After a hawkish turn from the European Central Bank (ECB) these past three weeks, the Euro has finally failed to meet the rising bar for further upside repricing. This can be seen at the ECB meeting on June 9, which reiterated hawkishness from the ECB but ultimately failed to lift the Euro. Lagarde further reiterated that the ECB ‘intends’ for a 25bp rate hike at the ECB meeting of 21 July and another 25bp rate hike at the September meeting. As such, 25bp hikes are fully priced into the July and September meetings. However, according to ING, markets are pricing in a total of 130bp of tightening by year end, which would imply a 50bp hike at one of the four remaining meetings. However, the ECB has left that door open by saying, “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” This of course opens up the risk of downside repricing of the ECB tightening cycle should the domestic and global growth situation further disappoint.
Risk sentiment is down, with the S&P 500 falling around 5% last week and the DAX 30 dropping around 4.8%. The US to German 10 year spread, declining since May, has slightly leveled off this week as well. The US 10Y is above the significant 3% level.
Recent weeks have presented the idea of a Fed pause, with disappointing housing data causing the Fed tightening cycle to be repriced lower. However, last Friday’s CPI and core CPI data beat expectations with headline inflation actually accelerating, rising 1% month-on-month which takes the year-on-year rate to 8.6% rather than the 8.3% consensus forecast. Food rose 1.2% and gasoline rose 4.1%, but even excluding food and energy, the core rate came in above expectations, rising 0.6% MoM and 6% YoY, rather than the 5.9% increase that was expected.
Regarding rates, little has been heard regarding the Pound last week. The political situation regarding Boris Johnson has taken the spotlight although the ramifications for the Pound are still unclear.
Overall, the pricing for the Bank of England cycle is incredibly resilient. The fact that money markets are still pricing in a further 175bp rate rise by the Bank of England this year goes to show that investors struggle to buy into the idea of a pause anywhere. In a time of softening growth, this optimistic hiking cycle runs the risk of a disappointment of market expectations, which may result in the Pound suffering a similar fate as the Euro.
The Euro continues to slide over the past week, down 1.88% from 1.07737 to trade around 1.05057 after the European Central Bank monetary policy decision continues to disappoint hawkish expectations. EUR/USD saw a rally last Thursday but reached a resistance level around the 1.072/1.078 area. On Friday, the Euro broke its 1.06 support level, with the sell pressure pushing EUR/USD towards its next support level of 1.047/1.050. It’s important to note that selling interest is prominent following recent disappointing US inflation data, and there is the potential that it could fall as low as 1.034/1.037, its May lows. On the flip side, if dip buyers return and spark a bullish reversal, it may push EUR/USD towards the next ceiling around the 1.089/1.090 level based on the 50% Fibonacci retracement from its 2022 high. This is reinforced by a steep decline in RSI reaching 40, indicating that EUR/USD could be in oversold territory, and is ready for a reversal.
GBP/USD experienced heavy selling for the past three days after strong US CPI data strengthened the greenback. The pair reversed its previous week rally, as GBP/USD fell 1.41% from its highs of 1.25995 to 1.23148. A breakthrough at its previous weekly low, around the 1.2430 area, saw an influx of bearish traders that added to the downward pressure. This is reinforced by reversal of the MACD and the price action rejecting its 30 day EMA. A continued downtrend and the formation of another lower high sets the stage for a pullback towards the area of support around the 1.22-1.24 area, further indicated by the bearish three black crows pattern that formed over the past three days. It will be interesting to see if dip buyers are able to hold the price around the 1.23 support level, in which case we may see another bounce in the following weeks.