No U.S. Recession Fears, U.K.’s Inflation Finally Below 8%, FED’s & ECB’s Hikes Ahead

PREVIOUS WEEK’S EVENTS (Week 17-21 July 2023)

Announcements: 

U.S. Economy

The measure of New York state factory activity, the Federal Reserve Bank of New York’s general business conditions index decreased 5.5 points to 1.1. This negative reading was higher than expected, at -3.5. The actual was above zero, signalling that the New York manufacturing sector is growing. 

The report showed manufacturers added workers after five months of paring payrolls.

The U.S. Retail Sales figures showed a less-than-expected increase in June. The data suggests consumer resilience, though slowing momentum in spending growth. Consumer spending is still signalling that the Fed has more work to do with rates. It remained strong despite frequent and high-interest-rate hikes from the Fed since March 2022. A tight labour market continues to boost wages while consumers’ purchasing power is slowly rising as inflation drops.

U.S. Unemployment Claims were reported less than expected, at 228K, a decrease of 9,000 from the previous week’s unrevised level of 237K. This is the second straight weekly decline in claims reported by the Labour Department. The data suggests that the economy is preventing a recession this year. No recession was recorded so far with not too many people losing their jobs.

The U.S. Central Bank is expected to resume hiking rates next Wednesday, the 26th of July, after skipping an increase in June. The Fed has raised its policy rate by 500 basis points since March 2022.

 

Australia Economy

Australia’s Employment Data release shows that employment increased significantly, beating expectations for the second month straight in June, while the jobless rate stayed near 50-year lows at 3.5%, adding to the probability of further interest rate hikes. The unemployment rate was recorded at 3.5%, whereas analysts had expected 3.6%.

The Reserve Bank of Australia (RBA) has lifted interest rates by 400 basis points to an 11-year high of 4.1% in just 14 months. However, the Labour Market is still hot, which raises concerns. Incoming RBA Governor Michele Bullock said that the jobless rate would need to rise to about 4.5% in order to have an important impact on inflation.

 

U.K.  Economy

The U.K. Retail Sales are estimated to have risen by 0.7% in June 2023. The reported figures were higher than expected in June despite continued high inflation. Inflation is near 8%, which is the highest of any large economy.

Some analysts think the economy is heading into a recession in the second half of this year.

 

Canada Economy

Canada’s Retail Sales figures were reported lower than expected in May and the Core Retail Sales figures — which exclude gasoline stations, fuel vendors, motor vehicle and parts dealers — were unchanged in May, suggesting a slowdown in economic growth that would allow the Bank of Canada (BOC) to leave interest rates unchanged.

The data suggests that the economy is slowing, in line with the Bank of Canada’s forecasts, reducing the chance for more future hikes. This month, BOC hiked its policy rate to a 22-year high of 5.0%, its tenth-rate increase since March last year.

The BOC has projected inflation to remain around 3% over the next year before dropping to the central bank’s 2% target by mid-2025.

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Inflation

 

New Zealand: New Zealand’s quarterly CPI change grew 1.1%, slightly above the expectations of a 0.90% increase. Expectations shift towards the idea that the Reserve Bank of New Zealand (RBNZ) would hike interest rates further despite signalling a pause earlier this month.

Inflation might have retreated from the 7.2% high since last year but still remains well above the RBNZ’s 1% to 3% target range.

 

U.K.: The release of the U.K.’s low Inflation figures has shaken the market as they finally suggest that hikes have the desired effect on inflation. Inflation was recorded at 7.9% but still well above the Bank of England’s (BOE) 2% target.

Anticipation of yet further rate hikes from the Bank of England caused the GBP to appreciate recently. This slower CPI change though is not enough to cause a change in policy. The BOE has a long way to go still.

 

Canada: Canada’s Consumer Price Index (CPI) monthly figure showed an increase of just 0.10%. Overall, it rose 2.8% year-over-year in June. The forecast inflation figure was to drop to 3.0% from 3.4% in May. Stickier and more persistent core measures in inflation are recorded though.

The average of two of the Bank of Canada’s (BoC) core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.8% compared with 3.9% in May.

Last week, the Bank of Canada raised rates to a 22-year high of 5.0%, its tenth-rate increase since last March and expects inflation to remain around 3% over the next year before dropping to the bank’s 2% target by mid-2025.

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Source: https://www.reuters.com/world/americas/canadas-inflation-rate-drops-27-month-low-food-prices-still-elevated-2023-07-18/

https://www.reuters.com/world/uk/view-uk-inflation-cools-june-pound-drops-2023-07-19/

https://www.reuters.com/markets/new-zealand-q2-cpi-rises-11-slightly-faster-than-expected-2023-07-19/

https://www.reuters.com/business/retail-consumer/soft-canadian-retail-sales-data-point-slowing-economy-2023-07-21/

https://www.reuters.com/world/uk/british-retail-sales-rise-07-june-2023-07-21/

https://www.reuters.com/world/asia-pacific/australia-employment-climbs-32600-june-again-beats-forecasts-2023-07-20/

https://www.reuters.com/world/us/us-weekly-jobless-claims-unexpectedly-fall-2023-07-20/

https://www.reuters.com/business/retail-consumer/us-retail-sales-rise-slightly-june-core-retail-sales-solid-2023-07-18/

https://www.reuters.com/markets/us/new-york-factory-activity-rebounds-april-ny-fed-2023-04-17/

https://www.bloomberg.com/news/articles/2023-07-17/new-york-state-manufacturing-barely-grows-while-price-gauges-retreat?in_source=embedded-checkout-banner

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Currency Markets Impact – Past Releases (17-21 July 2023)

The Empire State Manufacturing index recorded 1.1 points, higher than the expected figure but way lower than the previous one. A drop in the general business conditions seems not to have had much impact on the USD.

The release of the RBA Monetary Policy Meeting Minutes had a low impact on the AUD causing weakening. A small intraday shock was observed as the members discussed that the year-ended rate had declined and inflation remained quite above central banks’ targets in most advanced economies.

The market did not react much to the CPI changes for Canada reported on the 18th of July. Monthly CPI change dropped to 0.10% versus the expected 0.30%. Instead, the USD showed some signs of strengthening for a while after the release. On the same day, Retail Sales Data for the U.S. was reported lower, coinciding with the region’s recent economic data. Less spending is expected since the Fed managed to have a great effect on cooling economic activity and cause a significant drop in inflation.

On the 19th of July, New Zealand’s CPI quarterly figure was reported lower but higher than expected. The NZD strengthened moderately but the shock was not so great. NZDUSD moved upwards nearly 20 pips before reversing significantly.

On the same day, U.K. inflation was reported lower than expected. This was the expected result after BOE aggressively increased rates to respond to the 2-digit inflation, way higher than other rich countries. The GBP inevitably suffered heavy depreciation since the market reacted immediately to the news. 90 pips drop in GBPUSD after the release.

The U.S. Housing Starts figure, the annualised number of new residential buildings that began construction during the previous month, and the Building Permits figures were both reported lower. No impact was observed at that time.

The Employment Data for Australia was released on the 20th of July, showing fewer jobs but more than expected. The unemployment rate remained unchanged. The figures caused the market to react with AUD appreciation and an intraday shock for AUD pairs. The AUDUSD jumped over 50 pips.

The weekly release of the U.S. unemployment claims along with the release of the Philly Fed Manufacturing Index figure took place on the 20th of July too. The Claims were reported lower than expected. Inflation in the U.S. has significantly dropped, however, these labour data are suggesting that the impact on the market is not as negative as it is expected. After the release, USD showed rapid intraday strengthening causing the DXY to close higher. The Philly Fed Manufacturing Index has reported an almost unchanged negative figure, -13.5 versus the previous -13.7. The data suggests that manufacturing activity in the region continued to decline overall, more than it was expected.

The U.S. Existing Home Sales figures showed that U.S. home sales dropped in June to the slowest pace in 14 years. The figure was recorded as 4.16M versus the previous 4.30M. Compared to June last year, sales were 18.9% lower. That is the slowest sales pace for June since 2009. The continued weakness in the housing market is a result of a critical shortage of supply. USD kept appreciating greatly against other currencies after the release.

The monthly U.K. Retail Sales figures released on the 21st of July suggest that they are estimated to have risen by 0.7% in June 2023, with increases across all the main sectors; which is higher than expected. Retail Sales volumes rose by 0.4% in the three months up to June 2023, compared to the three months up to March 2023. The GBP appreciated at that time causing the GBP pairs to experience an intraday shock that lasted only a little. GBPUSD jumped near 25 pips.

The Canada Retail Sales figures showed that retail sales increased by 0.2% to $66.0 billion in May. That’s significantly lower than expected and the CAD depreciated moderately against other currencies during that time.

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FOREX MARKETS MONITOR

DXY (US Dollar Index)

The Dollar significantly strengthened last week. After the labour data release this month, such as the NFP report on July 7th 2023, the market reacted with a depreciation of the Dollar which had a lasting effect. The Dollar started depreciating heavily against other currencies starting from the 7th until the 14th of July. Then, a period of consolidation followed, as per the DXY, until the 19th of July, when the DXY started to climb. The 26th of July is near and the Fed is expected to increase the Fed rate by 25 basis points. 

EURUSD

The pair has moved below the 30-period MA and continued the downward movement steadily as the USD gained strength. Obviously driven by the USD, it moved more and more to the downside despite, the fact that the RSI is showing higher lows, signalling a bullish divergence. Rate decisions on the 26th (FED) and the 27th (ECB) will shake the markets in unpredictable ways, especially if there are surprises. 

USDCAD

This pair was moving downwards since the 18th of July, even when having the USD as the base currency. That is probably because the Bank of Canada has increased the overnight rate by 25 basis points causing the CAD to appreciate. In addition, on the 18th of July, some important inflation-related data for Canada were reported higher than expected which might have pushed the USDCAD further downwards. On the 20th of July, the pair reversed, crossed the 30-period MA on its way up and remained on the upside. Unemployment claims figures for the U.S. that day were reported lower than expected but still high causing USD appreciation and a jump of the pair. Retail Sales for Canada the next day, 21st July were reported lower than expected, causing also a jump as CAD depreciated.

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NEXT WEEK’S EVENTS (24-28 July 2023)

Monday starts with PMI releases for both the Manufacturing and Services sectors for major regions.

On Wednesday, the 26th of July, we have many important scheduled releases, such as Australia’s inflation figures, FOMC statement and Federal Funds Rate. The decision for rates from ECB will take place the next day, the 27th of July. 

Currency Markets Impact:

The PMI releases will probably cause more volatility than on a normal Monday. Shocks might take place at the time of the releases. High deviations from the MAs would likely take place during the German PMI and U.S. PMI release.

The U.S. CB Consumer Confidence report will take place on July 25th and the USD is expected to be greatly affected. An intraday shock for USD is less likely, and more volatility with retracements is more likely.

During the Asian session, on the 26th of July, the Inflation figures for Australia will probably have a good impact on the AUD. An intraday shock is expected with AUD pairs to reverse relatively quickly soon, something common to happen during that period considering recent past data.

At 21:00, the Fed will announce the decision on rates. A hike is expected and at the time of the release, a shock could cause the USD pairs to deviate significantly from the mean. A surprise increase or pause will probably do that with a lasting effect.

On the 27th of July, the ECB will announce their decision on rates as well. MRR is expected to be increased as well by 25 basis points. The ECB has made it clear that it is committed to continue with hikes. 

Advanced GDP, Unemployment claims and Durable Goods Data are released at the same time for the U.S. An intraday shock is expected for USD pairs. The unemployment claims figure is actually not increasing significantly. It will be the most interesting figure since the relevant data show labour market resilience even when the U.S. is experiencing this significant drop in inflation and is removing recession expectations.

The Bank of Japan stated recently that it is not expecting to change monetary policy. On the 28th of July, the BOJ policy rate is expected to remain unchanged. No hikes there, however, JPY weakening is a possibility with JPY pairs experiencing steady one-direction moves that might have a long-lasting effect. 

U.S. PCE price index and Employment Cost Index are considered important data and the market is probably going to react heavily. An intraday shock is possible for the USD pairs at 15:30. After the release at 17:00, the Revised UoM Consumer Sentiment report might not have such a great impact. 

 

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COMMODITIES MARKETS MONITOR

U.S. Crude Oil 

We can identify the breakout of the important resistance near 76.80 USD/b. The market has not pushed the price rapidly upwards. Resistance to the upside is apparent. An upward wedge is visible, as Crude continues the upward movement steadily with lower volatility as days pass. It is currently moving above the 30-period MA as it is on a short-term uptrend. Considering the recent path, it is not expected that we will see high deviations from the mean, at least until the Fed’s Rate Decision on Wednesday, 26th of July.

Gold (XAUUSD)

Gold eventually reversed downwards rapidly on the 20th of July, moving out of consolation, breaking the support levels near 1971 USD/oz and crossing the 30-period MA on its way down. The Dollar is currently gaining strength and that is a major driving factor. The downward movement continued while the index was below the MA the next day as well, on the 21st of July, and remained on that path. The RSI shows signs of bullish divergence with higher highs. Will this be enough to safely forecast a reversal to the upside? Let’s see.

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EQUITY MARKETS MONITOR

NAS100 (NDX)

Price Movement

On the 19th, the index moved early upwards but during the N. American Session, it dropped heavily, some time after the NYSE opening. On the 20th of July, the index fell surprisingly fast, especially after the start of the European session. After the reversal, on the 21st of July, the index retraced but it now keeps testing the next support levels. If the important supports near a 15429 USD/oz break, then it is expected that it could dive to 15390 USD at least. The RSI, though, shows a slowdown and signals bullish divergence.

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