Weekly analysis

The US dollar strength and higher US yields are the one-two punch continuing to drive risky assets into the red as the week gets under way, with US equity markets at new lows for the cycle ahead of the US open today. I suspect now that in the bigger picture, this cycle of USD strength only ends once US long yields begin falling, and falling because the Fed has exercised its put with new yield caps or because US pension- and/or other rules are changed requiring US savers to hold more treasuries, not because market forces at some point decide that long US treasuries are a superior long-term investment. For now, it would seem talk of such eventualities are premature, although if volatility continues at the current level for much longer, it will sharply bring forward the eventual policy response.

A number of USD pairs are at significant chart tipping point as this week gets under way. The most well defined of these is perhaps the 0.7000 level in AUDUSD, although USDCAD in the 1.2950+ area is quite remarkable as well – an area that has seen at least four prior touches, first as support just prior to the pandemic in early 2020 and then as resistance once the pair crashed back down through that level later that year. Oil prices are challenged from the demand side on Chinese Zero Covid lockdowns and budding behaviour change globally from skyrocketing diesel- and jet fuel prices. The range above there and above the psychological 1.3000 level is considerable – all the way to the double top of 1.4600+ from 2016 and 2020, but the bulk of the time, the 1.3650 area capped the action during those years. If oil suffers a more significant setback over this latest risk deleveraging event, that level could quickly come into play. The private debt leverage is far higher in Canada than in the US and one of the more sensitive sectors to rising rates is housing, which represents a far greater portion of the Canadian GDP growth over the last decade and a half relative to the US – interesting to watch the trajectory of the housing market in both countries after the enormous back-up in yields in recent months.

A further sense that the Fed wants to focus on tightening conditions for asset markets as well as for the economy in general was in evidence in the FOMC minutes last night, which revealed plans for a rapid pace of quantitative tightening after the May 4 meeting. Some Fed members were in favor of not “capping” Fed balance sheet reductions at all  in other words, not rolling whatever treasuries and other assets were expiring in a given month, but in the end, members “generally agreed” that a cap of $60 billion on treasuries and $35 billion on MBS would be an appropriate pace of tightening  still nearly double of the maximum pace during the 2017-19 tightening and really well over double the average pace of the average tightening over much of that time frame. As well, the minutes indicated that more on the Fed were in favour of moving 50 basis points at the March 16 meeting, but went with the 25-basis point move due to the Russian invasion of Ukraine. In response to the FOMC minutes, risk sentiment stayed under pressure and the US dollar surged against risky currencies/EM. 

Focusing on AUDUSD for the third day in a row as it is the most interesting technical pair and sits astride at least a couple of themes, including the commodity overlay focus across markets of late, the situation in China, where lockdowns are pressuring activity, and general risk sentiment, where the Fed is fully engaged in playing catch-up in a bid to attain credibility with its latest ratcheting higher of rate expectations and now a vicious tightening regime that will settle over the market in the coming months. So far, the reversal here is most interesting in that it took place just after the modestly hawkish RBA upgrade to guidance this week triggered a sprint above the well-defined range resistance of 0.7556. That move has been reversed, but the up-trend from the lows early this year has not yet been erased and only gets full tested below 0.7400, with the 0.7300 area perhaps the point of final capitulation. 

Trade accordingly with your risk

The euro boost comes as ECB expectations are rising sharply again on the back of fresh rhetoric indicating more urgency to kick off the rate tightening cycle. The ECB’s Villeroy, Nagel and Vasle today all indicated a strong lean for getting going, with Villeroy saying the case for ECB net debt purchases after June is “not obvious” and that it is “reasonable” to expect rates above zero by year-end. The Bundesbank chief Nagel said the ECB must get on with normalizing policy and that it shouldn’t hold back just because of the difficult backdrop, and Vasle saying it would be appropriate to raise rates before summer which means at the June 9 meeting  where the odds remain low for a hike. This has helped the euro higher against the lowest yielding CHF and the JPY punching bag as EU longer date yields also rose to new highs for the cycle. The German Bund yield has touched 1.00% in recent days. 

EURCHF is the focus of the day as the ECB earns some respect from the market in signaling more urgency to kick off its tightening regime. The price action has taken the pair above the well-defined 1.0400-area resistance as the yield spread has stretched some 100 basis points in the euro’s favour for 2-year since early March, more than off-setting now, apparently, the existential concerns that are burbling in the background as the Germany-periphery yield spreads widen. The 1.0500 area 200-day moving average is the next area of interest.

Since March 2021, EURCHF is on a legitimate downtrend and since the end of February, the pair was in a symmetric triangle pattern . By the beginning of May, after a series of bullish candles, the price managed to escape from the triangle to the upside. That only encouraged buyers and increased the momentum allowing the price to rise further and break the mid-term down trendline .
Breaking those two resistances is definitely a great sign and an invitation to go long. The buy signal is here and stays on the table as long as the price stays above the horizontal support on the 1.035.

An alternative scenario includes the price coming back below the orange support, which would effectively give us a sell signal. But the chance of that happening are now rather limited.

The USD/CHF outlook remains negative despite a recent recovery attempt. The broad risk aversion may keep the gains limited.
As buyers embrace the dollar’s recovery ahead of Monday’s European session, demand for a fresh intraday high near 0.9340 is fueling the USD/CHF pair.

Despite geopolitical worries out of Ukraine and negative headlines from China and Saudi Arabia, the Swiss currency pair is posting a rebound, supporting the US dollar as a safe-haven asset. In addition, a recent hawkish statement by Fed officials is also encouraging for bulls of the US dollar. Neil Kashkari, Thomas Barkin, and Christopher Waller, the three presidents of the Federal Reserve Banks of Minneapolis, Richmond Fed, and the Federal Reserve Board, spoke Friday about inflation and the Fed’s next steps. Dollar bears, who fear dovish rate hikes in the future, were repelled by policymakers citing the Ukraine crisis as the reason for the latest rate hike.

Market sentiment has been impacted by record-high Coronavirus cases in China and Evergrande’s suspension of trading in Hong Kong, which has resulted in a recent boost to the USD/CHF pair. These games indicate that the one percentage point decline in the S&P 500 futures at press time has helped, while the drop in Japan is limiting the US Treasury Department’s activity in Asia.

US Dollar will be watched for the impact Jerome Powell’s recent words have had on the US dollar as the Fed Chair speaks. US dollar bears will return to the table if the policymakers hope inflation worries will ease again. Risk aversion may limit USD/CHF declines.
The USD/CHF price looks feeble, struggling with the 50-period SMA (4-hour chart). The 20-period SMA is also pointing downwards. We can see four widespread down bars with very high volume in the immediate background. It shows that the pair will likely find it too hard to recover.
Any upside recovery may stall at 0.9350 ahead of 0.9400. On the flip side, 0.9300 will be the immediate target for the bears ahead of 0.9250.

The Bank of Japan refused to capitulate overnight as it doubled down on its yield curve control policy and announced unlimited daily auctions to enforce its yield-curve-control policy. This set the JPY on tilt again, with USDJPY rushing well above 130.00 overnight in the wake of the meeting.
Going into the BoJ overnight, expectation bias was that the Bank of Japan would have to loosen up its forward guidance in some meaningful way, even if very cautiously so. Kuroda and company could have taken the opportunity, for example, to indicate a two-way policy potential: on the one hand suggesting that for now it expects inflation will prove transitory and that it is happy with its current policy mix, but that if global yields continue to rise at anything resembling the recent pace and inflation  for cost of living expenses, particularly those driven by a weaker JPY  it may have to adjust its yield-curve-control policy in future meetings. The government’s recent fiscal package aimed at offsetting cost-of-living increases for vulnerable households is a clue that the weak JPY is weighing politically ahead of important lower house election in July. Instead, the BoJ meeting overnight saw Kuroda and company doubling down on the current policy mix and even announcing daily auctions with unlimited backing of the 0.25% 10-year yield cap.

Ironically, if global yields stagnate here and we avoid any new drama in energy prices, the pressure on the JPY could subside rather quickly, as the big devaluation story needs fresh fuel and a rise in yields elsewhere if the JPY is to remain under significant further pressure. The Japanese Ministry of Finance was out tempering the JPY decline with some sharp comments early today in Europe, but intervention would be silly and even more politically toxic perhaps than the MoF getting on the phone with Kuroda and twisting his arm to loosen up monetary policy guidance. Either way, Japan absorbs the pressure  whether it is on the currency and inflation of imported goods or via a rise in yields.

USDJPY exploded all the way through the 130.00 level and to 131.00 on the Bank of Japan refusing to change its policy mix at a time when virtually all other central banks are in a strong tightening regime, with USD liquidity concerns adding further energy to the fresh surge overnight. The natural focus is on the early 2000’s high above 135.00, but there is nothing holding the pair back from a surge to 150.00 or higher if US 10-year Treasury yields continue to rise and take out the 2018 high of 3.25%. The situation becomes increasingly dangerous if the pressure ratchets higher to the upside, as an eventual capitulation from the BoJ would come at an even loftier level and trigger that much large of an avalanche of mean reversion.

The EUR/USD weekly forecast is mildly tilted towards the downside as the pair failed to sustain above the 1.1000 area after several attempts.

The EUR/USD pair may not attract much speculative interest as it hovers around the 1.1000 level. As war-related uncertainty grew, volatility was limited due to a lean macroeconomic calendar. 
Despite Jerome Powell’s more aggressive stance as Fed chair, the US dollar strengthened on Monday. During the annual economic policy conference of the National Business Economics Association, he said that “inflation is too high” and that the central bank will act accordingly. As early as May, several Fed members reported that they would support a decision to scale back the Fed’s policy. Powell joined the bullish club with this announcement.

Upon Powell’s announcement, Treasuries were sold off, pushing yields to their highest level since May 2019. While yields declined over the days, the week yielded a higher yield.
European Central Bank’s patience is slowly ebbing away. As a result of Christine Lagarde’s unexpected aggressive comments at the last meeting, several members of the ECB have hinted at a rate hike by the end of the year. This is now planned for the third quarter of the year, earlier than previously planned by the central bank.

The Fed aims to achieve maximum employment and price stability, while the ECB is only concerned with price stability. The US and EU are experiencing the highest inflation in decades as economies slowly recover from the massive lockdowns imposed at the pandemic. 

The EUR/USD daily chart shows that the price is hovering around the 20-day MA. As a result, the pair could not find acceptance above the 1.1000 mark. However, the volume remains low for downside correction that started from the 1.1135 area. Therefore, the pair remains in a broad range, and traders should wait for a clear directional bias. Moreover, the traders should watch the triple bottom at 1.0965. If broken, the pair will lead to 1.0900 ahead of 1.0800.

The GBP/USD pair remained under intense selling pressure for the third successive day on Monday and plunged to the 1.2700 mark, or its lowest level since September 2020 during the mid-European session.

The British pound was pressured by last week's dismal macro data, which indicated that the UK economy is under stress from the soaring inflation. On the other hand, the prospects for a more aggressive policy tightening by the Fed pushed the US dollar to a more than two-year high and contributed to the heavily offered tone surrounding the GBP/USD pair.

Sterling is taking a broad beating, as well it should, with the economy beset by supply-side limitations, a contracting fiscal outlook and a cost-of-living crisis that is already showing signs of crimping real growth, with last week’s weak March Retail Sales and second-lowest ever April GfK Consumer Confidence reading helping to spark the sterling meltdown on top of the pressure provided by the strengthening US dollar. And this is before the inevitable roll-over in home prices once higher rates begin to bite. The UK has a yawning current account deficit aggravated over the last 6 months by spiraling costs for its energy imports, while recent weak risk appetite reduces the potential for investment capital inflows to offset. The 1.3000 level in GBPUSD gave way on Friday with brutal force and the follow through to kick off this week looks ominous. On the chart, the eye is drawn toward the massive 1.2000 level – arguably the real range support when not considering the worst chaotic days in early 2020 during the reaction to the global pandemic outbreak.

A convincing break below the 1.2700 mark, leading to a subsequent break through the September 2020 low, around the 1.2675 region, will reaffirm the negative bias. The GBP/USD pair might then turn vulnerable to weaken further below the 1.2600 round figure and accelerate the slide towards the 61.8% Fibo. level, around the key 1.2500 psychological mark.

On the flip side, the 1.2755-1.2760 region now seems to act as an immediate resistance ahead of the 1.2800 mark. Any subsequent move up is more likely to run out of steam near the 1.2825-1.2830 region, which should act as a pivotal point. Sustained strength beyond could trigger a near-term short-covering move.

The GBP/USD weekly forecast is bullish as the price found respite at 1.3000 psychological level despite the central bank divergence.

Risk-sensitive currencies like the British pound have been relieved by optimism regarding the probable truth between Russia and Ukraine. As a result, the GBP/USD pair staged an impressive comeback as the US dollar failed to capitalize on the Fed’s dovish outlook. Although the Bank of England (BOE) raised interest rates cautiously, Cable posted its first weekly gain in four weeks. Next week, data on UK inflation and US durable goods will be closely watched, while geopolitical developments in Eastern Europe will also be closely monitored.
The sterling bulls eventually gained control, leading a solid recovery in the major currencies that continued into Thursday. However, as markets repositioned ahead of Wednesday’s critical Fed decision, the US dollar lost its winning momentum and yields. The world’s most powerful central bank raised interest rates by 25 basis points, bringing their target range to 0.25-0.50%. Despite six more rate hikes this year on the Fed’s scatter chart, Chair Jerome Powell said each meeting is a live meeting.
The US dollar did not benefit from the Fed’s hawkish stance as market optimism overshadowed hopes for diplomacy in the Ukraine crisis, eroding its safe-haven appeal. However, the currency pair pared all of its Fed-inspired gains on Thursday following the Bank of England’s cautious rate hike. Despite the uncertainty in Ukraine and its risks to the country’s economic growth, the UK central bank raised interest rates for the third consecutive month by 0.25%. 

Macro traders are bracing for a quiet start to a busy week, with Wednesday’s UK inflation data expected to be the first major event. Increasing oil prices caused by the crisis in Ukraine will lead to an increase in the UK consumer price index (CPI) to 6.0% from 5.5% previously. Also, in the middle of the week, the UK will release its annual budget report.
The GBP/USD price formed a double bottom at 1.3000 and soared to 1.3210 weekly highs. However, the pair saw fluctuation within 1.3100 to 1.3190 several times. The daily chart shows a cup and handle pattern with a handle top around 1.3200-10. If the price breaks this level, we may see a test of a broken double bottom at 1.3272. 

Trade accordingly with your risk

The risk sentiment slide yesterday gathered further momentum as the Biden White House was out fretting an “extraordinarily elevated” March CPI release today. Whether that is simply to prep the general public for the first 8-handle on the headline year-on-year CPI in over 40 years or because it has had a sneak peek at the data and it is even worse than the consensus expectations for an 8.4% reading (and 1.2% month-on-month, with core expected at +0.5% MoM and +6.6% YoY) is impossible to say. A 9% CPI rate could encourage the market to look for a move straight to 1.00% at the May FOMC meeting, something the market has not yet been willing to price, preferring instead to predict multiple 50-basis point moves. 

More interesting than the data itself will be to track the market reaction in longer maturity treasuries after we have seen a strong pivot in the direction of steepening of the yield curve in recent days.
The most alarming being that the market has become less concerned that projections of Fed tightening are getting too aggressive and therefore eventually risking an incoming recession. Instead, a continued steepening of the yield curve here could suggest that the market thinks that the Fed is not in any way in control of the narrative or inflation yet, with the risk that an inflationary mind-set has taken hold that could suddenly bring forward demand (make large purchases now and generally hoard what can be hoarded rather than waiting for price rises later) and lead to a scramble for hard assets and spiking monetary velocity. This would trigger the risk of a titanic inflationary bust in the worst instance.

USDCAD has bounced back to just about the half-way point of its slide from the early March highs inspired by the risk-off meltdown in the wake of Russia’s invasion of Ukraine. One the one hand, CAD under pressure from weaker risk sentiment of late and the correction in oil, although as we point out above, the market has repriced longer term oil prices significantly higher. And Canada’s trade bounce has pulled out of a long period of large deficits to begin posting solid trade surpluses. The Bank of Canada tomorrow is seen hiking 50 basis points for the first time since 2000. If the focus in coming days is on inflation risks and crude oil rebounds strongly without a strong melt-down in risk sentiment, USDCAD could post a key reversal lower if the BoC encourages the market’s forward pricing of its hiking intentions (currently looking for a BoC policy rate near 2.2% by year end – about in-line with Fed expectations.)

The weekly forecast for gold price is bullish as the deteriorated risk sentiment lends support to the precious metal as a safe-haven asset.

Gold price reacted sharply to changes in risk sentiment throughout the week, ending the week at its highest weekly close since November 2020 near $1950. Russia does not intend to deescalate the conflict with Ukraine.
The price of gold began the week strongly after the US, EU, UK, and other western countries banned some Russian financial institutions from using SWIFT, the global payment system. However, this week, a second round of “peace talks” was organized between Russian and Ukrainian delegations, alleviating investors’ concerns.

Russian military was reported to have increased its presence in Ukraine in an attempt to seize Kyiv, which triggered a surge in safe-haven inflows.

The sharp rise in US Treasury yields resulted from hawkish remarks from FOMC Chairman Jerome Powell on Wednesday, despite a weak market environment. This pushed gold into negative territory. In his semi-annual hearing on the first day, Powell told the House Financial Services Committee that a 25 basis point rate hike in March would be appropriate. Powell indicated that if the first round of rate increases fails to ease price pressures, a rate hike of 50 basis points may be considered later this year. According to the chairman, sanctions against Russia will not directly affect the US economy but are fueling uncertainty about growth prospects.

After losing some ground on Wednesday, gold regained some momentum on Thursday and Friday, erasing some of Wednesday’s losses. On the second day of his Senate Banking Committee hearing, Powell effectively reiterated his economics, inflation, and politics. 

There will be no high-level macroeconomic data out of the US on Monday and Tuesday. As a result, gold’s market value will likely remain affected by the Russian-Ukrainian crisis and risk perceptions. 

Consumer price index (CPI) data for February will be released Wednesday by the US Bureau of Labor Statistics. In January, the CPI rose to 6% from 6% annually. The Fed’s dovish outlook should remain intact unless inflation surprises the downside. The yellow metal’s growth could be limited by a further rise in US Treasury yields due to a strong CPI.

On Wednesday, the European Central Bank (ECB) will also announce its monetary policy decisions. The ECB’s rate hike rates have already been priced in by the markets. However, there are growing concerns about the potential negative impact of the Russo-Ukrainian war on the Eurozone economic outlook, prompting the bank to adopt a dovish stance. Gold remains attractive in this scenario.

If investors don’t see signs of a de-escalation in the Russia-Ukraine conflict, the yellow metal should remain a traditional safe-haven asset next week. However, XAU/USD’s upside potential might be limited by gold’s inverse correlation with US Treasury yields after the Federal Reserve’s monetary policy outlook was released following inflation data.