The European Central Bank held an extraordinary meeting two weeks ago to discuss the fragmentation of European counties between the peripheral countries, such as Italy and Greece, and the core countries, such as Germany and France. The result of the meeting was two-fold:
- To apply flexibility in reinvesting redemptions from the PEPP portfolio
- To create a committee to design a new anti-fragmentation instrument which would put a limit on bond spreads.However according to a speech last week from ECB’s de Guindos, the Governing Council has yet to discuss the details of the new program.
Markets will get a chance to react to the possibility of wider spreads this week when the EU releases its first look at June’s CPI print. Expectations are for a headline print of 8.4% YoY vs a May reading of 8.1% YoY. The May reading was a record high! The core inflation reading is expected to be 3.9% YoY vs 3.8% YoY in May. Will this print cause the ECB to hike rates more than the 25bps promised on July 15th? Or will the slowing manufacturing data hold them back? Also expected this week are the final PMI readings. The initial readings released last week for Europe were worse than expected, sending concerns through the markets of a possible recession. How will sovereign yields react if Europe produces a higher inflation reading and worse revisions to the PMI data? Will the ECB raise 25bps or 50bps when it meets in 2 weeks? This week may give the markets more clues!
The US Federal Reserve has been on quite a run of its own when it comes to raising interest rates. The Federal Reserve hiked rates by 75 bps at the June meeting and suggested that it would raise rates by either 50bps or 75bps at the July meeting. However, last week at Powell’s semi-annual testimony to the Senate and Banking Committee, Powell said that it is a possibility rate rises could cause a recession. In addition, he noted that it would be very challenging to achieve a soft landing. This week, Powell will get more information for the FOMC. The US releases the PCE Price Index and Core PCE data. Expectations are for the headline PCE Price Index to rise to 6.7% YoY from 6.3% YoY in April. Expectations are for the Core PCE Price Index to drop to 4.8% YoY vs an April reading of 4.9% YoY. Traditionally, Core PCE is said to be the Fed’s favorite measure in inflation. However, at the press conference following the last FOMC meeting, Powell said that the Fed is concerned about ALL inflation. This could mean that members will be paying close attention to both the headline PCE and the Core PCE! The US will also release revisions to last week’s PMI data and the ISM Manufacturing Index, which is expected to drop from 56.1 in May to 54.9 in June. If the data is worse than expected, it may send a give the FOMC ammo to only raise by 50bps at the July meeting.
On a daily timeframe, EUR/USD had been moving in a downward sloping channel since May 2021. In late April 2022, the pair broke aggressively below the channel, testing the low from January 2017 near 1.0340, only to bounce back into the channel. Resistance held at the 38.2% Fibonacci retracement level from the highs of February 22nd to the lows of May 12th. In doing so, EUR/USD held below a new trendline that had formed (green) and fell back towards the 1.0340 level. The pair is bouncing again and trying to test the green downward sloping trendline once again.
Source: Tradingview, Stone X
On a 240-minute timeframe, first resistance is at the confluence of horizontal resistance and the green downward sloping trendline near 1.0636. If price trades above there, it can move to the previously mentioned 38.2% Fibonacci retracement level. This will form a double bottom. The target for the double bottom would be near 1.1230. However, there would be plenty of more resistance levels to get through before that. First support is at the lows from June 23rd near 1.0482. Below there, price can fall all the way down and retest the lows near 1.0440.
Source: Tradingview, Stone X
With inflation data and manufacturing data from both the US and the EU this week, EUR/USD could be volatile. The results of these data prints could give the markets direction as to how much the FOMC and the ECB may raise rates at their next meetings!
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