The recent sell-off in EUR/GBP may be coming to an end as ECB governing council members continue to opine that the central bank will shortly start hiking interest rates in an attempt to stave off rising inflation. The ECB’s deposit rate of -0.5% is set to return to positive territory this year with the outline of a series of 25 basis point rate hikes expected to be tabled at the June 9 meeting and started at the July 21 meeting. Current market pricing is for around 90 basis points of tightening this year, implying that four 25 basis point rate hikes may be on the cards this year. The ECB, along with a range of other major central banks, is battling with an unwelcome double of sky-high inflation – 7.5% in April according to a flash estimate from Eurostat – and faltering growth. The European Commission recently downgraded European growth to 2.7% in 2022 from a prior expectation of 4%.
The Bank of England (BoE) is also expected to continue hiking rates. The UK central bank has already raised the Bank Rate by a total of 90 basis points to 1%, the highest level in 13 years, to try and dampen runaway price pressures. While the market expects a further 115 basis points of rate increases this year, UK growth is expected to slow sharply in 2023, leaving the BoE battling rampant inflation and weakening growth. The projected 1%+ of rate hikes over the rest of 2022 may not play out if growth continues to erode.
Looking at the shorter term, EUR/GBP has turned sharply lower since the May 12 multi-month high of 0.8621. The pair currently trades just above 0.8400 and near a cluster of prior support between 0.8384 and 0.8365. The daily chart remains positive with a series of higher highs and higher lows from early March still in place
If EUR/GBP can keep support at 0.83665 in the short-term, then the pair may well push back and eventually look to post a new higher high on a longer term outlook.
U.S. stocks had another ugly day on Thursday, amid risk-off mood and capitulation on Wall Street. After moving between small gains and losses in morning trading, the tug of war resolved to the downside, with all three major equity averages registering their weakest close for the year.
When it was all said and done, the S&P 500 declined 0.13% to 3,930, recovering from a 1.8% drop that had the index flirting with bear market, a period of prolonged declines in which an asset has fallen 20% or more from a recent high. Although a bear market does not in itself predict future returns, it can certainly increase investor pessimism and further reduce risk appetite, especially if the condition afflicts the world’s most important benchmark.
As for the catalysts, the drivers remain the same: stagflation and Fed jitters. Traders are increasingly convinced that the inflationary environment will require a more forceful policy response, which may lead to a recession, a dreadful scenario for the U.S. consumer and, of course, for corporate earnings. Whether the excessive pessimism is justified is irrelevant, what matters now is that traders are convinced that trouble is coming and are acting on that belief by buying downside protection and shying away from stocks.
With no relevant U.S. economic data or key Fedspeak for the next couple of days, sentiment will remain fragile, preventing any meaningful rebound in risk-assets.
For the 20% decline condition to be met, the index will need to break below the 3,855 area. By looking at the daily chart below, we can see why this is problematic: just around those levels, we have a key technical support corresponding to the March 25, 2020 swing low. If this floor were to be taken out, sellers could accelerate the move lower, with the next notable barrier at 3,800, followed by 3,725.
On the flip side, if dip buyers return to take advantage of the oversold condition and spark a bullish reversal, the first resistance to take into consideration comes in at 3,980, and 4,060 thereafter.
The Nasdaq led Wall Street higher as it put aside Fed Chair Jerome Powell pumping up the hawkish mantra and focused on positive data to finish the cash session with solid gains.
The Nasdaq ended with a 2.76% rally, although futures are pointing to a soft start to the upcoming day session. There are a series of descending trend lines above and below the price which may suggest a bear market is unfolding. The snap move below 12700 went through a previous low and one of the descending trend lines. That might now be an area of resistance just above 12700 as there is a topside descending trend line near there. Support could be at the recent low of 11689 or the at the low trend line, currently at 11200.
Trade accordingly with your risk
AUD/USD largely tracks the weakness in commodity bloc currencies as it trades to a fresh yearly low (0.6945), and swings in investor confidence may influence the exchange rate as the US stock market pushes to fresh yearly lows.
As a result, the recent series of lower highs and lows may push AUD/USD towards the July 2020 low (0.6877) amid the deterioration in risk appetite, and it remains to be seen if fresh data prints coming out of the US economy will influence the exchange rate as the Consumer Price Index (CPI) is anticipated to downtick for the first time since August.
AUD/USD may face a further decline over the coming days as it clears the January low (0.6968), and the exchange rate may attempt to test the July 2020 low (0.6877) as it snaps the opening range for May.
AUD/USD clears the January low (0.6968) as it extends the series of lower highs and lows from last week, with a break/close below the 0.6940area raising the scope for a test of the July 2020 low (0.6877) as it snaps the opening range for May.
Next area of interest comes in around 0.6770 to 0.6820 , with a break of the June 2020 low (0.6648) bringing the 0.6510 to 0.6520 area on the radar.
However, lack of momentum to break/close below the 0.6940area may generate a rebound in AUD/USD as the recent decline in the exchange rate fails to push the Relative Strength Index (RSI) into oversold territory, with a move above the 0.7070 to 0.7090 region bringing around 0.7130 to 0.7180 back on the radar.
Trade accordingly with your risk