USD: Balance of risks tilted to upside
Global risk sentiment continues to be challenged by adverse developments across the world. The US banking earning season has kicked off on the wrong foot, China reported the weakest growth numbers (0.4% YoY, vs 1.2% expected) in more than two years, new Covid variants are boosting infection and hospitalisation numbers globally, Italy is facing a new political crisis and markets keep flirting with the idea of a 100bp Fed hike in July.
With fears of global recession adding pessimism to the overall picture, we struggle to see a material recovery in sentiment for now. European equity futures are showing signs of a rebound this morning, but that seems largely related to hopes that Mario Draghi may stay as Italian Prime Minister. US stocks could continue to feel the strains of multiplying downside risks today.
Equity instability may continue to put a limit to any dollar correction for now, and further upside risks to the greenback may come from a further repricing higher in Fed’s rate expectations. Our view is that there isn’t enough reasoning to back a 100bp move in July, but the Fed’s Chris Waller (a known hawk) suggested that this is not off the table, and we cannot exclude that markets may continue to speculate on such prospect. We’ll hear from another big FOMC hawk, James Bullard, today, as well as from the more moderate Raphael Bostic and normally more dovish Mary Daly.
GBP: TV debate for Tory candidates
It will be interesting to see the first TV debate between the remaining five candidates in the Tory leadership contest today, mainly to start gauging what positions on policy and Brexit can be associated with each contender. Rishi Sunak has remained the front runner, while the potentially most pro-Brexit of the leading group, Liz Truss, looks set to receive a vote boost from the endorsement of Suella Braverman, who dropped out of the race yesterday. This could put Truss as the second-most voted candidate, ahead of Penny Mordaunt, in the next ballot scheduled for early next week.
Away from political developments, the UK data calendar is very quiet and there are no scheduled Bank of England speakers today. Cable looks at risk of moving to 1.1600-1.1700 in the coming days on the back of USD strength, while EUR/GBP may keep hovering in the 0.8400-0.8500 area for longer – unless EUR-specific woes trigger another break lower.
EUR: Italian political crisis in focus
EUR/USD continued to hover around parity, and to show elevated intra-day volatility. This looks unlikely to change for now unless we see the pair rebound decisively above 1.0150 (safely away from parity) or drop to the 0.9800-0.9900 area. We think the latter scenario is more likely given the still grim macro picture (yesterday’s revised EU Commission estimates were a case in point) and lingering uncertainty around the Russia-EU spat on gas supply.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.