The dollar was the strongest for most of the week and even exceeded parity with the euro. But the greenback pared its gains due to a late reversal in market sentiment and finished only second best. The Swiss franc was surprisingly the best performer, while the kiwi was the third. The yen was the weakest as the selloff continued on the central bank’s divergent path with other peers. The British Pound and Euro were the next weakest. The Canadian dollar just ended mixed even though the BoC surprised the markets with a mega rise of 100 basis points.
Investors still expect “just” a 75 basis point rate hike from the Fed this month, which has helped sentiment pick up. Given the prospect of a stronger rally in equities, the risk of a pullback in the greenback increases, except against the yen. Moreover, the euro could finally rebound after failing to decisively break through parity against the dollar. Gold is also approaching a key support level.
Markets price 71% chance of 75 basis point Fed hike in July
The BoC’s mega surprise 100 basis point hike last week sparked speculation that the Fed will follow in its July 27 decision. Markets once priced a 50/50 chance of this happening. But those speculations receded after comments from some Fed officials. The messages are that first, with a 75 basis point hike to 2.25% to 2.50%, the fed funds rate will already be in the neutral range. Second, a 100bps won’t make a huge difference over a 75bps at this point.
Additionally, the University of Michigan consumer survey showed that inflation expectations are falling. Five-year inflation expectations fell from 3.1% to 2.8%, reaching their lowest level in a year. One-year inflation expectations also fell from 5.3% to 5.2%, the lowest since February. It is hoped that the realized inflation data will start to reverse in the coming periods.
The Fed will have nearly two months of data between the July FOMC meeting and September, with a neutral interest rate, before assessing the next move. A 75 basis point hike is still reasonable. Either way, fed funds futures are pricing in a 71% chance of a 75 basis point rise, 29% of 100 basis points.
Relief bounce staged by DOW, more upside down?
US stocks saw a relief rebound towards the end of the week. It’s still early to conclude, but the DOW corrective decline from 36952.65 seems to have ended with three waves down to 29653.29. This happened after hitting the 30,000 handle and a 38.2% retracement from 18,213.65 to 36,952.65 at 29,794.35.
The firm break of the resistance at 31511.46 will confirm this bullish case. A sustained trade above the 55-day EMA (now at 31866.31) will open the way to the 55-week EMA (now at 33237.69). Such a development could start to happen in the third quarter, if incoming data really starts to show US inflation rising, while the economy remains strong, and as the Fed begins to ease its pace of tightening. .
The 10-year yield continues its sideways consolidation
The outlook for the 10-year yield is unchanged as it hovered around the 55-day EMA last week. Price moves from 3.483 are seen as a medium-term consolidation pattern, with a range between 2.709 and 3.483). It is probably in the second stage of the pattern and a further rise could be seen. But the upside should be capped at 3.483. It will take a little longer to complete the whole pattern.
The dollar index continued its uptrend, but looks a bit stretched
The uptrend in the Dollar Index continued last week, but it looks a bit stretched near the medium-term channel resistance. Considering that risk aversion sentiment could recede as Treasury yields hold steady, a pullback for the DXY is not unrealistic. The break of the support at 106.92 should signal the start of a correction towards the 55-day EMA (now at 104.27).
But of course, before the break of the 106.92 support, the recent uptrend is still in favor of continuation, towards the long-term channel resistance (now around 113).
Will the EUR/USD rebound after defending the parity? Gold to reverse?
To better assess the chances of a dollar decline, special attention is paid to both EUR/USD and gold. The EUR/USD is still defending the pair, despite falling to 0.9951. The bearish momentum has waned, as seen in the 4-hour MACD as it approached the 100% projection from 1.1184 to 1.0348 from 1.0773 to 0.9937. A break above 1.0121 minor resistance will signal a short-term bottom and bring in a stronger bounce towards 1.0348 support-turned-resistance.
Gold is now close to an important long-term support level at 1682.60, with a 38.2% retracement from 1046.27 to 2074.84 at 1681.92. Strong support should be seen at this level to complete the three wave consolidation pattern from 2074.84 (2020 high). Break of 1745.21 minor resistance will be the first sign of a reversal and bring a stronger bounce back to 1786.65/1878.92 resistance area. If the EUR/USD and gold succeed in rebounding, at least in the short term, the dollar should naturally begin to decline.
USD/JPY Weekly Outlook
USD/JPY uptrend resumed last week and hit 139.37 high. With a temporary top in place, the initial bias turned neutral this week for consolidations. But the lower pullback should be contained by the support at 134.73. On the upside, the breakout of 139.37 will resume a broader uptrend towards a 100% projection from 114.40 to 131.34 from 126.35 to 143.29.
Overall, the current rally is seen as part of the long-term uptrend from 75.56 (2011 low). The next target is a 100% projection from 75.56 (2011 low) to 125.85 (2015 high) from 98.97 to 149.26, which is close to 147.68 (2015 high). 1998). This will remain the preferred case as long as the support at 126.35 holds.
On the longer term, the uptrend from 75.56 (2011 low) to 125.85 (2015 high) has just resumed. The next target is a 100% projection from 75.56 (2011 low) to 125.85 (2015 high) from 98.97 to 149.26, which is close to 147.68 (2015 high). 1998).