Markets Confident Despite Relative Hawkishness

The highlights of data this week were American inflation and meetings of the Fed and ECB, with the latter two mostly in line with expectations while non-core inflation in the USA declined more than expected to 4%. Euro-dollar made strong gains yesterday while gold also recovered and cable continued its upward movement. This article summarises the possible ongoing effects of the week’s major releases and looks at the charts of gold and euro-dollar.

The ECB hiked its main rates yesterday, taking the deposit facility rate to a 22-year high of 3.5% as expected. The pressure on the ECB to continue tightening remains significant. The situation is less critical now in the USA but the eurozone’s non-core inflation remains above 6%:

Meanwhile the ECB’s forecasts for inflation in the EU were raised and expectations for growth reduced into the end of next year. On the whole, markets seem to have discounted the technical recession in the eurozone so far, which makes sense given that the scale is trivial at 0.1% quarterly decline and considering the ECB is very likely to hike again at its next meeting on 27 July. For the time being, the majority of participants expect a pause this summer with no change in September or October.

Some intrigue came yesterday afternoon from American initial jobless claims which were significantly higher than anticipated and came with a revision upward for last week’s figure, both 262,000:

Monthly export prices were also much worse than expected, down nearly 2% against the expectation for no change. While one mustn’t read too much into these relatively less important releases, it seems from the context of Wednesday’s press conference that the Fed remains strongly committed to ‘hike until stuff breaks’ to try to maintain the downward momentum for the rate of inflation. Stock markets don’t seem to care yet: the S&P 500 reached a two-month high above 4,400 last night.

Gold, Daily

Gold was more volatile yesterday with the ECB’s statement and press conference plus initial jobless claims within the same hour, but for now it seems that the break below $1,940 has been rejected. If there’s follow-through during today’s American session, it’d be possible to see the price test the near-term resistance around $1,980 over the next few days of trading, which is the area of early June’s highs and the 50 SMA from Bollinger Bands.

Beyond that, $2,000 is the next critical resistance. Participants might seek more clarity from Jerome Powell’s comments on Wednesday before committing to a significant position, though.

Euro-dollar, Daily

Euro-dollar made an unusually strong gain yesterday after Christine Lagarde stressed that the ECB isn’t thinking about pausing rate hikes yet and that inflation in the eurozone remains too high. Technically the price looks strong, being above all three of the moving averages, but volume doesn’t support the big gains this week and there’s a clear overbought signal from the slow stochastic.

That might suggest a retracement to the value area between the 50 and 100 SMAs. With no very major data due out next week for either the EU or the USA, technical action might dominate unless sentiment on future monetary policy shifts notably.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.