Euro volatility will intensify before the European Central Bank? :: InvestMacro

Everyone was talking about the euro after the currency hit its lowest level in nearly two decades, staggering parity amid the widening policy divergence between the Fed and the European Central Bank.

Price action around the 1.000 psychological level looked like a fierce tug of war between bulls and bears with no clear winner in sight. In fact, there were various fundamental forces at play – putting the merchants on an emotional roller coaster ride all week long!

The past few days have certainly been wild for EURUSD but that could intensify in the new trading week thanks to major economic reports and risk events. There may be more volatility on the Euro cards but before we cover what to expect from the currency, here are the economic data/events scheduled for the coming week:

Monday 18 July

  • CAD: Housing starts in Canada
  • NZD: New Zealand CPI
  • The US dollar: a cross-border US investment
  • GBP: Bank of England Monetary Policy Committee Member Michael Saunders speaks

Tuesday 19 July

  • AUD: RBA Meeting Minutes
  • EUR: Eurozone CPI
  • Sterling: UK Unemployment Claims, Unemployment, Bank of England Andrew Bailey Speech
  • The US Dollar: The Beginnings of Housing in the US

Wednesday 20 July

  • CNH: Initial interest rates for Chinese loan
  • Pound Sterling: UK CPI, PPI
  • Euro: Consumer Confidence
  • US Dollar: US Existing Home Sales

Thursday July 21

  • Japanese Yen: Bank of Japan Interest Rate Decision
  • Euro: European Central Bank rate decision
  • US Dollar: US Initial Jobless Claims

Friday July 22

  • Japanese Yen: Japan CPI
  • EUR: Eurozone S&P PMI
  • GBP: Standard & Poor’s PMI in the UK
  • CAD: retail sales

Caution will likely remain the name of the game in the coming week as inflation and recession fears and ongoing geopolitical risks sap investor confidence. Given how sensitive the markets are and their reaction to major economic reports, this could lead to some action in the FX space with a strong dollar seen benefiting from safe haven flows. Over the weekend, the meeting of G20 finance ministers and central bank governors continues in Indonesia. It may also be wise to keep an eye on the final Eurozone CPI figures for July due on Tuesday.

Let’s start the chase…

All eyes will be on Thursday’s European Central Bank meeting. The central bank is widely expected to raise interest rates for the first time since 2011! Markets are pricing in a 25bp move which should keep Eurozone interest rates still in negative territory despite inflation hitting a new record high of 8.6% according to preliminary estimates. When considering how the euro slides below parity, it may invite more hawks to the negotiating table…

An anticipation of the unexpected from the central bank with a sudden 50 basis point rise may not hurt the markets by surprise.

Ultimately, if the central bank allows the euro to weaken further – that could increase inflationary pressures, but fighting through higher interest rates could penalize an economy already facing a potential recession.

Whatever happens during the ECB meeting, it could have a lasting effect on the Euro. Taking a quick look at the EURUSD currency pair, it’s all about the 1.0 psychological parity level. See this space.

The S&P 500 is still in the building

The S&P 500 continues to suffer from risk aversion and lack of risk appetite. As recession and inflation fears drive investors to rush to safety, this continues to weigh on riskier assets. Since the start of 2022, the index is down more than 20% with prices trading around 3,779. It’s clear that stock bulls need a lifeline and this could come in the form of US earnings. However, technical indicators are still bearish with continued weakness below 3810 which opens a way back towards 3700 and lower.

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