Three Possible Opportunities in the Third Quarter :: InvestMacro

by ForexTime

For the third quarter, investors and traders around the world are set to continue to worry about similar topics that have rocked the markets so far in 2022:

  • inflation
  • high rate (or not) by major central banks
  • Recession risks How does it affect Wall Street profits?

As we count down the hours leading up to the third quarter (and marvel again at how fast time flies), let’s filter these three market themes down to how they affect these key instruments/assets:

  1. EURUSD is falling and approaching parity?

EURUSD has been finding it difficult to stay above its 50-day simple moving average – a major resistance level for the world’s most traded currency pairs over the past 12 months.

This downtrend in the EURUSD currency pair reflects two main factors:

  • Overview of the US economy in relation to the Eurozone. After all, the Russian-Ukrainian war is still raging on the eastern borders of the latter.
  • The Fed’s plans for further rate hikes appear to be less risky than those of the European Central Bank.
    The European Central Bank has just started, and it is scheduled to raise interest rates twice in the third quarter. But markets fear upcoming ECB hikes could inadvertently trigger a sovereign debt crisis.Retail risk.

In general, if the economic outlook for the EU becomes darker than the US, which means that the ECB cannot raise the benchmark interest rate as quickly as the Federal Reserve, this could put more downward pressure on the EURUSD.

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If the above assumption holds, EURUSD may be dragged and held below that psychologically important 1.04 level in Q3.

At the time of writing, markets are forecasting a 72.5% probability that EURUSD will reach parity sometime in the next three months!

Although it is clear, the same odds are placed on the EURUSD recovery to 1.09.

Much will depend on how different the outlook is between the US economy/Federal Reserve versus the Eurozone/ECB economy.

Key events to watch EURUSD:

  • Economic data from the European Union and the United States (particularly the monthly CPI)
  • Market outlook for the July and September policy meetings of the European Central Bank and Federal Reserve
  • August 25-27: Jackson Hole Fed Economic Symposium – A major event that often sees the Fed provide a big signal to the markets about its policy outlook.

2) USDJPY currency pair to climb above 140?

The USDJPY currency pair reached its highest levels since 1998, easily surpassing previous highs set in 2015 and also in 2002.

USDJPY’s rally reflects the widening policy gap between the US Federal Reserve and the Bank of Japan.

  • In June, the Federal Reserve raised its benchmark rates by 75 basis points – its largest increase since 1994 – and now at 1.75%.
  • Meanwhile, the Bank of Japan appears content to keep the benchmark interest rate in negative territory at -0.1%.

This divergence has also seen US 10-year Treasury yields rise above 3%, while the Japanese equivalent is still capped at 0.25% by the Bank of Japan.

In other words, global investors will be more attracted to the higher yields offered in the US, which leads to more demand for the US dollar…as opposed to the Japanese yields (less demand for the Japanese yen).

This divergence is set to continue into the third quarter as well, which should translate into more bullishness for the USDJPY.

Markets anticipate a 74.7% chance of USDJPY reaching 144.93 over the coming months.

However, there is also a possibility of a similar magnitude that USDJPY will fall again to 125,847, which was also the peak of June 2015.

A drop in USDJPY will require Japanese policy makers to halt the yen’s declines, either by intervening in the FX markets or by the Bank of Japan’s shock shift to a hawkish stance (a sign that it will start raising interest rates/lift yield curve control. Objectives).

Key events to watch for USDJPY:

  • What officials from the US Federal Reserve said against the Bank of Japan
  • Japanese government bond yields versus US Treasuries

Read more: Why is the yen so weak? (April 2022 article)

3) Standard & Poor’s 500 to go deeper into the bear market, and reach 3500?

At the time of writing, the S&P 500 Index – the benchmark used to measure the overall performance of the US stock market – is set to re-enter the alcohol market.

Note: A bear market means that the price of the asset is down 20% from its recent peak.

Although fears of a US recession have dominated market talk lately, the S&P 500’s dip so far this year has not fully reflected such risks.

Stock speculators (those who hope that the price of an asset will rise) hope that American consumers will be resilient enough to continue generating revenue and profits for these publicly listed companies.

This is where the upcoming earnings season in the US will play a pivotal role in the performance of the S&P 500.

If Wall Street continues to be optimistic about its earnings outlook, and markets can believe in such optimism, it could bolster support for the S&P 500.

However, the most likely scenario seems to point to the S&P 500 near 3,500 or lower in the second half of 2022, as markets brace for profit cuts and more warnings about a US recession, especially if the Fed is forced to launch more of the bigger- The usual rises in interest rates in its battle against persistent hyperinflation.

Key events to watch for the S&P 500 Index:

  • July 14 onwards: US earnings season
  • US economic data
  • What Board and Federal Reserve officials on Wall Street say about the chances of a recession in the United States

And as always, you can stay updated on how the markets are performing on a daily basis throughout the third quarter and beyond by reading our site daily market analysis.

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