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11 July 2022
- The euro has been weakening against the U.S. dollar since the end of May, and according to many investors and analysts, we can expect the EURUSD pair to reach parity as early as this month. The dollar is strengthening thanks to the Fed’s actions and the safe-haven status, while several factors are affecting the price of the euro to drop sharply.
- The war in Ukraine means Russia is threatening to cut off gas supplies to Europe due to sanctions, which could cause a recession. The fact that Germany has recorded a trade deficit of 1 billion euros for the first time since 1991 only proves that the economic situation in the EU is not good.
- The economic slowdown is not making it easier for the ECB to raise interest rates, and its representatives are still not united on this issue. Because of the relatively strong US labour market data, a slowdown in the pace of rate rises in the US cannot be expected, leading to a further widening of the interest rate differential between the EU and the US. Will we see parity this week? On Friday morning, the EURUSD pair was already trading below the 1.0100 level, so we are not too far away.
Indices
US stocks rose again last week. Hopes that the Fed will be able to fight inflation without pushing the economy into recession brought optimism to the markets, and the S&P 500 Index once again came out of the bearish territory. In particular, the communication services, consumer discretionary, and information technology sectors did well. The volatile energy sector stocks had a negative day on Tuesday after WTI Crude Oil fell below the $100 per barrel mark but recovered most losses by the end of the week.
Stocks in Europe also made gains. However, the growth was limited by the news that China is reintroducing restrictive measures to combat Covid-19 and reports that an energy shortage could lead to a recession in Europe. Pan-European STOXX Europe 600 ended the week 2.45% higher, Germany’s DAX 40 rose by 1.58%, France’s CAC 40 gained 1.72%, and the UK’s FTSE 100 tacked on 0.38%.
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US30 +0.77% |
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US100 +4.66% |
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US500 +1.94% |
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GER40 +1.58% |
Commodities
On the commodities market, the development was relatively mixed, with somewhat contradictory factors influencing individual commodities in addition to the strong U.S. dollar. For example, natural gas and coal prices rose on fears that exports from Russia to Europe would fall significantly in the near term. On the other hand, oil prices fell due to concerns about the slowing economic growth and the falling demand for black gold. Moreover, analysts expect oil to fall further, at least below US$90 per barrel.
The most significant impact, however, is the strong price of Gold to US Dollar which has reached a ten-month low of US$1,730 per ounce. In addition, assumptions that the Fed will raise interest rates by 0.75% at its next meetings, and could possibly move to a 100 basis point increase by the end of the year, will certainly not help Gold in the near term.
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Gold -3.78% |
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Silver -2.87% |
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BRENT -4.13% |
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NATGAS +5.31% |
Forex
The U.S. dollar keeps rising and continues to hit the 20-year highs. This appreciation is reflected in all major currencies, but the EURUSD pair has come close to approaching parity again for the first time in a long time last week.
The weak yen is clearly not a problem for the Bank of Japan, which continues its easy monetary policy even though the Japanese yen is at its 24-year low against the U.S. dollar. Prices in Japan may be rising, but the rate of increase is minimal compared to inflation elsewhere in the world, so this approach is excusable for now.
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EUR/USD -2.30% |
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USD/JPY +0.59% |
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GBP/USD -0.53% |
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USD/CAD +0.50% |
Macro
372,000 payrolls in June, well above consensus expectations of around 270,000. Wednesday’s Fed minutes showed that the policymakers acknowledged that further tightening of financial conditions would negatively affect the economic activity more than anticipated. Moderating economic data leads to speculation by some investors that the Fed will not be as aggressive at future meetings, but a significant reduction in rate hikes is not expected.
S&P Global and ISM’s U.S. services PMI ended slightly above the estimates but suggested a continued growth slowdown, and ISM’s measure hit its lowest level since June 2020.
The minutes of the ECB June meeting showed us that most central bankers want to raise rates by 0.25% at the July meeting and are willing to go ahead with a 0.5% hike in September. So if inflation continues to rise, there is still room for faster rate hikes.
Producer prices in the euro area rose by36.3% year-on-year in May and by 16% excluding energy. Retail sales then rose by 0.2% in May, less than expected.
Germany posted a trade deficit of €1 billion in May for the first time since 1991 after exports unexpectedly fell due to supply constraints. On the other hand, imports rose sharply due to higher prices of food, energy, and materials.
What to watch out for this week
- This week’s main driver will be June inflation, which most countries will report on Wednesday. In the US, year-on-year inflation is expected to rise from 8.6% to 8.8% and the month-on-month inflation to 1.1%, from 1% in May. Gas prices and energy costs are expected to be the main reasons for the rise, while the producer price index is also expected to be high. Record inflation is also expected in France, Germany and Spain.
- Friday’s US retail sales data will show how consumers are reacting to rising prices and the overall economic situation. After a surprising decline in May, a 0.8% month-on-month increase is expected for June.
- The geopolitical situation is also having a significant impact on the economic developments. The resignation of the Sri Lankan President shows that the poor economic performance combined with Covid-19 and high inflation can negatively affect emerging markets. In addition, the resignation of British Prime Minister Boris Johnson is causing uncertainty in the United Kingdom, and the rest of Europe is watching the never-ending conflict between Russia and Ukraine with tension.
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