JFD Team | Jul 13, 2021 03:22AM ET
Global equities traded higher yesterday and today in Asia, ahead of the US CPIs for June, which may well affect expectations over the Fed’s future course of action. Accelerating underlying inflation may bring hike bets forward, but market participants may get a clearer view on the Fed’s plans by Fed Chief Powell himself, who testifies before Congress on Wednesday and Thursday. Tonight, the spotlight is likely to fall on the RBNZ monetary policy decision. Given that, last week, a closely watched business confidence index jumped to its highest in four years, we see the case for a relatively optimistic language.h2 Will Rising US Inflation Increase Bets Over An Earlier Fed Tightening?/h2
The US dollar traded mostly lower on Monday and during the Asian session Tuesday. It gained only against JPY, while it lost the most ground versus AUD, NZD, and CAD in that order.
Today, market participants may lock their gaze on the US CPIs for June as they try to estimate when Fed officials are likely to push the rate-hike button. The headline rate is forecast to have ticked down to +4.9% yoy from +5.0%, while the core one is anticipated to have inched up to +4.0% yoy from +3.8%.
At the same time, equities are likely to correct lower, but we believe that the main focus for equity investors is likely to be second-quarter earnings, with big banks reporting this week. Today, we will get results from JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), and Bank of America (NYSE:BAC).
Expectations are for a growth of 65.8% for companies in the S&P 500, up from a previous forecast of 54% at the start of the period. Solid earnings are likely to encourage more equity buying, and thus, we don’t expect a major pullback in stock indices in case data show that underlying inflation continued to accelerate in the US.
We believe that expectations around the Fed’s future course of action may be reflected more in the FX sphere. Even if so, the market’s response may still be relatively cautious as on Wednesday and Thursday, Fed Chief Jerome Powell will testify before Congress, and thus, investors and traders may get clearer hints with regards to the Fed’s plans directly from him.
h2 EURO STOXX 50 Technical Outlook/h2The Euro STOXX 50 cash index traded higher yesterday, breaking above the downside resistance line drawn from the high of June 17. What’s more, the rally took the index above last Wednesday’s high of 4087, thereby confirming a forthcoming higher high. In our view, yesterday’s jump has turned the technical picture back to positive, which means that further advances are likely.
Investors may decide to push the index higher, with the first obstacle on their way north perhaps being the 4132 zone, which provided decent resistance between June 22 and 25. If that area is not able to halt the advance this time around, market participants could target the all-time high of the index, at 4168.10, hit on June 17. A break higher would take the price into uncharted territory, and thus, we will mark as our next resistance the round-figure territory of 4200.
On the downside, we would like to see a retreat back below 4037 before we abandon the bullish case and star examining whether another round of selling could be possible. This would confirm the index’s return below the downside line drawn from the high of June 17, and may initially allow declines towards the 3962 support zone, defined by the low of July 8. Another break, below 3962, would confirm a forthcoming lower low and perhaps target the low of May 4, at around 3915.
Tonight, during the Asian morning Wednesday, the spotlight is likely fall on the RBNZ, which decides on monetary policy. Although no policy action is expected, the tone of the accompanying statement may play a major role in shaping expectations over the Bank’s policy plans. Last week, market participants brought forth their bets over when this Bank will push the hike button, with 60% of New Zealand’s financial-sector firms expecting interest rates to rise over the coming year. This happened after a closely watched business confidence index jumped to its highest in four years.
NZD/USD traded higher yesterday, but hit resistance near 0.7010 during the Asian session today, and it pulled back somewhat. Overall, since May 27, most of the price action has stayed below a downside resistance line, as well as below all three of our moving averages on the 4-hour chart. In our view, this paints a somewhat negative picture, and thus, we would see decent chances for the pair to drift lower.
However, in order to get confident on that front, we would like to see a clear dip below 0.6923, a hurdle that stopped the pair from moving lower on June 18 and July 9. Such a move would confirm a forthcoming lower low and perhaps encourage the bears to drive the battle towards the 0.6878 area, which provided support back on Nov. 17, 18, and 19. If they are not willing to stop there this time around, the next area to consider may be the low of Nov. 13, at 0.6810.
On the upside, a recovery above 0.7010 will also take the rate above the aforementioned downside line and may initially target the high of July 7, at 0.7062. A break above that barrier may extend the advance towards the 0.7105 zone, defined as a resistance by the high of the day before, but the move that would turn the picture to a more positive one is a break above that level. This will confirm a forthcoming higher high on the daily chart and could initially allow a test near the 0.7155 hurdle, which stopped the rate from moving higher between June 14 and 16.
During the early EU session, we already got Germany’s final CPIs for June, which just confirmed their preliminary estimates. Later in the day, after the US CPIs, the API report on crude oil inventories is coming out, but as it is always the case, no forecast is available.
As for the speakers, we do have one on today’s agenda and this is Atlanta Fed President Raphael Bostic.
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