The ECB 50bp rate hike brings volatility, but dollar strength fails to go away. Meanwhile, the reopening of the Nord Stream gas pipeline has sent energy markets lower across the board. ECB hike beats expectations, with euro weakness a risk to inflation “Volatility has been the name of the game this afternoon, with Cristine Lagarde announcing an unexpected 50 basis point rate hike in a bid to stabilise the euro and stave off inflation. Unfortunately for EURUSD bulls, today’s rate rise does still keep us on track to see US-eurozone interest rates diverge given the 83% expectations of a 75-basis point hike from the Fed next week. With Lagarde’s predecessor Mario Draghi hitting the news today, it is interesting to see how we are currently in a position where the ECB want to drive the euro higher rather than the bearish jawboning undertaken back in Draghi’s day. While a weak euro can help raise demand for eurozone businesses, the ECB will be well aware of its role in raising inflation as imports become increasingly expensive.”  Energy prices slump as fears of a Russia gas shutdown ease somewhat “Fears that Russia will keep the gas pumps shut after the 10-day Nord Stream maintenance period have been allayed, with European nations breathing a sigh of relief as the key energy source starts to flow once again. Today’s sharp declines throughout gasoline, crude, natural gas, and heating oil prices highlight recent speculation over the potential implications if Russia ratchets up the pressure on Europe by keeping the pipeline shut. Nonetheless, traders should keep a close eye out for indications over quite how much product is flowing through the pipelines, with some fearing Russian manipulation of supply given Gazprom’s recent force majeure letter to European buyers.”

The ECB 50bp rate hike brings volatility, but dollar strength fails to go away. Meanwhile, the reopening of the Nord Stream gas pipeline has sent energy markets lower across the board. ECB hike beats expectations, with euro weakness a risk to inflation “Volatility has been the name of the game this afternoon, with Cristine Lagarde announcing an unexpected 50 basis point rate hike in a bid to stabilise the euro and stave off inflation. Unfortunately for EURUSD bulls, today’s rate rise does still keep us on track to see US-eurozone interest rates diverge given the 83% expectations of a 75-basis point hike from the Fed next week. With Lagarde’s predecessor Mario Draghi hitting the news today, it is interesting to see how we are currently in a position where the ECB want to drive the euro higher rather than the bearish jawboning undertaken back in Draghi’s day. While a weak euro can help raise demand for eurozone businesses, the ECB will be well aware of its role in raising inflation as imports become increasingly expensive.”  Energy prices slump as fears of a Russia gas shutdown ease somewhat “Fears that Russia will keep the gas pumps shut after the 10-day Nord Stream maintenance period have been allayed, with European nations breathing a sigh of relief as the key energy source starts to flow once again. Today’s sharp declines throughout gasoline, crude, natural gas, and heating oil prices highlight recent speculation over the potential implications if Russia ratchets up the pressure on Europe by keeping the pipeline shut. Nonetheless, traders should keep a close eye out for indications over quite how much product is flowing through the pipelines, with some fearing Russian manipulation of supply given Gazprom’s recent force majeure letter to European buyers.”

EUR/USD witnessed some selling on Wednesday and snapped a three-day winning streak. The resumption of the Russian gas supply assisted the pair to regain traction on Thursday. The focus remains glued to the crucial ECB policy decision, due to be announced later today. The EUR/USD pair retreated from the 1.0275 area, or a two-week high touched earlier on Wednesday and ended the day in the red, snapping a three-day winning streak. The energy crisis grabbed the headlines after Russian President Vladimir Putin warned that supplies sent via the biggest pipeline to Europe could be reduced further and might even stop. The European Union told member states to cut gas usage by 15% until March as an emergency step, which, in turn, revived recession fears and weighed on the shared currency. This, along with a goodish US dollar rebound from its lowest level since July 6, exerted some downward pressure on the major. Global equity markets, so far, have struggled to carry the positive mood witnessed during the first half of the currency week amid the worsening global economic outlook. Adding to this, elevated US Treasury bond yields assisted the safe-haven USD to stall its recent sharp pullback from a two-decade high. That said, receding bets for a more aggressive rate hike by the Federal Reserve in July kept a lid on any further gains for the buck. Furthermore, the resumption of Russian gas supply via the Nord Stream 1 pipeline offered some support to the common currency amid expectations the European Central Bank might deliver a jumbo 50-bps rate hike. The combination of the aforementioned factors pushed the EUR/USD pair above the 1.0200 mark during the Asian session on Thursday. Traders, however, might refrain from positioning for big moves ahead of the crucial ECB policy decision. The central bank is to hike its benchmark interest rates for the first time since 2011. Markets, meanwhile, are split on whether the ECB policymakers would stick to the previously telegraphed 25 bps increase or raise rates by 50 bps to curb runaway inflation. The ECB is also expected to provide more details of its new anti-fragmentation tool aimed to shield highly indebted countries from surging borrowing rates. Apart from this, ECB President Christine Lagarde's comments at the post-meeting press conference could infuse some volatility around the euro. This, along with the USD price dynamics, would help determine the next leg of a directional move for the EUR/USD pair. Meanwhile, the US economic docket - featuring the release of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless  Claims - might do little to provide any impetus to the USD or influence spot prices. Technical outlook From a technical perspective, the recent corrective bounce from the lowest level since December 2002 stalled near a resistance marked by the top boundary of a short-term descending channel extending from late May. The mentioned barrier, around the 1.0275-1.0280 region, is closely followed by the 1.0300 round-figure mark, which if cleared will be seen as a fresh trigger for bulls. The pair might then accelerate the momentum and aim to reclaim the 1.0400 round figure. On the flip side, the 1.0150 area now seems to have emerged as immediate support and should help limit the immediate downside. Some follow-through selling will negate any near-term positive bias and make the pair vulnerable to breaking below the 1.0100 mark. The subsequent downfall will expose the parity market and the YTD low, around the 0.9950 region.

The Bank of Japan will likely maintain its monetary policy unchanged, but tapering is not far away. Japanese inflation surged above 2% YoY in May for a second consecutive month. USD/JPY remains near a multi-decade high and may extend its rally to 140.00. The Bank of Japan will announce its monetary policy decision on Thursday, July 21. The central bank is one of the last to maintain its ultra-loose monetary policy and seems to be in no rush to hike rates. Governor Haruhiko Kuroda warned of "very high uncertainty" over the economic outlook just last week and repeated the central bank is ready to ramp up stimulus as needed to underpin a fragile recovery. Still on-hold Kuroda, whose term ends next April, can afford an accommodative monetary policy as Japan has avoided rampant inflation. On the contrary, the country has spent decades struggling with deflation. According to the latest official figures, the annual inflation rate stood at 2.5% in May, its highest in over seven years and above the BOJ’s 2% target for a second consecutive month. Interest rates turned negative in 2016 and are expected to remain set at -0.10%. Japanese policymakers will also maintain the yield curve control, with an upper limit of 0.25% for the 10-year bond yield. The central bank will also publish its quarterly outlook report, with updates on inflation and growth forecasts. Wage growth remains subdued in the country, another reason for the BOJ to stick to its ultra-loose monetary policy stance, as sustained wage growth should help engender healthy inflation levels. Central banks’ imbalances Meanwhile, over 75 central banks from around the world have begun tightening their monetary policies. The US Federal Reserve is among the most aggressive, and speculation mounts that it could pull the trigger by 100 bps in their meeting next week after hiking 75 bps early in June. The Japanese yen has weakened against its American rival to its lowest level in over twenty years. So far, policymakers have refrained from doing more than the usual jawboning of “watching carefully” the exchange rate. USD/JPY possible reactions The USD/JPY pair has little chances of turning volatile, as the decision is already priced in. Policymakers may hint at tightening, although not in the near term. If the BOJ is set to change its monetary policy, it will likely be in the last quarter of the year. Nevertheless, a heads up could be enough to boost the local currency and push USD/JPY firmly down. In risk-averse scenarios, demand for the dollar has outpaced that of its Japanese rival. The possibility of a bullish run will likely be linked to the market sentiment rather than any potential central bank announcement. A strong static support level and a possible bearish target is the 137.00 figure, with a break below it hinting at a bearish continuation that could extend towards the 134.70/135.00 price zone in the next few days. On the other hand, if the pair manages to run past 139.38, a test of the 140.00 threshold is on the cards.

Stock markets are understandably choppy so far this week, as Europe posts small gains with Italy being the outlier up more than 1%. It's shaping up to be a critical week for Europe, with Brussels nervously waiting to see whether gas flows will resume following the completed maintenance of Nord Stream 1 on Thursday. That's the same day that the central bank will be weighing up a 25 or 50 basis point rate hike to combat soaring inflation in the bloc. There were already massive doubts about whether flows would resume, with many suggesting Russia could be prepared to ramp up the weaponisation of energy in response to Western sanctions. There's been plenty of occasions over the last year when Russia has claimed it hasn't politicised energy supplies with Europe, something many would speculate isn't the case and later this week, that could become extremely clear. In calling a force majeure dating back a month yesterday, Gazprom may have laid out how it plans to delay the resumption of flows which the European Commission expects to happen. Not that the company or the Kremlin would be hoping to fool anyone, it's simply a legal exercise but it could set the stage for the winter to come. And all of this makes the ECBs job all the more difficult. The bloc is probably already facing a recession but it can't continue to ignore inflation running at more than four times the target, even if the core is much lower at 3.7%. Despite previous guidance being a 25 basis point hike this month, it has been suggested this morning that the ECB is considering turbo-charging the lift-off and raising rates to zero percent. It really shouldn't be the big deal it's being perceived to be but that would represent a monumental shift by the central bank. Markets are pricing in a strong chance of a 50 basis point hike on Thursday; I just wonder whether the move will depend on any announcement from Gazprom in the lead-up to it. If the company declares supplies won't resume due to delays, the ECB may opt to hold back in anticipation of a further economic shock. No announcement in time for the meeting could yield the same result. The euro is performing quite well ahead of the ECB meeting, which given it breached parity against the dollar last week may come as a surprise. It may also be temporary, considering the pullback in the dollar as risk appetite has improved has contributed enormously to the pair moving away from parity. Weaker earnings weigh on sterling It's also doing well against the pound following the UK jobs report this morning. The data was largely in line with expectations, with the unemployment rate remaining at 3.8% and earnings excluding bonuses increasing slightly to 4.3%. Including bonuses, earnings rose only 6.2% after rising 6.8% in May, with forecasts pointing to a slight increase from there. Is this a sign of wage pressures abating, something the BoE would no doubt like to see as it desperately tries to cling on to its gradual approach to tightening? Whether it stops them from joining the 50 basis point club in a couple of weeks is another thing, with markets pricing in a 91% chance that they will ramp it up. Oil pares gains It's been another volatile couple of days for oil, with Biden's seemingly unsuccessful trip to the Middle East very much stealing the spotlight. Traders continue to weigh up tight supplies against recession prospects which have brought the price back to a suddenly more reasonable $100 a barrel. We could see it slip further if economic prospects continue to deteriorate, or if Saudi Arabia hints at turning on the taps faster. The former is possible, but the latter still looks unlikely. Traders will be keenly awaiting the next OPEC+ meeting in a couple of weeks. Is gold about to break $1,700? Gold is struggling today even as the dollar falls around two-thirds of one percent. The prospect of it breaking away from $1,700 to the upside is looking increasingly slim if it can't even do so when the dollar has fallen more than 2.5% from its highs over the last few sessions. Yields not sliding alongside that may be responsible. A break below $1,700 could be a big move but I still believe $1,680 may be bigger given how important a level of support it's been in the past. It will be interesting to see how the momentum holds up around those levels. Can Bitcoin gather momentum? Bitcoin is certainly enjoying this period of improved sentiment, a weaker dollar and a scarcity of new worrying headlines. It's still above $22,000 although yesterday's foray above here quickly saw the price pushed back. While the rebound has been impressive, I'm still...

Outlook: We see the outline of the emerging world economy in the form of tidbits. Russia declares force majeure on natural gas to oppress Europe. The announcement came overnight in the US time scale but failed to make the WSJ, NYT or even the FT. Bloomberg includes it but not as a headline. Reuters and the Guardian are the two that headline the story. The FT’s top headline is an unattributed claim that the ECB may consider a 50 bp hike on Thursday instead of the announced and expected 25 bp. “Some Baltic states” is as close as we get to the origin. Meanwhile, we still await the “anti-fragmentation” policy tool. Apple is cutting investment and hiring. Johnson and Johnson whines that profits are suffering from the too-strong dollar. (We used to consult to them on FX at Citi and like most big organizations, they can’t get out of their own way; funny, Japanese companies know how to hedge and you never hear that complaint from them.) The US Congress is considering a bill to fund domestic chip-making to get around foreign shortages–not exactly totally free capitalism. Look what happened to the waste and failure when we tried the same thing with government-funding solar. We get US housing starts and permits today, plus sales later this week. Yesterday the NAHB/Wells Fargo Housing Market Index for July crashed by 12 points for the second biggest drop in the data going back 35 years (after the April 2020 covid lockdown). The housing market is “stalled.” Moreover, it’s the 7th monthly drop and returns the index to where it was in May 2015. Notice that this, too, is not making the headlines. Buyer traffic fell off the cliff. Homebuilder stocks are way down, too. This has the makings of a crisis of some sort, although one accompanied by falling prices. The idea that Pres Biden visited Saudi Arabia to firm up the West’s relations and push China out is getting some traction. Bloomberg reports Pres Xi invited all the top European leaders to a summit in November and they have not yet responded. “The proposed meeting would mark a return to in-person diplomacy with the West for Xi, who hasn’t left his country since the outset of the pandemic in January 2020. Relations soured after the EU sanctioned Chinese officials over accusations of human rights abuse in Xinjiang.” Separately, Russia is making deals with Iran and Iran already has a special relationship with China. So, China + Russia + Iran = new cold war. For the moment, we have a resurgence in risk appetite that coincides with a need among big FX players to dump some long dollar positions. This is a big, fat correction not connected to inflation expectations, central bank policies, rate forecasts, or growth or other hard data. It’s simple repositioning and highly speculative. Usually we try to avoid these pushbacks and stick to the primary trend, but this one promises to be a humdinger. How long can it last? Until something comes along to trash the US stock market, maybe. The current pullback in equities seems incomplete to many (and in comparison with historical precedent). Or there is some other Shock. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!