With central banks shifting towards accepting that monetary tightening is impossible without some economic damage, the market narrative has swung 180 degrees this week – and indeed, that wind direction change has taken place in real-time. Rather than sticky inflation, the market is now panicky about slumping growth. You can roll out various indicators like the weaker PMI and ISM prints, which point to a consumer-driven economic slowdown. Still, the big differentiator is Germany's energy problems. The markets now fear a significant deceleration in Germany against the ECB's intent on raising rates triggering thoughts of a global contagion risk emanating from Europe's industrial powerhouse diving headlong into the economic plunge tank. And with central banks willing to hike into the perfect financial storm, cracks in consumer demand will surely widen and cut deeper worldwide, which could exert significant disinflationary forces if the central banks act too aggressively for too long. In the meantime, central bankers are entirely willing to accept economic damage as the price for slower inflation. US inflation is back in line but at the cost of a scorched consumer demand policy. Powell and company left it too long to chase down inflation, and now growth is slowing at peak hawkishness. When the Fed chair uses terms like " pain " and repeats the phrase "the clock is ticking," he sends a very deliberate signal, basically telling us there is less of an open playing field for the Fed to sprint to the finish line. The Chair is well aware of the political and public fallout to come, so the frontloading of rate hikes makes sense both in terms of not allowing inflation expectations to de-anchor and when public and political pressure is minimal. And the hope is that by the November midterm elections, when the economy has chilled enough, it will be possible to pause or at least significantly slow further hikes to allow investors to enjoy a Santa Claus rally; otherwise, it could be a winter of discontent. In the meantime, there will be little breathing space for risk markets until rates price meaningful rate cuts representing how economies can bounce back from a short recession. Indeed, a southbound central bank pivot is probably the only catalyst runway to get us out of this mess. OIL PRICES Oil prices pressed down after US President Biden said he would ask the Gulf Alliance to increase output. WTI is down about $9 from Wednesday's high. The inter-week collapse in oil price reflects growing recessionary concerns and risk-aversion. The general sense is that oil has overheated amid mounting consumer recession risks that seem to be putting a cap on near-term prices. And with energy bulls having a good run this year, investors seem more inclined to take money off the table in the face of growing uncertainty as the energy crisis moves onto the global recession phase. As the adage goes, the best cure for high prices is high prices. FOREX The Uniper news is a confirmation of a fear. German and Italian governments are hastily reloading the fiscal bazookas to attenuate the worst for the average person. In that light, the fragmentation plan is now critical to calm sovereign debt fears – if underwhelming, the BTP spreads are vulnerable to another attack, and so is the EURO. The market seems to assume that ECB PEPP reinvestments will be used to buy periphery today – BTPs in particular. It does not make sense; then again, anything the ECB does tends to come with conditional question marks. I expect BTP spreads to widen once the market realizes the tool is an insurance policy that would only kick in at 250-300 bp for Italian spread. So, despite the EURCHF jumping above par at the 16.00 London cut-off, indicating rebalancing flows, the short EURCHF will cover the ongoing market pain. I feel safer pivoting to China  this week and long CNH on the China reopening vibe. Honestly, the best place is cash under the mattress right now; however, the Yuan could offer a safe harbour while the street tries to figure out the cleanest dirty shirt in the Forex laundry basket. But importantly, it is back to basics and tracking consumer data which is improving in China and weaker everywhere else. And to a large degree,  the next 5 % move in the US dollar could be a function of just how resilient the US consumer is, which will be critical to a not-so-hard landing in the US economy. 

A combination of factors dragged EUR/USD to a nearly two-week low on Wednesday. Softer German CPI print weighed the shared currency amid broad-based USD strength. Powell’s hawkish remarks and the risk-off impulse provided strong lift to the greenback. The EUR/USD pair extended the previous day's rejection slide from the 50-day SMA - levels just above the 1.0600 mark - and witnessed heavy selling for the second successive day on Wednesday. The downward trajectory dragged spot prices back below mid-1.0400s, or a nearly two-week low, and was sponsored by a combination of factors. The shared currency was undermined by softer German consumer inflation figures, which, along with a strong pickup in the US dollar demand, exerted downward pressure on the major. According to the preliminary estimate, inflation in the euro area's largest economy surprised to the downside and the Harmonised Index of Consumer Prices (HICP) declined to the 8.2% YoY rate in June. This marked a notable deceleration from the 8.7% in May and was also well below expectations for a reading of 8.8%. Adding to this, European Central Bank President Christine Lagarde, speaking at the central bank's annual forum, offered no fresh insight on the rate hike path, which further weighed on the common currency. In contrast, Fed Chair Jerome Powell reaffirmed bets for more aggressive rate hikes and said that the US economy is well-positioned to handle tighter policy. Powell added that the Fed remains focused on getting inflation under control and the market pricing is pretty close to the dot plot. Powell's hawkish remarks helped offset a downward revision of the US Q1 GDP, which showed that the economy contracted by 1.6% against the 1.5% fall estimates previously. This, in turn, provided a goodish intraday lift to the greenback. Apart from this, a fresh wave of the global risk-aversion trade further boosted demand for the safe-haven buck. The market sentiment remains fragile amid concerns that rapidly rising interest rates and tighter financial conditions could cause a global economic slowdown. Meanwhile, growing recession fears, along with the anti-risk flow, led to a steep decline in the US Treasury bond yields. This, in turn, capped gains for the USD and assisted the EUR/USD pair to gain some traction during the Asian session on Thursday. Market participants now look forward to second-tier Eurozone macro data for some impetus, though the USD price dynamics will continue to play a key role in influencing the EUR/USD pair. Later during the early North American session, traders will take cues from the US economic docket - featuring the Core PCE Price Index (Fed's preferred inflation gauge) and the usual Weekly Initial Jobless Claims. This, along with the US bond yields and the broader risk sentiment, will drive the USD demand and produce short-term opportunities. Technical outlook From a technical perspective, the overnight decline validated Tuesday's breakdown through a two-week-old ascending trend-line support and favours bearish traders. The negative outlook is reinforced by the fact that spot prices have now found acceptance below the 61.8% Fibonacci retracement level of the recent recovery from the YTD low. Hence, a subsequent fall below the 1.0400 mark, towards retesting the monthly/YTD swing low around the 1.0360-1.0350 region, remains a distinct possibility. Some follow-through selling would be seen as a fresh trigger for bears and pave the way for a further near-term depreciating move. On the flip side, attempted recovery might now confront stiff resistance near the 50% Fibo. level, just ahead of the 1.0500 psychological mark. This is closely followed by the 38.2% Fibo. level, around the 1.0520 region. Any subsequent move up would be seen as a selling opportunity and fizzle out rather quickly near the aforementioned ascending trend-line support breakpoint. The latter, currently around mid-1.0500s, coincides with the 23.6% Fibo. level and should now act as a key pivotal point for short-term traders.

Another disappointing day for stock markets with US indices ending the day flat after Europe posted decent losses. There was always going to be some nervousness heading into today, with Fed Chair Jerome Powell, ECB President Christine Lagarde and BoE Governor Andrew Bailey all appearing on a panel at the ECB Forum. Under normal circumstances there would be potential for that to put investors a bit on edge so you can imagine what today had the potential to do. Which probably explains the very conservative approach by the above. As is so often the case with events like these, there was a lot of attention in the build-up but the panel discussion itself was a bit of an anticlimax. Nothing we heard was new, there was no interesting fresh insight or hints at impending policy shifts that risked catching investors wrong footed. It was largely a rehash of past comments. So while it didn't send investors into panic mode, it didn't do much to reassure them either. Central banks are clearly concerned about inflation and the economy but ultimately, the former takes precendence. I'm sure there'll be plenty more surprises in the weeks ahead, perhaps starting tomorrow when we get inflation, income and spending figures. Oil reverses gains after inventory data The rally in oil looked set to extend to the fourth day, as supply concerns outweigh recession fears ahead of the OPEC+ meeting tomorrow. The OPEC meeting today ended without any decisions being made amid speculation around Saudi Arabia and UAE's spare capacity. I'm not sure it makes an enormous difference as neither were likely to save the day anyway or they would have already. And the group as a whole is failing miserably in its targets, running at 256% compliance and overall shortfall of more than half a billion barrels. I'm not sure what exactly we can hope for tomorrow that will make any difference. Although a formal acknowledgement that there's little more they can do could cause quite a stir. Crude prices did flip midway through the US session following the EIA inventory data, with WTI and Brent now off more than 2% on the day, having been 2% higher earlier. Will we see a gold breakout? Gold continues to thrill no one as it whipsaws around $1,830 within a narrow range. Traders may have eyed the ECB Forum today with the hope that a comment from one or more of the central bank heads injects some life into the yellow metal and as it turns out, they've been left disappointed. Which begs the question, how long do we have to wait now for a breakout in gold? It may not be an obvious source that proves to be the catalyst for such a move, of course, but there's still plenty ahead that could do it. There is an abundance of central bank speak and economic data left this week ​ - including inflation tomorrow - and with there being so much underlying anxiety in the market, anything could eventually set it off. Surviving Bitcoin has survived another day above $20,000 having traded briefly below it earlier on. It's getting very nervy in the crypto space and another significant break below here could bring fresh anxiety and more pain. It's still hard to create much of a bullish case for bitcoin beyond its admirable resilience but how long can that sustain it? The broader environment in financial markets certainly isn't helping.

Outlook: Not to be blasé, but crashing consumer sentiment in the US, UK and Europe should come as no surprise. Consumers are still digesting inflation at 8%+ and not as sure as the financial professionals that the central banks can tame inflation, having admitted supply-driven inflation is mostly immune to monetary policy. Equity markets choose to combine expected earnings shortfalls with consumer gloom to drive equity prices down, but gee, since when does consumer sentiment drive markets? We want deeds, not words, and so far indicators like retail sales point to the consumer not cowed much at all or retreating to the back of the cave. This is one reason why talk is silly of a flip-flopping Fed that will ease up by year-end as recession appears. El-Erian in the FT makes an eloquent case for how bad a return to stop-go policies would be. But throughout all the talk of the Fed chickening out we never see any evidence of a crack in the resolve to tame inflation. Bad forecasts, yes, Delayed admissions, yes. But now the Rubicon has been crossed, where are the signs of turning back? It’s like beating a horse already running as fast as he can. It’s superfluous. It’s unnecessary. It’s also mean-spirited. Example: Cleveland Fed chief Mester said the Fed is just beginning to raise rates, which can reach 3% to 3.5% this year and 4% plus next year even if that risks recession. The goal is to prevent a wage-price spiral that would arise if people expect inflation to be lasting. “Job one now is getting inflation under control.” The Fed’s messaging is consistent now. There’s no need to jab at it for past mistakes. As noted yesterday, the trend in commodity prices is down. The Daily Shot offers this chart showing most are in “bear territory.” That means, to these analysts, more than 20% below their 52-week high. Funny, nobody names this as a potential or probable reason for inflation to moderate–or for emerging markets to fall back on the ropes. As we head into a thin trading week due to the US July 4 holiday, everyone is puzzled by how it can be possible to hold two conflicting ideas in your head at the same time without going bonkers–central banks resolutely raising rates but not triggering recession–aka the soft or softish landing. Well, it’s in insoluble problem at this point in time. It’s like forming a forecast without the benefit of sampling data. Never before have we had this exact combination–a rise out of a pandemic followed closely by supply chain crises and trade-damaging war. Fortunately, as time goes on, we will get evidence as to how consumers cope, whether new capital spending improves, how much global trade recovers (a problem, according to Oxford Economics), and other measures of resilient or stagnant economies. In a nutshell, it’s too soon to say, and it’s foolish to draw trendlines on data like retail sales. We say it’s wise to delay forming a single scenario. It seems as though the new risk-on/risk-off sentiment is based on rising global growth/falling global growth, with outright inflation numbers secondary. And if inflation numbers are secondary, expected future rates and the resulting “real” return is secondary, too. This is a wild hypothesis but it does account for the mysterious movements in the AUD, if not fully the Swissie. The implication is that the RBA and SNB want growth at almost any cost, even the cost of a weak currency (temporarily). If they get their way, weakness will take care of itself. This is an old-timey way of looking at things but not necessarily wrong. In contrast, the Fed is targeting inflation alone and to hell with growth. This puts the dollar on the backfoot. It can take the lead again only if the real rate of return starts getting impressive, and the best way for that to happen is a genuine drop in inflation. Then it’s a battle between wanting that real return (dollar up) and seeking a happy surprise in the Other Dollars and Ems. 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!

EUR/USD - 1.0530 Despite euro's resumption of recent erratic rise from June's 1-month trough of 1.0360 to a 2-week high of 1.0614 Mon, yesterday's break of 1.0555 support to 1.0504 in New York on broad-based rebound in usd suggests a temporary top is made and stronger retracement towards 1.0445 is envisaged before prospect of recovery later. On the upside, only a daily close above 1.0555 would prolong choppy sideways swings and risk gain to 1.0590/00. Data to be released on Wednesday: U.K. BRC shop price index, Japan retail sales, consumer confidence, Australia retail sales, Swiss investor sentiment, EU business sentiment, economic sentiment, industrial sentiment, services sentiment, consumer confidence, U.S. mortgage application, GDP and PCE prices.

Despite encouraging headlines around China loosening its covid policies, US stocks faded aggressively from earlier strength after harrowing consumer confidence data poured ice water on the month-end relief rally. For context, that is in the region it was printing in the 2015/16 downturn. It is a tough market to navigate these days: yesterday's market was trading bad data equals good news; today, weak data signals all roads lead to recession.  And with consumer confidence hitting multi-year lows, dragged down by high gasoline and other inflation price pressures, walking in to see Brent Crude testing $114 is providing more gnarly inflationary proof is still in the pudding.  I expect the earnings downgrade dam to burst, but the market reaction will determine whether the cuts are enough.  Short-sellers were waiting for verification that the US consumer was faltering. The dire sentiment data suggests weaker consumer demand will intensify an earning recession that could trigger new lows. So, the extent to which the recent US and Eurozone equity market upswing marks the cycle low or is a bear market rally depends primarily on downside earnings risks from the economy and the latest data should provide a very sobering thought  With the macro backdrop leaning inflationary, led by soaring oil prices, the headwinds for equities markets, namely central bank tightening, will remain in place. You have this whirligig action across markets underpinned by energy price moves. Oil prices leaked lower, so inflation expectations declined, and Fed tightening forecasts fell, which has helped equities bounce early in the week. Now that oil creeps back higher, it is not difficult to see how things can quickly go into reverse again.   Oil There has been a lot to digest lately, and it does not seem headlines are about to stop anytime soon with Iran nuclear talks reportedly resuming, the G7 meeting, and cautious comments around UAE and Saudi's spare capacity. So, the question is when will EU/US supply talks aggressively pivot to Iran or Venezuela.  Oil prices are on a gusher again, helped by reports that excess spare capacity from Saudi and UAE is not as high as previously thought; meanwhile, production disruptions in Libya and Ecuador amid political unrest could further threaten the global oil supply. And further fuelling the rally is the Chinese government easing some quarantine rules, which could see more planes filling the tracking radars across ASEAN flight paths. Indeed, this is the first time China has done so since the pandemic's start, which could trigger a broader walk down of restriction if the covid curve remains tame.   Price Cap G-7’s underlying aim is to prevent Russia from profiting from high energy prices. But there are also domestic political pressures to deal with – all countries are facing the same backlash from their electorate on the energy cost. However, discussing price caps and understanding how it could be done are different things. Although it’s not difficult to limit the Russian oil supply, putting a price cap in is another matter especially given that limiting or ending the Russian supply in and of itself drives the oil price up.inflatio