Daily Market Analysis - TUESDAY JUNE 27, 2023

Market reactions are varied and uncertain due to the ongoing uncertainties in Russia and concerns about inflation.

Key News:

Eurozone - ECB President Lagarde Speaks
USA - Building Permits
USA - Core Durable Goods Orders (MoM) (May)
USA - CB Consumer Confidence (Jun)
USA - New Home Sales (May)

On Monday, the US stock market experienced a decline as investors adopted a cautious approach towards riskier assets due to uncertainties surrounding the outcome of the disrupted mutiny in Russia over the weekend.

The mutiny, led by Russian mercenaries, raised concerns about the future of President Vladimir Putin and the stability of the country. While Putin expressed gratitude on Monday towards the mercenaries and commanders who chose to stand down, thus preventing bloodshed, the US State Department highlighted that the situation in Russia remained fluid and unpredictable.

The impact of these geopolitical events was evident in the performance of the primary indices, particularly with regards to growth stocks. Companies such as Meta Platforms Inc (NASDAQ: META), Alphabet Inc (NASDAQ: GOOGL), and Tesla Inc (NASDAQ: TSLA) experienced significant downward pressure, resulting in sharp declines in their stock prices.

Investors' caution stemmed from the potential ripple effects of the Russian mutiny on global political and economic stability. Uncertainties surrounding the future leadership and governance of Russia, as well as the potential for geopolitical tensions, contributed to the market's apprehensive sentiment. As a result, investors opted for a more risk-averse approach, leading to the decline in growth stocks.

The situation in Russia will continue to be closely monitored by market participants, as any further developments or shifts in geopolitical dynamics could have implications for global markets. Investors will seek clarity and stability before reevaluating their risk appetite and investment strategies.

META stock daily chart

GOOG stock daily chart

TSLA stock daily chart

The foreign exchange market currently lacks clear signals favoring safe-haven currencies such as the US dollar, Japanese yen, or Swiss franc. This subdued response can be attributed to two key factors that are influencing market dynamics.

Firstly, there is a sense of uncertainty surrounding the future in the aftermath of the challenge to President Putin's authority in Russia. The mutiny led by Russian mercenaries has raised questions about political stability and the potential implications for global markets. As a result, investors are exercising caution and refraining from taking strong positions in safe-haven currencies until there is greater clarity on the situation.

Secondly, the financial markets have already witnessed a year of a stronger dollar and higher energy prices due to the ongoing Russian invasion of Ukraine. This prolonged geopolitical tension has had an impact on currency markets, and investors may be hesitant to further increase their exposure to safe-haven currencies, considering the recent market trends.

Instead, the primary focus of the market currently lies on inflation. Central bankers and governments are facing criticism for maintaining loose monetary and fiscal policies for an extended period. The upcoming annual ECB symposium in Sintra is expected to delve into this topic, particularly focusing on monetary policy. Many central bank governors from the G7 nations are anticipated to attend the event and deliver a potentially hawkish message, similar to Federal Reserve Chair Jerome Powell's recent testimony to Congress.

Market participants are eagerly awaiting insights and guidance from central bank officials regarding their stance on inflation and the potential tightening of monetary policy. This focus on inflation dynamics and monetary policy decisions is shaping the market sentiment and influencing currency flows.

USD/JPY daily chart

The anticipation of an approaching recession has led to expectations of inverted yield curves, as investors assess the economic landscape. Consequently, the US dollar is projected to maintain its strength against currencies that lack robust monetary defenses. This strength is particularly evident in the USD/JPY currency pair, which is expected to sustain its upward trend as investors seek the safety of the US dollar.

Another significant event on the US economic calendar this week is the release of core Personal Consumption Expenditures (PCE) inflation data for May, scheduled for Friday. Market participants will closely analyze this data as it carries crucial implications for monetary policy decisions. If the data reveals another high reading, especially around 0.4% month-on-month, it would indicate that inflationary pressures persist and may prompt the Federal Reserve to maintain its hawkish stance without signaling any plans for easing monetary policy.

Investors will closely monitor these developments as they shape market expectations and influence currency movements. The interplay between recession concerns, the strength of the US dollar, and inflation dynamics will be crucial factors driving investor sentiment and decision-making in the foreign exchange market.

US Dollar Currency Index

Based on forecasts, the US Dollar Index (DXY) is expected to fluctuate within the range of 102.00 and 103.00 over the course of this week. In addition, the USD/JPY currency pair is anticipated to approach the intervention zone around 145.

On the preceding Friday, Europe received discouraging data concerning the Purchasing Managers' Index (PMI), particularly in the services sector, which indicated a decline. This adds to the already sluggish state of the manufacturing sector. Consequently, the EUR/USD currency pair witnessed a decrease of approximately 50 pips following the release of this data.

The weakening PMI figures in the services sector contribute to concerns about the overall economic growth and recovery in Europe. As a result, market sentiment towards the euro has been dampened, leading to a downward pressure on the EUR/USD pair. The data release highlights the challenges faced by the Eurozone economy and underscores the importance of monitoring economic indicators to gauge the direction of currency pairs.

In the coming days, market participants will closely monitor economic data releases, central bank communications, and geopolitical developments, as these factors can significantly influence the movement of currency pairs, including the EUR/USD and the broader US Dollar Index.

EUR/USD daily chart

The prevailing narrative of central banks needing to maintain higher interest rates for an extended period may initially appear unfavorable for the pro-cyclical euro. However, the European Central Bank's (ECB) hawkish stance has provided some defense against the elevated interest rates in the United States, leading to the EUR/USD currency pair rising above 1.09. This stance also reinforces the expectation of two additional 25 basis points rate hikes in July and September, potentially offsetting the modest easing anticipated in 2024.

Given the current circumstances, it is likely that the EUR/USD will continue to trade within the range of 1.0850 to 1.1000, while the desired outcome of a smooth economic transition and a more accommodative policy from the Federal Reserve seems to be further delayed.

The challenges faced by central bankers in navigating the shift from a relatively straightforward decline in headline inflation driven by base effects to the more complex task of reducing core inflation are extensively discussed in the financial press. Many countries are experiencing core inflation rates around 5%, with the Bank of England contending with an even higher rate of 7%. In light of this situation, it is expected that Bank of England officials will not hesitate to price the Bank Rate above 6% early next year. Additionally, it is anticipated that the government will maintain its stance on mortgage interest relief, as compromising on this issue would only complicate the Bank of England's efforts.

These factors underscore the intricacies and challenges faced by central banks in addressing inflationary pressures and maintaining financial stability. Market participants will closely monitor central bank actions and policy decisions as they navigate these complex dynamics, which will have a significant impact on currency movements and trading strategies in the coming months.

EUR/GBP daily chart

The decline in Eurozone PMI data on Friday had a notable impact on the EUR/GBP currency pair, leading to a decrease in its value. Despite concerns about a potential hard landing for the UK economy, your initial analysis remains unchanged regarding the Bank of England's response.

Looking at the UK calendar for this week, the key focus will be on Bank of England speakers, particularly BoE Governor Andrew Bailey's event on Wednesday, which will draw significant attention. The remarks and insights provided by central bank officials can have a considerable influence on currency movements and market sentiment.

Based on current analysis, it is anticipated that the EUR/GBP pair may experience a retreat and potentially reach the level of 0.8520 during the week. This suggests a strengthening of the British pound against the euro. Additionally, for the GBP/USD currency pair, it is expected to find support below the 1.27 level, indicating a potential resilience of the pound against the US dollar.