The Week Ahead 26th June – 30th June: Stress test for the Federal Reserve and release of CPI

Currency Pair Performance

5-day performance as of June 22, 2023. 11:30 GMT.

Let's check 10 Big Stories of Last Week in case you missed it...

Fed Chair Powell testified before Congress. Powells bi-annual testimony before Congress saw the Fed Chair warn that interest rates could be raised higher for longer to tame inflation.

UK inflation remained at 8.7%. UK inflation defied expectations and remained stubbornly high at 8.7% YoY in May, in line with April. Core inflation increased to 7.1%, its highest level since 1992.

BoE hiked rates. The BoE hiked interest rates by 50 basis points to 5%, a larger hike than the 25 bps expected, with more rate hikes expected. The market forecasts a peak rate of 6%.

USD/CAD fell to a 9-month low. The loonie rallied after stronger-than-expected Canada retail sales fueled bets that the BoC may need to continue hiking rates.

Airbus record order. The aircraft manufacturer announced a record 500 plane order from IndiGo at the Paris Airshow, indicating that demand was picking up post-pandemic.

Bitcoin rallies 15%. The cryptocurrency rises to a monthly high, boosted by news that Blackrock and other institutional names are getting involved in crypto.

PBoC cut rates further. As expected, the Chinese central bank cut the primary loan rate by 10 basis points. This comes after it cut short & medium rates last week amid concerns over the recovery.

EUR/SEK rises to a record high. A combination of expectations that the Swedish central bank was close to ending its rate hiking cycle and the souring market mood hit the Swedish Krona.

Tesla tumbled 5%. A broker downgrade from Barclays, saying that it was time to book profits after its impressive run higher, dragged on the share price.

Norges Bank hiked by 50 bps. The Norwegian central bank opted for a jumbo hike to 3.75%, a 15 year high after higher than expected growth in consumer prices.

Chart of the Week

After UK inflation surprised the market, holding steady at 8.7%, and amid strong wage growth, the market is pricing in a peak rate of 6%.

Economists broadly believe that this is too high. But according to Bloomberg analyst Dan Hanson, if tightening has taught us anything, its not to underestimate the persistence of inflation.

The chart shows how a 6% interest rate would be expected to produce a contraction in GDP, but a less severe recession than the pandemic or 2009 global financial crisis.

There is a growing concern that the BoE may need to hike the UK into a recession to end the price/wage spiral.

5 Things to Watch This Week

1. Eurozone CPI

Eurozone inflation cooled by more than expected in May, cooling to 6.1% YoY, down from 7%, its lowest level since Russia invaded Ukraine. Core inflation also cooled to 5.3%, down from 5.6%. Following the release, the ECB raised interest rates by a further 25 basis points to 3.5%, and President Christine Lagarde said that there was still more work to be done. The market is fully pricing in a peak rate of 4%. Cooler than forecast inflation could see peak rate expectations ease.

2. Australia CPI

Australian inflation data is due to be released on Wednesday, 28th June. The RBA minutes last week showed that the RBA almost didnt raise interest rates, easing expectations of further hikes. Should inflation data show that consumer prices continue to cool, then expectations could ease further, dragging on the AUD and boosting the ASX 200. Australian retail sales are also due and are expected to show a small decline.

3. US banks stress test

The Feds annual stress test results will be released on Wednesday, 28th June, and will be closely watched after bank failures a few months ago and as interest rates keep rising. The test examines how the largest 23 banks would weather crisis conditions, including unemployment rising to 10%, without degrading their capital to dangerous levels.

4. Nike earnings

Nike is due to release Q4 earnings on Thursday, 29th June. Wall Street expects Nike to report a year-on-year decline in earnings of $0.66 but higher revenue of $12.57 billion. Last year Nike posted an EPS of $0.90 on revenue of $12.2 billion. Investors will be watching inventory levels closely as these have been a key concern in recent quarters but showed an improvement in Q3.

5. US Q1 GDP

US GDP is expected to confirm the 1.3% annualised earlier reading, down from 2.6% in Q2 2022. The data is expected to show that private consumption surged 3.7% annualised, from 1% in Q4 but this was offset by a sharp decline in private inventory investment. The mixed picture in Q1 indicates that the US economy is coming to a turning point after growth in 2022. The mixed signals complicate the task of the Federal Reserve as it looks to tame inflation without putting the economy into a recession.

Economic Calendar Highlights

Technical Analysis:

TA of the major asset classes (Forex – Commodities – Indices…).

EUR/USD (Daily Candlestick Chart)

EUR/USD is in an uptrend, making higher lows and highs and above the 50 SMA.

The 50 SMA is flat, and the RSI has twice reached overbought conditions, suggesting slowing momentum and a possible downside reversal near the 1.10 round number. Look for a close over 1.10 to confirm the uptrend or a close under 1.091 to indicate a bigger pullback.

GBP/USD (Daily Candlestick Chart)

GBP/USD is in an uptrend, making higher lows and highs and above the 50 SMA.

Price is consolidating with indecisive candles under 1.282 after the breakout over 1.265. The trend remains higher while above 1.25.

USD/JPY (Daily Candlestick Chart)

USD/JPY is in an uptrend, making higher highs and lows and above the 50 SMA.

Price ignored the shooting star reversal at 141 and broke higher to over 143. The broken resistance at 141 is now support with upside targets at 145 then 146.8.

Gold (Daily Candlestick Chart)

XAU/USD is in a sideways trend but below the 50 SMA.

Price has broken down for a second time below key support at 1930 with 1900, then 1862 support beneath. A break back over 1945 is needed to turn more bullish.

Brent Oil (Daily Candlestick Chart)

XBRENT is in a sideways trend but below the 50 SMA.

The 50 SMA continues to offer resistance, while 72 is major support. RSI is not reaching extremes, which is indicative of the sideways trend.

US500 (Daily Candlestick Chart)

XUS500 is in an uptrend, making higher highs and lows above the 50 SMA.

Since early June, The RSI has dipped out of overbought territory after the surge. The pullback offers an opportunity to bulls. 4330 then 4282 are support underneath, with 4500 the next big upside target.