Euro/dollar falls through parity, then reverses as Fed downplays 100bp rate hike
Stock markets and oil prices follow similar path, but gold can’t catch a break
Chinese economy contracts, Italian politics in the spotlight, key US data eyed
Not so fast
The world’s most liquid currency pair pierced through the legendary parity level yesterday after another sizzling-hot reading on US producer prices added credence to speculation that the Federal Reserve might raise interest rates by one percentage point this month. It did not last though.
Euro/dollar found fresh buy orders and snapped back to reclaim the parity region with some help from a couple of Fed officials who downplayed a 100bps move as a little too radical. Fed Board Governor Waller said his baseline scenario is still for a 75bps move in July despite the nasty surprise in inflation, arguing he would only change his mind if the upcoming retail sales and housing data came in “materially stronger than expected”.
Waller has been a paragon of hawkishness, so his comments came as a relief for nervous traders - if an arch-hawk like him is not on board with 100bps, it is unlikely the rest of the Committee is. Bullard echoed a similar message, and their combined efforts saw the market implied odds for a one percentage point rate hike in July decline substantially, breathing life back into riskier assets and clipping the dollar’s wings.
With the size of the next rate increase hanging on the upcoming data, today’s retail sales and the inflation expectations component in the University of Michigan's consumer survey just became infinitely more important.
Stocks rejoice, oil roars back
Wall Street went on a rollercoaster ride too. The session started with traders fretting about inflation and the mood turned even gloomier after JPMorgan Chase and Morgan Stanley reported disappointing earnings. The S&P 500 was down almost 2% but staged a heroic comeback to erase most of its losses after Waller’s comments.
Energy prices were equally volatile. Crude oil sliced below its 200-day moving average for the first time in seven months, before coming back with a vengeance to close almost unchanged. Oil has been caught in a crossfire lately, with concerns about a faltering demand outlook clashing against the ongoing scarcity in supply.
Calmer waters might lie ahead. The US President will visit Saudi Arabia today in a last-ditch attempt to bring more oil production online, and he seems determined to get a deal following reports his administration is considering lifting the ban on sales of offensive US weapons to the Kingdom. The bigger question is how much spare capacity does Saudi Arabia have, amid whispers it is almost tapped out.
Gold wallows, China contracts
Staying in the commodity complex, it was another bruising session for gold, which fell to a fresh one-year low. The past few months have been a hellish environment for bullion because of the simultaneous appreciation in the US dollar and the sharp spike in real bond yields, two forces that have eclipsed safe-haven demand.
Elsewhere, the Chinese economy contracted in the second quarter, when major cities went into strict lockdowns and as the property sector continued to struggle. However, the market took the news in its stride, with the only visible impact being in local stock markets.
Finally, Italian politics have returned to haunt the euro. Prime Minister Draghi offered his resignation yesterday as his fragile coalition started to fall apart with the 5-Star movement withdrawing its support, but it was rejected by President Mattarella, who urged Draghi to form a new coalition in an attempt to avoid early elections.
Early elections in Italy could spell disaster for the euro, since opinion polls suggest far-right parties like Brothers of Italy and the League that have long criticized the European Union and the euro itself could gather enough support to form a joint government.