It’s starting to look a bit rough for stocks at the moment as the fallout from the US CPI data continues to reverberate.

S&P 500 futures are down to the lows for the day, dropping by nearly 1% now as risk starts to falter in European morning trade. Regional indices are also caught in the crossfire with the DAX now down 0.9%, CAC 40 down 1.2%, and Italy’s FTSE MIB leading the declines with a drop of 2.2% – not helped by domestic political uncertainty.

After the Bank of Canada decision yesterday and Fed policymakers opening the door to a 100 bps move as well, it is spooking markets a little amid prospects of major central banks frontloading rate hikes in a more aggressive manner.

This article was written by Justin Low at www.forexlive.com.

The Russia-Ukraine conflict has kicked things into overdrive in Europe this year and the economic landscape remains rather dire when you look at how things are developing at the moment. Parity beckons for EUR/USD and we’ve already seen EUR/CHF tumble below 1.00 after the SNB policy pivot last month. It’s tough to find much relief for the euro and here are reasons why.

1. Inflation pressures are still surging across the region

Sure, German inflation may have seen a bit of a moderation in June but near 8% inflation is still extremely high with Spanish inflation even surpassing 10% last month. As mentioned before, there is a difference between inflation peaking and inflation hitting a plateau.

The latter seems likely for most parts of the world dealing with surging price pressures and Europe is no different. The fact that oil prices and natural gas prices are set to remain elevated going into winter will only exacerbate the pain.

2. A recession beckons

The key question now will be how bad will the recession in Europe look like. As inflation takes a toll on consumption and surging price pressures grip business activity, it is looking bleak once we get past the summer sunshine. There is no easy fix and if Russia seeks to restrict supply of gas to Europe, I fear that it will shape up to be a rather harsh recession – particularly in the latter stages of the year.

3. Fragmentation risks on the cards

The ECB may be able to deal with this with their „resolve“ but at the end of the day, they need some solution to get the monkey off their back. I doubt policymakers will be helpless in letting a debt crisis spiral but they will lose some face in trying to convince markets that they can raise interest rates while ridding themselves of some form of easy policy – which have been a mainstay over the past decade.

QE but not QE seems to be what they will go with but we will see how things play out in practice.

4. The ECB suddenly looks behind the curve again

For all the talk by ECB policymakers on tightening policy, they are still yet to officially raise interest rates amid the whole inflation debate globally. As other major central banks step up their game, the ECB’s plan to raise rates by 25 bps this month and then 50 bps in September suddenly looks rather ‚lame‘.

The new meta this week suggests that 100 bps is the next hot pick and the ECB is once again being left behind. As markets rush to price in a more aggressive Fed and more frontloading by other major central banks, the ECB’s lack of flexibility is not helping the euro’s plight considering that they are not able to come together for a more aggressive tightening push.

This article was written by Justin Low at www.forexlive.com.

The yen continues to implode as traders are using the US CPI data this week as a catalyst for a push higher in USD/JPY once again. It’s not a perfect excuse but the timing fits as the data mainly reaffirmed that the ongoing narrative over the past two to three months is very well vindicated still at this stage.

That is enough to give USD/JPY another boost after weeks of a struggle to shake off a firm break above 135.00.

The push higher in Treasury yields today is also helping, with 10-year yields up 8 bps to 2.985% on the day. As much as there was a negative reaction for yields yesterday, it is hard to imagine a material climb down in rates so long as the market focus remains on a more aggressive Fed.

We may have seen a peak in yields already but a reversal of the trend is still something that may be a bit of a reach, unless traders start to turn their attention towards rate cuts and more material risks of a recession in the months ahead.

Either way, the technicals continue to do the talking – much better than Japanese authorities – in USD/JPY and 140.00 beckons now as price trades above 139.00 to its highest in over two decades.

This article was written by Justin Low at www.forexlive.com.

• Prior -5.4%
• Market index 300.0 vs 305.3 prior
• Purchase index 224.3 vs 232.6 prior
• Refinancing index 685.3 vs 670.3 prior
• 30-year mortgage rate 5.74% vs 5.74% prior

Mortgage activity continues to decline with purchases dropping once again, more than offsetting a slight increase in refinancing activity in the past week. As the Fed looks set to raise rates further, the squeeze is on for the US housing market.

This article was written by Justin Low at www.forexlive.com.

Again, for this to really work, you’d have to get India and China on board surely. And that is almost certainly not going to happen, so it’s tough to imagine how they are planning to execute this in a meaningful and significant manner.

This article was written by Justin Low at www.forexlive.com.

Political fracture in Italy is nothing short of the norm these days and while Draghi’s reign as prime minister has been promising early on, we are seeing the same failings resurface ahead of the national election due in the first half of next year.

The Five Star Movement party is holding leadership talks today and as support for their party wither, they need a change to stay relevant and most key party figures are pointing towards breaking away from the current government coalition.

A recent split has seen the party lose a chunk of its support with many lawmakers joining a breakaway group led by Luigi Di Maio, a former leader of the Five Star Movement party. Those who have stayed on are urging for a change – blaming Draghi for watering down flagship measures that have been key pillars of the party.

The issue here is that if Five Star Movement pulls out, there is going to be a ripple effect. Matteo Salvini’s Lega party is adamant that they will not back the government if Five Star Movement withdrew from the coalition.

Meanwhile, that will also create a bit of a divide with the Democratic party – who at least still seems to be wanting to back Draghi and the government.

In any case, the wheels are set in motion already and if leadership talks this week for Five Star Movement result in a push away from the government, we could see election risks brought forward for Italy.

This article was written by Justin Low at www.forexlive.com.

EUR/USD continues to keep around 1.0030-50 with the low earlier touching 1.0007 as the euro stays vulnerable close to parity. The outlook for the single currency is still rather poor as outlined here. But today, it is all about the dollar as the market keeps its focus on the US CPI data set to be released later in the day.

USD/JPY is holding slightly higher around 137.10-20, up 0.2%, as buyers stay buoyed in search of a further breakout this week. The retreat in Treasury yields yesterday tempered with the mood but we are seeing things pick up again today. Meanwhile, GBP/USD got a light nudge higher earlier to 1.1935 on the back of better-than-expected UK monthly GDP data but it came with a caveat.

Better health services on the month provided an outlier and the pound found little to be optimistic as such, with cable back down now to 1.1890 on the day – keeping rather flattish.

Looking elsewhere, the mood in equities is rather mixed with European indices holding lower while US futures are up slightly. That said, I wouldn’t look much into it until we get to the US CPI data later today.

This article was written by Justin Low at www.forexlive.com.

• Prior +0.4%; revised to +0.5%
• Industrial production +1.6% vs +0.3% y/y expected
• Prior -2.0%; revised to -2.5%

Looking at the details, the production of non-durable consumer goods rose by 2.7%,
capital goods by 2.5% and durable consumer goods by 1.4%, while production of intermediate goods remained
unchanged and production of energy fell by 3.3% on the month in May.

This article was written by Justin Low at www.forexlive.com.

Headlines:

• EUR/USD hits parity for the first time since 2002
• US June NFIB small business optimism index 89.5 vs 93.1 prior
• Germany July ZEW survey economic sentiment -53.8 vs -38.3 expected
• Yellen says did not discuss currency intervention with Japanese officials
• Japan, US agree to continue consulting on FX market, cooperate ‚as appropriate‘

Markets:

• JPY leads, GBP lags on the day
• European equities lower; S&P 500 futures down 0.4%
• US 10-year yields down 6.7 bps to 2.924%
• Gold up 0.1% to $1,735.32
• WTI crude down 4.7% to $99.20
• Bitcoin down 3.1% to $19,774

The key story on the session was EUR/USD hitting parity for the first time in two decades, with the pair briefly hitting level and then bouncing back slightly to around 1.0069 and then coming back down now to 1.0030-40 levels.

The move comes as the dollar continues to keep steady across the board, with GBP/USD also dragged to fresh lows below 1.1900. USD/JPY was lower throughout though, as a retreat in bond yields weighed on yen pairs. That saw price fall from 137.20 to 136.70 on the session as we see US 2s-10s invert by the most since 2007.

Equities were rather sluggish but there is a slight improvement in the mood with Nasdaq futures paring earlier losses, though overall sentiment remains on the softer side. European indices are in the red mostly as recession fears continue to emanate, with the German ZEW survey today highlighting a rather dire outlook.

Elsewhere, oil is weighed down once again with WTI crude falling past $100 as the push and pull continues. And Bitcoin is marked lower back below the $20,000 level as the downside pressure stays the course.

This article was written by Justin Low at www.forexlive.com.

Nomura says that it expects the Fed to reach a terminal rate of around 3.50% to 3.75% by February 2023 before proceeding to start rate cuts in September 2023. Meanwhile, the firm expects the ECB to hike rates by 175 bps come March next year before starting out with a 25 bps rate cut in June 2023 as a potential recession drags on.

They also chip in with a BOE forecast, expecting two rate cuts in May and August next year after having seen 100 bps worth of rate hikes this year.

This article was written by Justin Low at www.forexlive.com.