Risk off sentiment has dominated global markets in recent weeks. Headlines around some of the more speculative areas of the market like cryptos, have abounded in this environment. The Fed tightening story has much to do with this as the liquidity tap is constricted and policymakers rush to reinforce the central bank’s inflation-fighting credibility. If recession concerns grow louder, they may transcend inflation worries. This means the bid in the dollar could weaken broadly as the 3.20% 10-year US Treasury yield (and 105 in DXY) becomes strong resistance to more upside.
We kick off the week with activity data from China. The most recent PMIs have been very downbeat, reflecting the stringent lockdown restrictions in Shanghai and other major cities. Going forward, we will keep a close eye on the PBoC as potential rate cuts get announced to support economic activity. This should boost credit growth and some of the China-linked commodity currencies like AUD and NZD which have been highly correlated to the yuan recently.
Elsewhere sees the usual mid-month cluster of UK figures. Inflation is the major release with expectations of a double-digit headline print later this year. The BoE is already anticipating this in its forecasts. Another fall in the unemployment rate next week is likely to highlight the tightness of the jobs market. This adds to wage and price pressures, though the MPC seems more preoccupied by falling growth.
The beleaguered pound (and the euro too) are eyeing up major levels. The weak undertone in GBP/USD sees the bears targeting 1.20, after a fourth consecutive week of declines. Long term retracement support sits just above here. EUR dropped through major support at 1.05 with sellers eyeing up 1.0341, the January 2017 low. Both major currencies are deeply oversold on medium and long-term charts.
It's a busy calendar this week; here are the key risk events:
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