The tectonic shift in the Federal Reserve’s policy, according to which the regulator no longer expects that inflation will naturally find its way to the target level and goes all in to suppress it, is still being digested by financial markets. Risk demand recovers slowly, despite the fact that last week’s drop largely removed overbought, European and Asian equity indexes show mixed performance today with gains barely exceeding half a percent. Powell’s testimonial is due this week, which will likely be used by the Fed chair to shape correct expectations for the July meeting and he will most likely pitch discussion to explain why another 75 bp move may be needed. Consequently, bullish surprises for the dollar seem to be not over, and any pullbacks in the Dollar index are not expected to linger. EURUSD is likely to find support at 1.04-1.0450, but the risk of a breakout below the near-term support zone is not negligible:Stock indices sluggishly rise on Monday, US markets are closed due to the national holiday. One gets the feeling that investors have not yet fully realized the large-scale changes in the policy of the Fed. Last Wednesday, the regulator hiked interest rate and did not rule out that in July it could raise the rate at the same pace, but by the beginning of this week it became clear that such a scenario became baseline, derivatives based on the Fed rate (overnight interest swap), priced in additional 70 bp tightening in July.Over the weekend, Fed official Waller spoke openly in favor of a 75bp move especially if there are no surprises in the macroeconomic data for June, also saying that inflation needs to be reduced no matter where it comes from. Waller is a known hawk and it’s clear that his mindset probably isn’t dominating most FOMC members, but the signs that the Fed is putting more, if not all, effort into fighting inflation have become clear enough that it will take time for the market to fully price it.At the same time, along with tightening of the Fed’s policy, the chances are growing that the economy will fall into recession next year, which will force the Fed to move to cut rates and resume QE. According to BoFA, the probability that the US economy will fall into recession next year has risen to 40%, while high inflation will persist due to the resilience of pro-inflationary factors on the supply side. In other words, destroying consumer demand may not be enough. Bank analysts expect GDP growth to slow to near zero in the second half of next year as lagged tightening of financial conditions starts to cool demand in the economy. The rebound in 2024 will be moderate.This week the economic calendar is not particularly remarkable, the markets may pay attention to the real estate data in the US. Indeed, the US real estate market is now gaining attention, as rapidly rising mortgage rates and declining consumer confidence indicate that this week’s reports could be disappointing, especially the existing sales numbers:The significance of this data should not be underestimated, as housing construction makes a significant contribution to GDP (about 2%), and home sales are positively correlated with retail sales data. Existing home sales are expected to rise by 5.4m from 5.61m in the previous month, the weaker figure could fuel risk aversion in the market.
Source: Tickmill
