Major currency pairs struggle to choose direction on Monday, European indices move back into modest positive territory, US futures slip with S&P 500 futures trying to defend the 3800 level in order to prevent development of bearish momentum.Last week we saw a significant rally in key sovereign debt markets (US, EU), with long-term bond yields falling to their lowest level since early June. The market now considers the 325-350 bp range to be the most likely outcome of the series of Fed rate hikes by the end of this year against 350-375 bp a week ago. In other words, market expectations for cumulative Fed rate hikes this year have been cut by 25 bps:Growing risks of slowdown and even recession of the global economy is likely to continue to constrain the hunt for yield this week, based on this, a significant pullback of the dollar, which again rushed to multi-year highs, appears to be unlikely. An argument in favor of a slight correction in the dollar may be extreme positioning according to the CFTC data: the speculative long position on the dollar is now at a two-year high, which suggests a potential long squeeze.Two significant reports this week are the minutes of the Fed meeting and the report on the US labor market for June, which is traditionally released on Friday of the first week of each month. FOMC “minutes” may raise expectations that the Fed will raise the rate by 75 bp for the second time in July if the content of the report indicates a strengthening of consensus that such a move is warranted.Given the deteriorating growth forecasts for the US economy, the Fed’s commitment “by all means” to reduce inflation, the US labor market report is likely to provoke a classic reaction in the event of a surprise: job growth below the forecast (270K) will strengthen expectations that the Fed will tighten policy aggressively in a slowdown and trigger risk-off, while higher-than-consensus job growth will support risk assets as fears that the economy will not bear the burden of policy normalization will likely subside. Only a very weak labor market report, such as contraction in the number of jobs, could lead to expectations of lower rate hikes, which will appeal to risk assets and could lead to a rebound.As for the European economy, the inflation report caused a minimal market reaction, as asset prices already factor in a fairly aggressive ECB rate hikes (140 bp for this year) and market participants’ focus on data that will help to clarify recession risks. As for the Eurozone, the main factor of this risk is the reduction in energy trade with the Russian Federation, fears of an escalation in this direction significantly affect the markets. The risk of a bearish breakout and movement of EURUSD towards the previous local minimum (1.0380) is, in my opinion, higher than the risk of a correction to 1.05, given potential negative development of the sanctions war.Another significant event this week will be the RBA meeting on Tuesday, which will take place before the opening of European markets. The main question is whether there will be a 50 bp rate hike or the RBA will decide to go with modest 25 bp. The first outcome is not fully priced in by the money market, so 50 bp move will likely trigger upside in AUDUSD. Nevertheless, given negative sentiment of investors regarding currencies correlated with the phase of a business cycle of the global economy, AUDUSD recovery will probably be short-lived, with 0.70 level seen as the key resistance where a downside may resume:
Source: Tickmill
