Dow Jones, US Dollar, Euro, Japanese Yen, Crude Oil, Inflation, ECB, BoJ

Global financial markets came under pressure last week as recession fears permeated market sentiment, dragging equity indices, commodities and risk-sensitive currencies. The closely watched 10-year/2-year yield spread – a so-called recession predictor – fell deeper into the inversion. That suggests waning confidence in the Fed’s ability to orchestrate a “soft landing.”

Economic growth expectations have recently eased considerably. China’s second-quarter GDP data was the latest sign that global growth headwinds are strengthening. The US Consumer Price Index (CPI) for June recorded its highest print in more than 40 years. Markets began to estimate the possibility for the Fed to increase by a full percentage point later this month. Those bets went into the weekend after several Fed officials tempered expectations.

A University of Michigan report found that US consumers’ long-term inflation expectations fell in early July. That, along with a strong US retail sales report, allowed stocks to close out the week at a high level, with the Dow Jones gaining 2.15% on Friday, nearly wiping out its weekly loss. Gold prices continued to slide into the weekend despite some weakening of the US dollar. Prices for Brent and WTI crude oil fell by more than 5% amid the resurgence of growth fears. A large stockpile of gasoline reported by the EIA dragged demand expectations down. The oil-related Canadian dollar fell. Canada’s June inflation is falling this week.

The US Dollar Index (DXY) reached its highest level since September 2002. The Japanese yen fell nearly 2% against the US dollar, maintaining its position as the worst performing major currency in 2022. The Bank of Japan is expected to have its ultra-loose policy in place when it meets on Thursday, although we may see changes in inflation and growth forecasts. Policymakers have expressed concern about the JPY’s weakness, and some believe the 140 level could trigger an intervention, but in any case, it’s unlikely to come before the BoJ meeting. Japanese inflation in June will also go through brackets.

The euro was another big drop against the USD, with EUR/USD briefly breaking parity. The European Central Bank (ECB) is expected to begin its rate hike cycle Thursday with a 25 basis point hike. Inflation in Europe is well above the ECB’s target and energy prices are rising later this year. Markets are pricing in a 50bp rate hike for the ECB meeting in September, although many believe they are already well behind in tackling inflation.

Wheat prices collapsed, falling more than 12% to their lowest level since February. Ukraine and Russia are reportedly close to signing an agreement allowing the resumption of grain exports. Wheat prices rose by more than 40% from February to June after Russian troops blocked Ukraine’s Black Sea ports. Still, the deal isn’t finalized, and volatile political tensions could make railroad discussions possible.

Elsewhere, New Zealand’s second-quarter inflation data will usher in the week’s economic base. Analysts see inflation rising from 6.9% year-on-year to 7.1% in the second quarter. Labor market and inflation data for the United Kingdom are expected. GBP/USD is trading near the 2020 lows. CFTC data showed USD longs rising.

US DOLLAR PERFORMANCE VS. CURRENCY AND GOLD

usd vs fx chart

Fundamental forecasts:

Euro (EUR/USD) forecast – It’s time for the ECB to grab the nettle

The euro faces a week of risky events and the single currency looks to the ECB for stability and guidance on Thursday. Expect further EUR/USD volatility.

Canadian dollar weekly forecast: CAD on behalf of crude oil and unbridled US dollar

The Canadian dollar has a big week ahead of it with Canadian inflation, an aggressive Fed and low crude oil prices dictating USD/CAD price action.

Pound Sterling (GBP) Weekly Forecast: PM Race Warms Up in Time for Heat Wave

UK inflation and jobs data next week following televised PM debates over the weekend.

Bitcoin (BTC/USD) Resilience Holds Up After Another Big Week for USD

Bitcoin, Ethereum and their alt-coin counterparts have recovered despite the shocking US CPI pressure feeling further dented. BTC/USD remains above USD 20,000 despite fundamental risks.

Rebound AUD/USD rate susceptible to RBA policy preset path

The Reserve Bank of Australia (RBA) minutes may have little impact on the AUD/USD, as the central bank appears to be on a pre-set course in normalizing monetary policy.

Weekly Stock Market Forecast: S&P 500 & DAX 40

Russian gas flows, ECB anti-fragmentation tool and Italian politics take focus

Japanese Yen Forecast: Will a Dovish BoJ Raise USD/JPY? CPI also in focus

The Japanese yen is vulnerable to external forces and the Bank of Japan is still expected to be one of the few remaining moderate central banks. Is it all clear for USD/JPY to then continue to rise?

Technical predictions:

S&P 500, Nasdaq, Dow Jones Forecast for Next Week

Stocks are holding onto July’s range but could be poised for further recovery within the annual downtrend. Levels that matter on S&P 500, Nasdaq & Dow technical charts.

Gold Price Forecast: Gold Spins or Burns as Bears to 1700 . to drive

The gold price has fallen by 10%, while sales have declined for five consecutive weeks. Below are two years of lows lurking, is there any hope for XAU bulls?

— Written by Thomas Westwater, analyst for DailyFX.com

Contact Thomasuse the comments below or @FxWestwateron Twitter

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