Oil decline could accelerate
(Alexander Kuptsikevich – FxPro Financial Services Limited)
WTI oil lost more than 4.5% on Monday, returning to the area of last month’s lows and marking a new stage of the downtrend.
Oil dynamics are tightly linked to the expected economic growth rate and appear weakly linked to gas prices. The trend in oil has already turned downwards in the first half of June, while gas has been rising strongly for most of July, only beginning to correct in the last few days.
The WTI price slumped sharply by more than 4% on Monday and stayed below its 200-day moving average. Earlier in July, this curve acted as a strong support line several times.
For Brent, it is even more symbolic, as yesterday’s sell-off took it below $100. The British benchmark has managed to stay above its 200-day average, but getting well below the important round level could trigger a sell-off in the weaker hands. That is, from those speculators who have been making bullish bets.
The global economic slowdown, in our view, is a more significant factor influencing the oil price than fears of supply cuts. If we are correct, we might see a local sellers’ victory this time and consolidation below the 200-day average, which we have not seen since November 2020.
This week, US jobs data could be critical in determining the direction of oil in the future. In case of weak economic data, commodity prices may increase their decline. A new upward momentum cannot be ruled out if the following jobs report surprises with its strength. However, the latter scenario looks less likely.
A collapse in WTI crude under the 200-day average would open a direct route to $84, the cyclical highs of last November. For Brent, a further bearish sentiment would open up the potential for a correction to $85-86.
Will the EUR/GBP move higher as the BoE meets? [Video]
(Giles Coghlan LLB, Lth, MA – HYCM)
The Bank of England meets on Thursday at 12:00 GMT and expectations from the STIR markets are 100% for a 25 bps hike and 845% for a 50 bps rate hike. In its June meeting, the Bank of England hiked rates by 25 bps to 1.25% in a move that was widely anticipated. For the UK headline inflation is expected to move into double digits and growth is expected to turn negative in 2023. This stagflationary environment has been weighing on the GBP for some time.
Over the last 15 years, between Aug 02 and Aug 28, the EURGBP has had a 14.58% return. The pair has gained 10 times with an average return of 0.97%
If the BoE takes a more dovish tilt on Thursday than markets are expecting then watch for potential EURGBP gains.
Major trade risks: If the BoE takes a more hawkish approach to manage surging inflation then the EURGBP can buck its seasonal trend.
Yen is recovering – The most volatile currency on FX
(Daniel Kostecki – Conotoxia)
In the FX market, high volatility could appear on several pairs simultaneously, or selectively on one currency. Currently, the title of the most volatile major currency seems to be taken by the Japanese yen, and fluctuations on JPY-linked currency pairs seem to be the greatest in the past weeks.
To get an idea of the magnitude of the changes taking place on the USD/JPY pair, for example, it is worth recalling that back at the beginning of the year, 100 yen had to be paid for a dollar. Meanwhile, a month ago, the dollar already cost almost 140 yen, which means a 40% increase in the rate in just over six months. Then, the USD/JPY exchange rate reached its highest level since 1998.
Importantly, in the case of Japan, we are not talking about the economy of a developing country or one mired in political or economic crisis, but about one of the world’s leading economies. The rally in the USD/JPY exchange rate seemed to stem from the divergence in the monetary policy pursued by the US Federal Reserve and the Bank of Japan. The Fed strenuously tightens the monetary policy, while the Bank of Japan resists any increases in interest rates, including bond yields, and continues to buy their unlimited quantities.
However, while the Bank of Japan’s policy maintains its course, the market started to play against a possible turn in the Fed’s actions. This could reduce the spread in the U.S. versus Japanese bond yields and lead to a strong turnaround in the USD/JPY exchange rate. The yield difference between 10-year U.S. Treasury securities and the corresponding Japanese debt held near its lowest level in nearly four months at around 245 basis points, which could weaken the dollar’s appeal.
In early August, the dollar was around 131 yen, and it took only three weeks to move from around 140 yen. This is a relatively large change for the currencies of the world’s major economies. As a result, the U.S. dollar has fallen to its lowest level in more than six weeks against the Japanese yen, and investors appear to be increasing bets that the Federal Reserve’s aggressive monetary policy could drive the economy into recession.
Traditional market indicators of recession (such as the yield curve) appear to be falling to their lowest levels this year. Investors seem to be increasingly confident that US interest rates will peak by the end of 2022 – according to data from the federal funds rate futures market. This could lead to a potential weakening of the US dollar.