Stagflation fears have intensified significantly over the past week. In particular, even the usually cautious ECB pre-committed to rate hikes in July and September, while delivering new economic forecasts with significantly higher inflation and weaker growth projections. The sell-off in risky markets accelerated further after the US CPI reaccelerated to a new 40-year high. Hopes of a spike in inflation have been dashed. The Fed is more likely than not to continue with its 50bps-per-meeting hike plan through September. Higher prices and rates will suppress consumer spending and eventually drag the economy down.
The dollar ended as the strongest, both supported by risk aversion and rising treasury yields. The yen was originally the runaway loser, but came back to live on risk aversion on Friday. The Swiss franc was the second worst. The Euro’s performance was disappointing given the more hawkish ECB than expected. The other currencies mainly traded were mixed against each other.
The S&P 500, FTSE and DAX fell on fear of stagflation
In the United States, the S&P 500’s slide began on Thursday, followed by a gap-low on Friday and an accelerated sell-off. The development suggests that the oversold bounce from 3810.32 ended at 4177.41. The rejection by the 55-day EMA keeps the short-term outlook down.
The whole corrective pattern from 4818.62 is still in play and it has likely started another down leg to the 3810.32 low. Strong support may be seen around the 3666.44/3672.97 cluster projection level to complete the correction (61.8% projection from 4637.30 to 3810.32 from 4177.51 to 3666.44, 161.8% from 4818.62 to 4222.62 from 4637.30 to 3672.97).
However, a firm break of 3666.44/3672.97 will bring an even deeper correction into the support zone between 3195.28 and 3505.24 (61.8% and 50% retracement from 2191.86 to 4818.62 ).
Across the Atlantic in the UK, FTSE price action from 7687.27 is seen as an upward corrective pattern from 4898.79. This is probably the start of another leg dropping. The break of the support at 7158.52 should send the FTSE down to a 38.2% retracement from 4898.79 to 7687.27 at 6622.07.
In Germany, the sharp decline in the DAX suggests it is likely to start another leg down in the correction from 16290.19. The rejection by the 55-week EMA confirms this bearish case. The short-term focus is on the 13380.67 support. A firm break will confirm this bearish case and target the support at 12438.85, and likely following the 61.8% retracement from 8255.65 to 16290.19 at 11324.84.
US 10-year yield hits 2018 high as uptrend resumes
The yield on the German 10-year Bund jumped to close at 1.52%, its highest level since 2014. The yield on the UK 10-year Gilt also rose to 2.4475, its highest since 2014 as well. In the US, the breakout in 10-year yields at 3.167 suggests that the medium-term uptrend is resuming. But it should be noted again that TNX is facing a key long-term resistance level at 3.248 (2018 high), which may cap its upside. However, a sustained break of 3.248 would eventually mark the end of the decades-long downtrend from 15.84 (1981 high). It would be a significant, era-defining development if it happened.
The dollar index could be ready to resume a long-term uptrend
The rebound in the Dollar Index from 101.29 extended higher last week. The strong support seen from the 55-day EMA is a bullish sign. Current bullish acceleration increasing the chances of a resumption of the uptrend. Short-term focus is back on the 105.00 high. The rejection at 105:00 will extend the corrective pattern from there with another leg down, likely with one more hold on the 55-day EMA.
However, a sustained breakout of 105.00 will resume the long-term uptrend. The next target will be a 61.8% projection from 72.69 (2011 low) to 103.82 (2017 high) from 89.20 (2021 low) to 108.43.
USD/JPY around 150? Or will Japan intervene?
The yen fell to its lowest level against the dollar since 2001 last week. The yen’s sell-off was originally broad-based, but managed to rally against most others due to risk aversion on Friday. The widening yield spread will keep the pressure on the Japanese currency. But the question is whether the current development is sufficient to trigger government intervention or BoJ action.
On rare occasions, the Ministry of Finance, the Financial Services Agency and the BoJ have issued a statement, expressing concern. The statement noted that “we are concerned about the rapid depreciation of the yen”. The government and BoJ will work to “closely monitor trends” and their impact on the economy. More importantly, he noted that, based on the G7 agreement, “excessive fluctuations and chaotic movements” can lead to “appropriate action if necessary.”
Barring special actions, including direct intervention by the MoF or the BoJ allocating a wider range for the 10-year JGB yield, the USD/JPY rally is here to stay. Continue. As long as the support at 126.35 holds, the current uptrend should aim for a 100% projection from 75.56 (2011 low) to 125.85 (2015 high) from 98.97 to 149.26 , which is close to 147.68 (1998 high).
Gold’s Main Hurdle at 1900 Despite Impressive Rebound
Gold’s reversal on Friday is impressive and worth mentioning. It first dipped to 1824.93 following the US CPI release, but then rebounded to close at 1871.47, after breaking through the resistance at 1873.88. An environment where global interest rates are rising should be unfavorable for gold. Yet it attracts safe-haven flows (much less than the dollar), when funds rush out of Treasuries and stocks.
Technically, there is short-term upside potential. But the main hurdle is the 1900 handle, which is near 1894.77 support and short-term falling channel resistance. Strong resistance could be seen from this handle to complete the corrective recovery from 1786.65.
The fall from 2070.06 is seen as the third leg of the whole corrective pattern from 2074.74 (2020 high), and there should still be some downside to come, towards support at 1682 60. Nonetheless, a sustained breakout of 1900 will mitigate this bearish case and could trigger fierce buying towards 2000.
EUR/USD Weekly Outlook
The late fall in EUR/USD last week suggests that the corrective recovery from 1.0348 has ended at 1.0786, after rejection by the 55-day EMA. Initial bias remains lower this week to retest long term support at 1.0348 and 1.0339. A decisive break there will resume a larger downtrend. On the upside, minor resistance above 1.0641 will first turn the intraday bias into neutral.
Overall focus remains on long-term support at 1.0339 (2017 low). The decisive break will resume the downtrend from 1.6039 (2008 high). The next target is a 61.8% projection of 1.3993 to 1.0339 from 1.2348 to 1.0090. However, the firm break of 1.0805 support turned resistance will delay this bearish scenario. The rise from 1.0348 is at least a correction to the downtrend from 1.2348. A stronger rebound would be seen with a 38.2% retracement from 1.2348 to 1.0348 to 1.1112.
On the longer term, the current pattern suggests that the long term downtrend from 1.6039 (2008 high) is ready to resume. The breakout of 1.0339 will target a 61.8% projection of 1.3993 to 1.0339 from 1.2348 to 1.0090. A decisive break there could lead to an acceleration down to a 100% projection at 0.8694.