The Week Ahead – US Dollar Recovers As Fed Sticks To Its Hike Plan

EURUSD under pressure as recession looms

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The euro struggles over dimming growth outlooks. The recession risk is not negligible given the energy crisis in Europe, and growth data have pointed to a slowdown. However, a solid labor market in the euro-zone would suggest a mild downturn, alleviating fears of a ‘hard landing’. With inflation over four times the ECB’s 2% target, another rate hike in September seems to be a done deal and the market is leaning towards an additional 50 basis points. The single currency may find some respite but will have a hard time against the US dollar which benefits from uptrend inertia. 0.9980 is the last support and 1.0440 is the hurdle ahead.

GBPUSD capped by stubborn inflation

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The pound struggles over fragile economic fundamentals. The UK’s inflation accelerated to a double-digit in July, hitting its highest level in four decades. The BoE is facing the thorny problem of price pressure and recessionary headwinds. There is a growing belief that the US inflation may peak soon, leading to a slower tightening pace by the Fed. As the BoE catches up in terms of the rate differential, the Sterling could meet some buying interest. The major downside risk is worries that Britain could be more vulnerable to a recession than other countries. 1.2300 is the closest resistance and March 2020’s low at 1.1450 is the target.

UKOIL falls as supply rises

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Oil prices retreat as the rising output may outweigh global demand. Steady consumption eases concerns about slowing economic growth. Rising imports from Europe to replace Russian fuel have triggered a sharp drop in US crude inventories and refineries are set to keep running at near full capacity to meet both domestic and international demand. The planned increase in production from OPEC+ members would further loosen supply constraints. This shift in supply and demand balance is likely to keep the commodity under pressure. Brent spot contracts are exchanging near the psychological level of 90.00 and 108.00 is the first resistance.

SPX 500 retreats as more tightening to come

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The S&P 500 rallies over the prospect of moderation in tightening. As the Fed pushes rates to the fine line between a ‘soft landing’ and a recession, the pace and the size of rate hikes would eventually go downhill. The question is whether the peak is in sight. Traders are split between a 50 or 75bp hike in the next meeting as the central bank is yet to acknowledge a turning point in price pressures. But as officials are committed to tame inflation for as long as needed, the downside risk is that a lengthy hike journey would lift interest rates to a prohibitive level. The index is heading towards 4500 and 4150 has turned into support.

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