• Friday’s US hot inflation reading triggered a flight to safe-haven currencies like the greenback, and precious metals fell.
  • The 2s-10s US Treasury yield curve inverted during the day as a recessionary scenario looms.
  • The CME FedWatch Tool shows that the odds of a 75 bps increase in the June meeting lie around 34%.
  • Gold Price Forecast (XAU/USD): A daily close at around $1820 to open the door towards $1800.

Gold spot (XAU/USD) slides to a new monthly low near the $1820 figure on Monday, as US Treasury yields skyrocket, propelled by Friday’s hotter than expected US inflation numbers, ahead of the US Federal Reserve June meeting, in which investors have priced in a 50 bps increase. At the time of writing, XAU/USD is trading at $1826.60, down near 2.20%.

Pessimistic sentiment triggered a flight to safe-haven assets, except Gold

Risk-aversion dominates Monday’s session. European and US equities are plunging as a recession looms,  spurred by global central banks, which forecasted inflation as transitory, falling behind the curve. Market participants are flying toward safe-haven assets, as reflected by the greenback. The US Dollar Index, a measure of the greenback’s value vs. six currencies, advances 0.80%, trading at fresh 2-decade highs around 105.027.

In the meantime, Gold remains trading heavy after reaching a daily high near $1880, weighed by higher US Treasury yields. The 10-year benchmark note rate jumped to multiyear-highs, to levels last seen in 2011, at around the 3.314% threshold, up by 15 bps.

Meanwhile, the short-end of the yield curve, the 2s-10s, inverted during the day on concerns that a higher Federal Funds Rate (FFR) might trigger a recession, as the US central bank battles inflation readings near 9%, not seen since 1981.

Elsewhere, some commercial banks around the globe begin to price in a 75 bps rate hike on Wednesday, like Barclays. However, most analysts expect the Fed to hike 50 bps as they aim to keep its credibility intact, though it could open the door for higher rate increases in July and September.

The CME FedWatcht Tool shows the odds of a 75 bps rate hike at 34.3% while fully pricing in a 50 bps increase.

With no data in the US economic docket to be released, all eyes are set on the Fed monetary policy decision and Chair Jerome Powell’s post-meeting press conference. Traders must know that the Summary of Economic Projections (SEP) will also be unveiled. Expectations are mounting that officials would update inflation estimations to the upside and growth to the downside.

Gold Price Forecast (XAU/USD): Technical outlook

XAU/USD is trading below the 200-DMA, for the second time, in the last couple of trading sessions. In fact, it also broke a 4-year-old upslope trendline that, if confirmed by a daily close, would pave the way for further losses. Therefore, in the short term, XAU/USD is headed to the downside.

Gold’s first support would be May’s 18 low at $1807.23. A breach of the latter would expose the $1800 figure, which, once cleared, could send XAU/USD tumbling towards the YTD low at $1780.18.

 

  • Euro under pressure, yen soars on risk aversion.
  • Dow Jones tumbles 2.60%, US yields print multi-year highs.
  • EUR/JPY drops almost 500 pips in three days.

The decline of EUR/JPY from multi-year highs gained speed on Monday and tumbled under 140.00. From last week highs, it has fallen 500 pips

Reversal points to more losses

The EUR/JPY is trading around at 139.48, the lowest level in ten days. It is falling for the third consecutive day, making a sharp reversal that started last week from levels above 144.00.

The cross is holding under 140.00, a relevant support area. A daily close below the next key support at 139.00/10 should open the doors to more losses, targeting 138.40, the 20-day simple moving average.

The slide in EUR/JPY takes place amid risk aversion and despite higher US yields. The yen is among the top performers unaffected by the fact that the US 10-year yield hits the highest level in a decade above 3.30%.

On Wall Street, the Dow Jones is falling by 2.80% and the S&P 500 drops 3.79%. Markets look in panic mode at the beginning of the Federal Reserve’s week. Concerns about the global economic outlook and monetary tightening across the globe weigh on investors. The central bank is seen raising rates by 50 bps, although after Friday’s CPI data some analysts consider it could raise by 75 bps.

Technical levels

 

Gold bugs beware – a technical breakdown could be the catalyst needed to squeeze a massive amount of complacent length in the yellow metal, according to strategists at TD Securities.

Growing valuation gap between gold and real rates to exacerbate the repricing lower

“The trading bias is still to the downside, but participants are still looking for catalysts to flush out the massive amount of complacent length. We see risks that technical breakdown could be the catalyst. The bar for CTA liquidation is growing thin, as we estimate that a break below $1,810 would catalyze a substantial selling program from systematic trend followers.” 

“Prices have managed to break below the bull-market defining uptrend from 2019, which may catalyze additional liquidations from the complacent bulls at prop-shops.” 

“A growing valuation gap between gold and real rates might eventually exacerbate the repricing lower in the yellow metal, despite it being attributed to both an undue rise in real rates given quantitative tightening, and to the still-massive complacent length in the yellow metal which has kept the prices elevated.”

 

  • AUD/USD cratered into the low-0.6900s on Monday, down over 1.5% on the day and over 4.0% lower in four days. 
  • The pair is being battered by risk-off flows as markets price a more hawkish Fed and potential recession.  
  • China lockdown fears are also hurting the pair, with bears eyeing a near-term test of support in the low-0.6800s.  

AUD/USD cratered on Monday in tandem with a collapse in US and global stock market sentiment as investors upped their bets on both Fed tightening (in wake of last Friday’s US inflation data) and a US recession (in wake of last Friday’s US Consumer Sentiment figures). The pair was last trading to the south of the 0.6950 level, having shed over 1.5% on Monday, taking its string of losses in the last four sessions to over 4.0%.  

The risk-sensitive Aussie is also feeling the pain of renewed fears about lockdowns in China as Beijing and Shanghai both reinstate restrictions to contain new Covid-19 outbreaks. China is Australia’s largest trade partner and is the main export destination for many of the country’s industrial/energy coming.  

Anyone who bet on near-term Aussie upside in wake of last week’s larger-than-expected RBA rate hike has likely already been stopped out. That should deter traders from betting on a substantial rebound in the pair should this Thursday’s Australia labour market report come in better than expected. Indeed, the Aussie is this week set to continue to trade as a function of broader risk appetite and USD flows.  

As risk appetite craters on central bank tightening and recession fears and the US dollar benefits from the hawkish Fed and its status as a safe-haven currency (it is the world’s reserve currency, after all), AUD/USD next stop is likely the May lows in the mid-0.6800s. If it can break below 0.6800, there isn’t much to stop a run all the way lower to around the 2019 lows in the upper-0.6600s. The main macro events of the week will be Tuesday’s US Retail Sales report for May and Wednesday’s Fed meeting, where some are calling the bank to invoke a Volcker moment and surprise with a larger 75 or 100 bps rate hike.  

 

  • WTI is a little lower but still trading near $120, weighed slightly amid risk-off conditions and China lockdown worries.  
  • Weak US data, a surprisingly hawkish Fed and tough restrictions in China could combine to send WTI towards its 21DMA.  

Though still a little lower on the day, oil prices pared the bulk of earlier session losses on Monday, despite steep downside in global risk assets as investors fretted about last Friday’s hotter than expected US inflation and its implications for Fed monetary policymaking, as well as increasing signs that the US economy might be headed for recession. Front-month WTI futures were last trading a few cents in the red in the $120 per barrel area, having bounced from earlier session lows near $118.  

Traders cited China Covid-19 developments, after Beijing and Shanghai both moved to reimpose restrictions as Covid-19 infections rose once again, as weighing on the price action, as well as the market’s risk-off mode that has seen the US dollar strengthen. A strong buck means USD-denominated commodities are more expensive for international buyers.  

But the bounce from mid-session lows suggests that appetite to buy the dip remains strong, for now. Indeed, global oil markets are still very tight as demand in the northern hemisphere rises towards its summer peak and OPEC+ supply woes show no signs of abating, with Russian output still languishing in the face of strict Western sanctions and as smaller (mainly African) producers struggle amid a lack of investment and amid instability.  

Meanwhile, the prospect of a return by the US and Iran to compliance with the 2015 nuclear pact which could set the stage for well over 1 million barrels per day in Iranian exports to return to global markets appeared to have been dealt a death blow last week. Amid a spat with global nuclear watchdog the International Atomic Energy Agency (IAEA), Iran is set to remove nearly all equipment that had been used by the organisation to monitor its nuclear activities.  

But traders should be aware that amid the risk that 1) the China lockdown worsens, threatening oil demand in the country, 2) further US data this week points to a recession and 3) the Fed on Wednesday delivers a hawkish surprise as inflation continues to surprise to the upside, oil might be in for a rough time. A test of the 21-Day Moving Average in the mid-$115s seems a solid possibility. 

 

  • Silver met with aggressive supply near the $22.00 confluence resistance on Monday.
  • The technical set-up favours bearish traders and supports prospects for further losses.
  • Sustained strength beyond the $22.00 mark is needed to negate the bearish outlook.

Silver extended its rejection slide from the $22.00 confluence hurdle and dropped to a near one-month low, around the $21.20 region during the early North American session on Monday.

The latter coincides with the 61.8% Fibonacci retracement level of the $20.46-$22.52 bounce and acceptance below would be seen as a fresh trigger for bearish traders. Meanwhile, Technical indicators on daily/4-hourly charts are holding deep in the bearish territory and are still far from being in the oversold zone.

The technical set-up seems tilted firmly in favour of bearish traders and supports prospects for an extension of the ongoing depreciating move for the XAG/USD. Hence, a subsequent slide below the $21.00 mark, towards challenging the YTD low around the $20.45 area touched on May 13, now looks like a distinct possibility.

On the flip side, attempted recovery might now confront resistance near the 50% Fibo. level, around mid-$21.00s. Any further move up might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the $22.00 mark, comprising 200-period SMA on the 4-hour chart and the 23.6% Fibo. level.

A convincing break through the aforementioned barrier would negate the near-term negative bias and shift the bias in favour of bullish traders. The XAG/USD might then surpass an intermediate resistance near the $22.30 area and test the $22.50-$22.60 supply zone. Some follow-through buying should pave the way for additional gains.

Silver 4-hour chart

fxsoriginal

Key levels to watch

 

GBP/USD has dropped below 1.22 after disappointing GDP data ahead of the Bank of England’s (BoE) decision on Thursday. A cautious stance from the “Old Lady” could send cable to new lows for the year, economists at Scotiabank report.

BoE may allude to an eventual pause in rate hikes

“Further to the USD rally on Fed bets and the weak market’s mood, UK April GDP disappointed economists’ expectations in data published this morning. The country’s economy surprisingly contracted by 0.3% MoM against a median forecast for a slight 0.1% expansion.”

“The poor GDP showing makes the BoE’s decision even more difficult. We think odds have risen that the bank alludes to an eventual pause in rate hikes – perhaps as soon as August, but more likely in September or November.” 

“OIS markets still seeing two 50 bps hikes across the four BoE meetings between now and November are in for a severe disappointment and the GBP is at clear risk of plumbing new lows for the year (and since mid-2020) under the mid-1.21s if the BoE delivers a cautious message this week.”

 

The CAD is trading defensively against the strengthening USD. Economists at Scotiabank expect the loonie to continue at the mercy of the current US dollar’s force.

The risk of a push on to 1.2950/1.30 has risen

“The CAD slide looks excessive from our point of view, given the strength of the domestic economy, the BoC’s own hawkish intent, and yield premiums over the USD for the CAD but that will not help the CAD resist the USD’s general advance for the moment.”

“With spot already reaching the 1.2865 area (61.8% Fib of the May/ Jun USD decline), the risk of a push on to 1.2950/1.30 has risen.”

“USD support is 1.2815/25.”

 

GBP/USD has fallen aggressively. Analysts at Credit Suisse stay tactically bearish, with next key supports at 1.2157/50, then 1.2072, which is certainly not viewed as a floor.

Resistance moves to 1.2431/39

“Next key support is seen at the recent lows at 1.2167/57, which we expect to be broken fairly imminently, with short-term daily MACD momentum turning lower from neutral levels. Thereafter, we continue to look for an eventual fall to our 1.2072/17 target zone – the May 2020 low and 78.6% retracement of the entire 2020/2021 uptrend.”  

“Given the very strong downtrend, the 1.2072/17 area is not viewed as a floor and we certainly do not rule out an eventual move to 1.15/1.14, which is the bottom of the six-year range.” 

“Near-term resistance moves lower to 1.2300/01 initially, above which would trigger a move to the recent minor breakdown point at 1.2431/39, which we look to cap. Above here would open up more important medium-term resistance at 1.2668/76, where we would have even more confidence in a ceiling if reached.”

 

EUR/USD drops to mid-1.04s. Economists at Scotiabank expect the pair to extend its decline toward the year-to-date low of 1.0350.

EUR/USD ends its two-week consolidation period

“Risk-off sentiment, widening core-periphery spreads, a more hawkish Fed, and Eurozone growth concerns will likely offset augmented ECB hike bets in the near-term and keep the EUR on the backfoot as the current leg lower eyes the year-to-date low of 1.0350.”

“The EUR’s steep three-cent-plus drop from above the mid-1.07s last Thursday has wiped out a sizable share of its H2-May gains, ending its two-week consolidation period with a sharp slide that points it towards its year-to-date low of 1.0350.”