Markets Focused on Central Banks’ Aggressive Monetary Tightening. ECB consider a 50 bps hike.

July 20, 2022

US stock rebounded on Tuesday, regained upside momentum and closed near session highs in its biggest one-day gain since June 24th as investors assessed the outlook for earnings. Any upside surprises may lead to impressive gains for equity markets amid investors’ expectations for potential disappointments ahead of the earnings report season. But the market focus remained on whether the aggressive monetary tightening by major central banks to fight high inflation will lead to a recession or not. In the Eurozone, the European Central Bank may consider a 50 bps rate hike during its meeting this week to deal with the worsening inflation, which lifted the Euro higher to its highest level in two weeks. On top of that, recession concerns have cooled a little bit as Russian gas giant Gazprom would resume its gas provision to the EU as planned on July 21.

The benchmarks, S&P 500 and Dow Jones Industrial Average both advanced on Tuesday as the US dollar remained under selling pressure and investors speculated that markets may have come close to their bottom. The S&P 500 was up 2.7% daily and the Dow Jones Industrial Average also advanced with a 2.4% gain for the day. All eleven sectors stayed in positive territory as the Communication Services and the Industrial sectors are the best performing among all groups, rising 3.63% and 3.58%, respectively. The Nasdaq 100 meanwhile climbed the most with a 3.1% gain on Tuesday and the MSCI World index rose 2% for the day.

Main Pairs Movement

The US dollar declined for the third session on Tuesday, as European Central Bank policymakers are considering raising interest rates by 50 basis points, which is higher than expected at their meeting on Thursday to calm record-high inflation. The DXY index bounced back to a psychological resistance of 107.500 in the first half of Tuesday, then lost upbeat momentum and dropped to a level below 106.500 during the Asia Session. The dollar lost 0.63% for the day and is still under selling pressure as the improvement in risk sentiment.

As the market got a positive mood, GBP/USD advanced by 0.35% on Tuesday. The declining inflation expectations in the US may hurt greenbacks further. The cable slipped to a daily low below 1.194 level, then regained upside traction and surged to a daily high above 1.202 level. Meanwhile, ECB President Christine Lagarde may elevate interest rates by 25 or 50 bps, which will trim the Fed-ECB policy divergence. EUR/USD witnessed heavy buying and reached a daily high above 1.024 during the mid-Asia session. The pair went up 0.83% for the day.

Gold advanced by 0.14% for the day, getting to a daily high above the $1713 mark in the mid-Asia session. A pullback in the US dollar continues to support the gold price as investors move to the sidelines ahead of key central bank meetings. Meanwhile, WTI oil preserved its upside traction and reached a daily high above the $100 level during the US session.

Technical Analysis:

XAUUSD(4-Hour Chart)

Gold advances slightly on Tuesday amid the broad-based selling pressure on the US dollar.

From the technical aspect, the outlook of the bullion remains bearish as gold continues to trade within the negative territory since early July. However, gold might be primed for a rebound if gold can breach the upper bound of the descending channel. The breakout of the level would give the metal a boost towards the next resistance of $1,740. On the flip side, if gold fails to overcome the bearish channel, the downside would resume towards the trough of $1,697.

Resistance: 1,740.31, 1,766.70, 1,788.03

Support: 1,697.66

USDJPY (4-Hour Chart)

USDJPY edges lower for the third- consecutive day on Tuesday amid subdued greenback demand. A diminishing odd for a more aggressive US Fed interest rate hike in late July continues to weigh on the greenback. From the technical perspective, the four-hour outlook of USDJPY remains bullish but bearish in the near term. Bulls are supported as USDJPY continues to trade within the ascending channel while USDJPY has dropped below the 20 Simple Moving Average, suggesting a downside momentum in the short- term. As of now, the relevant support near 137.43 would be the first defendant for bulls. A convincing break below the level might prompt aggressive selling and bring the pair to test 136.82. On the four-hour chart, as long as USDJPY holds above 136.22, the overall outlook remains upside.

Resistance: 138.18, 139.38

Support: 137.43, 136.82, 136.22

EURUSD (4-Hour Chart)

EURUSD continues to advance toward 1.0250 as the US dollar struggles to find demand. The euro-dollar gains positive traction amid the speculation about the ECB meeting this week. Technical speaking, in the near- term, the outlook of EURUSD turns upside as it trades well above the 20 Simple Moving Average. The break of the previous resistance has given the euro dollar a boost toward the next immediate resistance of 1.0266. Despite the RSI indicator has reached an extreme level, the bullish MACD looks to attract more follow-through buyers of the euro dollar. At the time of writing, bulls might give it another attempt if the pair can successfully break above the aforementioned resistance level of 1.0266. Further price action eyes on the ECB meeting.

Resistance: 1.0266, 1.0363, 1.046

Support: 1.0146, 0.9952

Economic Data