EUR/USD hovers around a 20-year low on recession fears and as attention turns to Eurozone retail sales, the EC’s economic forecasts, and FOMC minutes.
· GBP/USD holds below 1.20 as PM Boris Johnson’s future is in doubt
· Fed minutes come as market prices in a 86.7% probability of a 75bp hike in July
· Oil rises after collapsing just shy of 10% yesterday
Recession fears saw European stocks tumble yesterday. Weaker PMI data, a warning over the deteriorating economic outlook from BoE’s Andrew Bailey, and concerns over Russian gas supply sparked a steep selloff, with the FTSE and the DAX closing 2.9% lower.
A late in the day turnaround on Wall Street is helping European stocks head higher on Wednesday. Big tech helped the broader US market stage a late rebound on Tuesday, with Alphabet and Meta booking 4% and 5% gains, respectively, while chip makers Nvidia and Micron Technologies also gained over 4%.
The change in the market mood appeared to be attributed to the bond market. The 2-year treasury yield, which was trading above the 10-year yield often considered a recession warning, reversed later in the session, easing recession fears which have hammered stocks recently.
EUR/USD
European stocks are rebounding, helped higher by better-than-expected German factory orders, which rose 0.1% MoM in May after falling -2.7% in April. Expectations had been for a -0.6% decline.
The euro remains depressed after plunging 1.5% yesterday to 1.0235, its lowest level since 2002. The surging USD and growing fears that the ECB would be starting the rate hiking cycle as the eurozone heads into recession keep the euro out of favor and raise the question of whether EUR to USD parity is likely.
UK politics
The FTSE is rebounding today; the pound continues o trade under 1.20, dragged lower by political woes. The resignation of the health secretary and finance minister yesterday has destabilised Boris Johnson’s government. It comes after months of damaging headlines and weeks after he narrowly survived a vote of no confidence. There are doubts over whether he can cling to power until the weekend.
Looking ahead
Attention will now turn towards Eurozone retail sales and the release of the European Commission’s economic growth forecasts. While retail sales are expected to rise 0.4% after slumping -1.3% in May. However, the EC’s economic growth forecasts are unlikely to be upbeat, with expected downward revisions to growth and upward revisions to inflation.
Fed minutes
The minutes of the latest Federal Reserve meeting will be released today and should shed some light on the trajectory for the path of near-term interest rates. At the post-meeting press conference, Jerome Powell said that the Fed could hike rates by 50 or 75 basis points in July. Since then, policymakers have been vocal in their support for another big hike. According to the CME FedWatch Tool, the market is pricing in an 86.7% probability of a 75 basis point rate hike. Hawkish-sounding minutes could lift the possibility, boosting the USD, which is pausing for breath after reaching a 20-year high yesterday while also pulling stocks lower.
Oil
Oil prices fell almost 10%, collapsing below $100 per barrel on Tuesday as recession fears overwhelmed the market hurting the demand outlook. Citigroup downgraded its oil price outlook and expected oil to fall to $65 by the end of the year. Today, oil prices are rising, paring some of yesterday’s losses as tight supply is again in focus. The Norwegian government ended a strike in the petroleum sector that had cut oil and gas output. Despite today’s move higher, recession fears will not fade anytime soon, which could keep the pressure on oil prices going forward.
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