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Euro surges on rate hike predictions

There will be a lot of central bank talk today by the heads of 3 of the largest institutions. What I am expecting is for the markets to calm down as the day progresses. What I wasn’t expecting was the volatility we saw at the start of the London session. EURUSD and USDJPY are in focus for directional changes, with intraday swings likely to cut through the volume voids created by impulsive moves this week.

Market Brief

I was expecting the moves in the currency majors to move after this evening’s speeches from Fed Chair Powell, ECB President Lagarde, and BoE Governor Bailey. As it turned out I arrived at my trading desk to find the EURUSD had surged 110 pips higher from the start of the European session. The reasons I can make out are because ECB members Wunsch and de Guindos both said that a rate hike by the ECB could happen as early as July 2022.

Because of the higher prices of energy and food, European inflation is rising, and the ECB has so far not signaled that they are considering it a major problem. The price action today hints at what the market will do when the forward guidance from Lagarde comes that they will be removing the APP and moving into a rate hike cycle.

The EURUSD reached for the 1.09400 and took out a couple of previous daily highs at 1.09328 and 1.09228 before we saw profit-taking start. I am expecting a swift drop back into the previous ranges with 1.08664 as my first target.

The reason I am still more bearish than bullish is that the sentiment indicator is showing the majority of traders on the ActivTrader platform are heavily positioned to the upside, so we need to test their resolve and stops.

European final CPI is also likely to come in at 7.5% but a print higher could see another spike in the euro unless the morning's price action has already priced this figure in.

Since the breakdown in gold from the London morning fix on the 19th of April, the precious metals markets have been consolidating but on low volume. This suggests to me that the bulls are starting to tire and a test of the origination of the previous rising trend line is quite likely.

Backing up my base-case scenario of lower prices in gold is the chart which shows US 10-Year yields, Inflation-Index. Also known as US 10-Year TIPS. This shows that with the rate of inflation in the US and the current prices in the interest rates, the TIPS have once again turned positive. The first time since they broke into negative territory in March 2020. The chart above shows that over history these TIPS are possibly a driver of the gold prices as traders use gold as an inflation hedge and signal that investors expect the nominal return on 10-year Treasuries to exceed average inflation over the tenor of the bond.

. Recently the TIPS in blue have been rising but the price of gold which trades inversely has held its prices just under the $2k/oz level. At some point in time, there will have to be a correction. Either the TIPS drop or the price of gold drops.

European bourses are doing well this London session. The French CAC is currently rising on news that President Macron is up in the polls. The German DAX is currently up 1% and is leading the other major western indices higher. I am looking for a sweep of the 14609 and then to see what the other traders do next. If they push on towards the 15,000 then the bulls are clearly in control. If they use the liquidity above the daily swing high, it could be the last high before we come back and test the 13,000 level again. The US indices are doing well out of hours on the back of the earnings season. This could also be supportive of the European equities.

The other chart I am watching is the USDJPY which took the highs from May 2002 and has since traded slightly lower. Yesterday’s low is the significant price I am watching as we have been seeing daily higher lows and higher highs for the 4 consecutive days. With the 130 big figure obviously a major target for the bulls, there could also be a lot of front running in the profit-taking and we could see a pullback into the mid 120s.