The US dollar strengthened against most of its other major peers, while equities slid after Fed Chair Jerome Powell confirmed that a double hike will be “on the table” when the Fed meets next and that even larger increases could follow.
Investors will keep an eye on the preliminary PMIs for April from the Eurozone, the UK, and the US, while on Sunday they could turn their attention to the second and final round of the French Election.
Powell Flags Even More Aggressive Hikes
The US dollar traded higher against most of the other major currencies on Thursday and during the Asian session Friday. The main losers were NZD, AUD, and CAD in that order, while the currencies against which the greenback lost ground were JPY ad EUR.
The strengthening of the greenback and the weakening of the risk-linked Aussie, Kiwi and Loonie suggest a switch to risk-off at some point yesterday or today in Asia. Indeed, turning our gaze to the equity world, we see that, although most major European indices traded in the green, all three of Wall Street’s main indices fell more than 1%.
NASDAQ actually lost 2.07%. The pessimism rolled over into the Asian session today as well. Among the indices under our radar, only China’s Shanghai Composite gained somewhat.
Responsible for forcing market participants to reduce their risk exposure appears to be Fed Chairman Jerome Powell, who confirmed the Fed’s willingness to move aggressively in order to curb high inflation.
He said that a 50 bps rate increase will be “on the table” at the upcoming gathering and added that it would be appropriate to “be moving a little more quickly”, reinforcing expectations over a triple hike in June.
Following those remarks, market participants, who have been already fully pricing in a 50 bps hike in May, increased their bets over a triple one in June, pushing the probability up to 78.4% from slightly above 50% ahead of Powell’s speech.
They even see a 70.3% chance for another 50bps hike to be delivered in July. In other words, they see the rate rising by 1.75% in the next three months. It seems that such an increase in such a short period of time is too much to bear for equity investors and that’s why we saw them selling after Powell’s remarks.
Remember that higher interest rates mean higher borrowing costs for companies, but also lower Present Values for high-growth firms, like tech giants, who are valued based on discounted expected cash flows for the months and years ahead.
Will the PMIs Hurt the Euro Today?
As for today, market attention is likely to turn to the preliminary PMIs for the month of April from the Eurozone, the UK, and the US. Both Eurozone’s manufacturing and services indices are expected to have slid, but to have remained above the boom-or-bust zone of 50, which separates expansion from contraction. This is likely to take the composite PMI down to 54.0 from 54.9.
Further slowdown in Eurozone’s economic activity is likely to confirm the notion that the ECB may need to proceed more carefully with raising interest rates than some other major central banks, like the Fed, the BoE, and the BoC.
Although there were reports yesterday that the ECB may eventually decide to hike interest rates in July, the increasing expectations over an ultra-aggressive stance by the Fed still point to a wide divergence between those two major central banks. Thus, we still see the path of least resistance for EUR/USD as being to the downside.
There are no forecasts for the UK PMIs, while in the US, expectations are for a fractional decline in the manufacturing index, and no change in the services one, with both indices staying near the 58 handle.
How Will the Market Respond to the Outcome of the French Elections?
Besides the economic agenda, investors will also keep an eye on the political scene and the second round of the French Election, with the vote taking place on Sunday. The opinion polls suggest a 55% support for incumbent President Emmanuel Macron, who appeared more convincing in Wednesday’s TV debate, against 45% for challenger Marine Le Pen. This points to a tight race on Sunday.
Le Pen is a Eurosceptic candidate, and, although she ditched past ambitions for a “Frexit” or getting out of the euro, a potential victory of hers could mean a 180-degree spin for France, from being a driving force for European integration to being more cautious on EU decisions and plans.
With that in mind, we suspect that a Le Pen victory may be negative for the euro, while the opposite may be true in case Macron comes out victorious. However, we don’t believe that a potential rebound could also signal a trend reversal, as the common currency could continue feeling the heat of the uncertainty surrounding the war in Ukraine, the slowdown in Eurozone’s economic activity, and the divergence in monetary policy between the ECB and other major central banks, like the Fed and the BoE.
NASDAQ 100 – Technical Outlook
The NASDAQ cash index tumbled yesterday, after hitting resistance slightly below the key barrier of 14305, marked by the highs of Apr. 14 and 20. The fall took the index below another important zone, at 13733, confirming a forthcoming lower low on the daily chart. In our view, this move has signaled the continuation of the prevailing short-term downtrend.
We believe that the dip below 13733 may have opened the way towards the low of Mar. 16, at around 13460, the break of which could carry larger bearish implications, perhaps setting the stage for declines towards the low of March 15th, at around 12945.
We will abandon the bearish case and start examining whether the bulls have gained the upper hand, upon a break above the 14305 key resistance. This will confirm a forthcoming higher high and may pave the way towards the highs of Apr. 7 and 8, at around 14635.
Slightly higher lies the 14765 zone, near the inside swing low of April 1st, which if it also gets broken, could see scope for more advances perhaps, towards the peaks of Apr. 4 and 5, at around 15180.
EUR/USD – Technical Outlook
EUR/USD traded lower yesterday after it hit resistance slightly below the 1.0945 barrier, marked by the highs of Apr. 6 and 7, as well as by the inside swing low of March 28th. The pair remains below the downside line taken from the high of February 10th, as well as below a longer-term line, drawn from the high of June 1st, 2021. In our view, this keeps the near-term picture negative.
As we noted yesterday, we believe that a new slide could result in another test near the 1.0760 territory, marked by the lows of April 14th and 19th, the break of which would confirm a forthcoming lower low and could set the stage for declines towards the 1.0635 area, defined as a support by the low of March 22nd, 2020. If that barrier doesn’t hold either, then we could see the rate testing the 1.0570 hurdle, marked by the low of April 10th, 2017.
On the upside, a break above 1.1027 could signal a large positive correction, but not a bullish reversal, as the pair will still be trading below the downside line taken from the high of June 1st, 2021. We may see the bulls driving the battle towards the high of March 31st, at 1.1185, the break of which could aim for that longer-term downside lien, or the 1.1275 barrier, marked by the high of Feb. 25.