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Daily Wrap Up 12 July 2022

12 Jul 2022 04:33 PM

EUR/USD rebounds, equities mixed

Earlier today EUR/USD traded at parity, it was the first time the currency pair hit that level since 2002. The post pandemic boom is over and there were already fears the eurozone was running out of steam. Tensions between the EU and Moscow are running high following Russia’s invasion of Ukraine. European leaders are bracing themselves for the possibility of Russia cutting off its gas supply in the winter, and that has put extra pressure on the euro. The German ZEW economic sentiment reports measures investment confidence, and it swung from -28 in June to -53.8 in July, the lowest reading in 10 years. It says a lot that analysts and investment managers are more downbeat now than there were in the early days of the lockdown. In the past few hours, EUR/USD has turned positive as short covering led to a recovery.

Stock markets are playing second fiddle to currencies as European indices moved from negative territory this morning to being on track to finish higher. It seems as if the rally in EUR/USD influenced equities. Trading is mixed in the US as the Dow Jones is up fractionally, while the NASDAQ 100 is in the red. The cautious mood in the markets has nudged up demand for bonds, and the 10-year yield has fallen to 2.91%, which is a sizeable fall from the 3% seen late last week. Judging by the price action in the commodities sector, traders hold a gloomy outlook, as oil, copper, palladium, and platinum are nursing large losses.

Traders are still questioning the health of the British economy. Andrew Bailey, the governor of the Bank of England, said there is “mixed outlook for risks” to the economy yesterday. UK CPI hit 9.1%, a forty-year high, but Mr Bailey predicts the cost of living will cool next year. Overnight, the British Retail Consortium retail sales monitor showed negative growth of 1.3%, the fourth consecutive reading. It is likely the high cost of living is chipping away at consumer sentiment, and that is contributing to the sell-off in the pound.

The Canadian dollar typically comes under pressure when oil is falling as Canada has a relatively large energy industry. WTI has dropped 6% today due to renewed demand worries as China has reintroduced new Covid-19 restrictions. Worries circulate the second largest economy in the world will move down a gear in terms of economic activity, and therefore demand could decline. The “Loonie” has not dropped too much when you consider the losses on WTI. Tomorrow the Bank of Canada will announce its interest rate decision, and economists are anticipating a hike of 0.75%, which would be a big lift. It seems as if tomorrow’s BoC meeting is preventing the Canadian dollar from falling aggressively.

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