Market Analysis: Possible Further Fed Hikes Pushes the Dollar Higher

Due to a dovish European Central Bank, the Euro significantly declines against the US Dollar and Japanese Yen. The European Central Bank has raised interest rates by a further 0.25%, taking the main refinancing rate to a 23-year high. However, investors saw comments from the ECB president as an indication that the European Central Bank will now hold for the rest of the year. Mrs. Lagarde emphasised the European economy's weakness and advised that the bank may hold or hike in September. However, investors know the bank will never indicate that a hike is not likely. For this reason, the market so the President's 50/50 response as a dovish indication. See below for further information on the Euro and technical analysis. 

The US Dollar is performing well mainly due to the poor performance of the Euro. The US Dollar Index trades with no gains or losses this morning but rose to a weekly high yesterday. The Japanese Yen appreciated against most currencies and was supported by higher-than-expected inflation. The Tokyo Core Consumer Price Index read 3%, higher than previous expectations. Additionally, this morning’s Bank of Japan is altering the yield curve control program, which will allow the bank to potentially shift away from its large stimulus package in the future. However, the bank will keep interest rates unchanged so far, but investors view the change to the yield curve as hawkish. 

EUR/USD

The Euro saw its most substantial decline against the US Dollar since the 15th of March. The exchange rate has declined by 1.08% over the past 24 hours and is trading at a 3-week low. However, it should be noted that the price action is not purely being influenced by the forward guidance given by the European Central Bank but also by the strength of the Dollar. The US Dollar is increasing in value against all currencies bar the Japanese Yen. 

The EUR/USD is currently obtaining signals from the technical analysis that the US Dollar will continue to rise in value against the Euro in the short term. The Regression Channel has fully formed and indicates a downward trend, as are the Ichimoku Trading Clouds and the MACD. Crossovers also show a downward price movement as the instrument is trading below the 75-bar Moving Average, and the latest crossover has been moving downwards since 06:30 (GMT+3). However, when monitoring the “PARCCI” strategy during yesterday evening’s webinars, the EUR/USD has yet to obtain a bearish signal. However, a signal will likely arise if the price drops below 1.09479.

EUR/USD 30-Minutes Chart on July 28th 

As mentioned above, the Euro is negatively affected by comments made by the European Central Bank President. Well-known analysts also leant towards a dovish outlook considering the president said that rates will be “set at”, indicating the pause in September. In previous months, the president instead said “will be brought to”, which signals more is the come. This has also resulted in the price of European indices rising to new highs, such as the DAX. However, the Euro will also largely be influenced by European inflation. Investors will focus on German CPI, which will be publicly available later in the day. The Euro may be more pressured if the German CPI reads lower than expected. So far, only Spain has released their inflation data this morning, which read higher than expected, which is positive for the Euro. 

According to Bloomberg, most analysts believe the ECB will not hike again in 2023, and there is a higher chance of the Federal Reserve hiking a further 0.25%. This is also one of the reasons why the US Dollar has risen against the Euro. The US Dollar continues to surprise investors with more robust economic data. Yesterday, the US Gross Domestic Product read higher than the previous quarter and higher than expectations. The US also saw lower than expected Unemployment Claims and higher Core Durable Goods Orders. All are deemed positive for the US Dollar. 

NASDAQ 

The NASDAQ and US indices generally saw a day of two halves. The first half of the day, up to 17:00 GMT+3, saw a solid bullish trend measuring 2.72%. However, the index declined, dropping to a lower price than the market opened. This is supported by higher-than-expected earnings amongst most companies, the latest being Intel and T-Mobile. However, in addition to this, investors have a higher risk appetite as the US economy is less likely to fall into a recession. This can be seen as positive for the US stock market. 

However, the index significantly declined as investors sold shares, cashing in their profits from earlier in the day and the past week. Analysts are advising that the selloff was also due to psychological reasons, as the index rose to a new high in a short period after performing poorly over the past nine days. However, in addition to this, the positive economic data and much higher energy prices are likely to support inflation. As a result, investors are again contemplating whether the Federal Reserve will indeed pause for a prolonged period. 

A concern for investors is that the price of Crude Oil has risen from $70.60 to $80.00, measuring an increase of more than 13.50%. In addition, the more expensive Dollar is also partially straining demand. Nonetheless, fundamentals remain positive, with Intel seeing Revenue read 6% higher than expectations and Earnings Per Share reading positive instead of a -$0.03. T-Mobile also saw their Earnings Per Share read 18% higher and significantly higher than the previous quarter. 

The main price driver throughout the day will be the PCE Price Index. Markets expect the Core PCE Price Index to read 0.2%, the lowest since December 2022. If the index reads lower than 0.2%, fears of further hikes will likely fade for the next week. However, higher than 0.2% can pressure the US stock market.

NASDAQ 3-Hour Chart on July 28th 

Summary:

• The European Central Bank raises interest rates by a further 0.25%, taking the main refinancing rate to a 23-year high.
• The Euro declines against most competitors. Across the currency market the Euro is depreciating most against the US Dollar and Japanese Yen. However, investors now look to the German Consumer Price Index. 
• The Bank of Japan is altering the yield curve control program, potentially allowing the bank to shift away from its large stimulus package in the future. However, the bank will keep rates unchanged so far, but investors view the change to the yield curve as hawkish. 
• Intel sees its Revenue read 6% higher than expectations and Earnings Per Share reading positive instead of a -$0.03.