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The European Central Bank maintains the dovish position and the three key interest rates remain unchanged

Market Focus

US stocks climbed to a record high as investors are shifting to believe Federal Reserve will maintain accommodative policies in upcoming months. The Nasdaq 100 Index gained more than 1%, while the Dow Jones Industrial Average index was up only 0.06%. S&P 500 closed 0.47% higher with Health Care shares led the gains, and Financials were underperforming.

Commerce ministers from China and the US agreed to push forward trade and investment links. While the two nations are slowly resuming official contact after Joe Biden took office, it is still unclear what the US plans to do with the so-called ‘Phase One’ deal signed last year. “It’s positive in the sense that both countries are stepping up economic and trade communication, but no game-changing decisions or announcements have come out yet, I won’t be overly excited,” commented Alvin Tan, head of Asia currency strategy at RBC Capital Markets LLC.

The Basel Committee on Banking Supervision is putting the strictest capital requirement for holding crypto assets on banks’ balance sheets. The panel proposed that a 1,250% risk weight be applied to a bank’s exposure, meaning banks need to hold a dollar in capital for each dollar worth of crypto-asset under the current 8% minimum capital requirement. The Committee is deeply concerned that the growth in these volatile assets could jeopardize global financial stability, thus the required capital will need to be sufficient to absorb a full write-off without exposing depositors and other senior creditors of the banks to a loss.

ECB kept the policy rate unchanged, and here are Bloomberg’s key takeaways from its policy statement:

  • Pandemic purchases will continue at a significantly higher pace than early this year.
  • New economic forecasts still put inflation in 2023 at 1.4%, well below the ECB’s goal.
  • There was a debate on the pace of purchase and some divergent views in the Governing Council.

Main Pairs Movement

EURUSD was on the back foot against the dollar greenback despite the dollar negative mood. The Euro weakness could come from the ECB’s announcement of larger monetary spending. Meanwhile, US CPI (MoM) in May climbed 0.6%, the second-largest advance in more than a decade. The inflation gauge showed steady growth in the costs of used vehicles, houses, airfares, and apparel. According to the Labor Department, the rapid rise in used car prices accounts for 1/3 of the total monthly advance in CPI. The Core CPI which excludes volatile food and energy rose 3.8% on a year-over-year basis, the highest number since 1992. Better-than-expected inflation should press Federal Reserve to start tapering sooner, which bolsters the US dollar. But since we saw quite the opposite reaction in the market, it rather implies investors are buying into Fed’s transitory inflation narrative and dollar bearish bias could resume from here.

Cable temporarily put behind some of its concerns and ride with dollar weakness gained 0.4% on Thursday. Aside from the EU’s disagreement over the implementation of the Northern Irish protocol, UK is also facing a possible delay in its reopening. The Delta variant is finding its way to spread around the unvaccinated, the highly anticipated ‘Freedom Day’ will likely be postponed from June 21st to early July.

Technical Analysis

NZDJPY (Daily Chart)

NZDJPY is still supported by a 78.6% Fibonacci level around 78.7. Most of the gains from the RBNZ hawkish shock have been erased by choppy trading sessions in the past two weeks. Price is retesting an upward trendline started from last November, and will likely cling to it given current uninspired market sentiment. A strong deviation to the upside is needed to keep the bullish bias alive. In the north, the nearest resistance sits around 80.1, next to 81.1.

Resistance: 80.1, 81.1, 82.2

Support: 78.7, 76.84, 75.5

USDCHF (Daily Chart)

USDCHF failed to extend beyond 0.899 as SMA20 remains to be a solid cap on this pair. There was a false breakout on SMA20 and it went straight to contest soft resistance at 0.904, but upward momentum quickly faded amid a lack of follow-up demand. With the bears are back in the driver’s seat, USDCHF looks to close the day with a lower-low, which could provide an exit to the recent consolidation phase. To the south, the immediate support lies around 0.885, followed by a six-years low of 0.878.

Resistance: 0.904, 0.908, 0.916

Support: 0.885, 0.878

XAUUSD (Daily Chart)

Gold briefly touched $1870 after the US CPI release, then quickly reversed back above $1890. We witnessed yet another strong defense from gold buyers, price did not even have a chance to pass the ascending trendline. Worth mentioning SMA20 is still a valid dynamic support line for the yellow metal. However, we are somewhat cautious on the direction of Gold in the near term given today’s positive correlated move in stocks and gold. Investors should be prudent to wait for a clear breakout, which could be provided by next week’s FOMC meeting.

Resistance: 1922, 1956, 2000

Support: 1870, 1890, 1847

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