Overnight Headlines

*USD broadly weaker Friday, closing for a weekly loss of 0.1%

*US equities notched record closes, Asian shares in the green

*Vix falls back near to 16, Q2 earnings season in focus

USD slid last week for only its second weekly loss in the last seven weeks, albeit closing marginally lower. GBP surged 0.8% above 1.39 and closed at its highest level since 24 June but is currently trading just below here. JPY is recovering back above the 110 level but suffered its worst weekly loss in five weeks, falling more than 0.8%.

US equities rebounded with the S&P500 earning its sixth week of gains in seven as US bond yields halted eight straight days of losses to reverse the big move down last Thursday. Despite Covid variant concerns, policy easing in China has helped calm some of the recent jitters on global growth. Earnings season kicks off with JP Morgan, Goldman, Citigroup and Wells Fargo among those reporting. Stock futures point to a flat or slightly negative open with Europe mixed.

Market Thoughts – Full risk calendar

This week has something for everyone with live central bank meetings and important data released, as well as the second quarter earnings season kicking off in earnest. The US CPI figures tomorrow will tell us if we did see the peak in inflation in May, potentially capping Fed rate hike expectations for now. Fed Chair Powell’s semi-annual appearance before Congress on Wednesday and Thursday will be key in setting direction for the bond market, which has been very volatile recently.

Wednesday also sees the RBNZ meet where the bank is expected to signal a path to normalisation with new forward guidance. Rate hike forecasts have been brought forward with many predicting an increase in rates at the end of next year. A third cut in QE is anticipated at the Bank of Canada meeting later on Wednesday. The rapid rebound in employment and successful vaccine campaign should see the bank reconfirm rate rises in the second half of next year.

Chart of the Day – EUR/GBP not coming home

A very bad headline, sorry, but at least after Wembley’s unhappy night for England supporters, the government is set to confirm that most restrictions will be lifted form next week. This is mostly priced by markets with focus this week on jobs and inflation data. ECB President Lagarde is still sounding dovish and hinted at new stimulus guidance over the weekend being announced at its 22 July meeting.

EUR/GBP has tracked sideways for the last few weeks between 0.8540 and 0.8615. The 100-day SMA has capped prices to the upside while solid support lingers below which has so far held off a drop to the April cycle lows at 0.8471. If we hear more from ECB officials and the divergence in policy between itself and the Bank of England, we could finally see a move south in this pair.