Traders short euro ahead of ECB’s minutes

The news shaping the markets today

Russia claimed complete control of the entire eastern Lugansk region. However, the US dollar index traded slightly lower this morning.

Australia’s private house approvals fell by 2.7% to 9,687 units in May, following 0.2% growth in the prior month, which exerted pressure on the AUD/USD forex pair lower.

Brazil’s trade surplus narrowed to $8.8 billion in June, from $10.4 billion in the year-ago month. Despite this, the BRL/USD pair remained flat in forex trading this morning.

Colombia’s manufacturing PMI climbed to 55.7 in June, from 53.9 a month ago, signalling the second strongest expansion in the country’s manufacturing sector since the data collection started in 2011. However, the COP/USD forex pair traded flat after the news.

Mexico’s manufacturing PMI improved to 52.2 in May, from 50.6 in the previous month. However, the MXN/USD pair declined in forex trading this morning due to strength in the US dollar.

What’s happening: The EUR/USD forex pair moved lower on Friday, with investors keeping to the sidelines ahead of the release of minutes from the ECB’s latest meeting.

What happened: The euro came under pressure on Friday, as investors await minutes from the ECB’s June meeting for signs of a rate hike higher than 25bps at its July meeting.

The EUR/USD also declined due to the strength in the US dollar, with traders looking for safe-haven options.

Why it matters: So far, there has been a wide divergence in the monetary policy between the US Federal Reserve and the ECB, which triggered the recent sell-off in the euro.

The US central bank has been aggressively raising interest rates to control surging inflation, while the ECB has kept rates unchanged. Several Fed policymakers seem to be backing another 75bps rate hike at their next meeting. The ECB is widely expected to be preparing for its first hike in 11 years.

Speculations of a rate hike by the ECB were fanned by the Eurozone’s inflation announcement. The bloc’s annual inflation hit a new record high of 8.6% in June, from 8.1% in May. The figure also topped market expectations of 8.4%. The annual inflation rate in Italy rose to 8% in June, the highest since January 1986.

Sentiment was hurt by the Eurozone’s S&P Global manufacturing PMI declining to 52.1 in June, the slowest factory growth since August 2020. US data also came in weaker-than-expected on Friday, with the manufacturing activity slowing more than projected in June, and new orders shrinking for the first time in two years.

The US dollar continued recording gains, with traders expecting aggressive rate hikes and investors looking for safe-haven options amid uncertainties. The US dollar index, which measures the greenback’s performance versus a basket of major currencies, gained 0.42% to 105.12 on Friday, just shy of the 20-year high of 105.79 recorded on June 15.

The EUR/USD forex pair fell 0.56% to close at 1.0426 on Friday.

What to watch: Traders will keep an eye on the minutes from the ECB’s June meeting. The NFP (nonfarm payrolls) data from the US will also remain in focus this week.

The release of the Eurozone’s producer prices data will also remain in focus today, as the annual producer inflation, which surged to a new record high of 37.2% in April, is expected to ease slightly to 36.7% in May.

The markets today

Asia-Pacific markets will be in focus today after closing lower on Friday

Context: Asia-Pacific markets settled lower on the first day of the new quarter, reversing earlier gains.

Details: Traders cheered positive economic data from China earlier in the session. The Caixin/Markit manufacturing PMI for China rose to 51.7 in June, from last month’s reading of 48.1. The official PMI data for June also showed factory output growing for the first time in three months, coming in at 50.2.

Mainland China markets closed lower despite the upbeat economic data. The Shanghai Composite lost 0.32% to close at 3,387.64, while the Shenzhen Component fell 0.28% on Friday.

Japan reported downbeat economic reports, with the au Jibun Bank manufacturing PMI falling to 52.7 in June, from a final reading of 53.3 a month ago. The Bank of Japan’s index for big manufacturers’ sentiment also declined to 9 in the second quarter, from 14 in the prior quarter.

Japan’s Nikkei 225 fell 1.73% to close at 25,935.62 on Friday, while the Topix lost 1.38% to end at 1,845.04, with tech stocks leading the downturn.

South Korea’s Kospi also reversed course to fell 1.17% on Friday. Australia’s S&P/ASX 200 lost 0.43%, ahead of the Reserve Bank of Australia’s policy meeting scheduled for later this this week, where the bank is expected to announce a half-point rate hike. The S&P Global Australia Manufacturing PMI rose to 56.2 in June, from a final reading of 55.7 in May.

Hong Kong’s markets were closed on Friday, while India’s BSE Sensex fell 0.21%.

What to watch: Traders await the release of services and composite PMIs from China, Japan, Australia and India, due for release on Tuesday.

After Friday’s sell-off, Asian markets started the week on a positive note, with the Nikkei 225 and Shanghai Composite gaining 0.6% and 0.1%, respectively, this morning.

Other Markets: US indices closed higher on Friday, with the Dow Jones index, S&P 500 and Nasdaq 100 up by 1.05%, 1.06% and 0.71%, respectively.

Support & resistances for today

Market snapshot

What else to watch today

Germany’s balance of trade, Spain’s unemployment change and tourist arrivals, Turkey’s inflation rate and producer prices, Brazil’s IPC-Fipe inflation, government budget value and Central Bank of Brazil’s focus market readout, Italy’s car registrations, Canada’s manufacturing PMI, as well as India’s balance of trade, exports and imports.