Global Growth Concerns and Central Bank Actions Impact Stocks, Euro Gains Momentum | Daily Market Analysis

Key events:

• Eurozone - ECB McCaul Speaks
• Eurozone - ECB President Lagarde Speaks

US stocks are declining as the global growth forecast continues to worsen due to weak global PMI readings. The risk of a severe economic downturn is higher for Europe compared to the US, which could maintain support for the dollar in the short term.

This week has been unfavorable for stocks, leading to an unraveling of many trades involving large-cap technology companies. The Nasdaq is taking a beating as the AI trade experiences significant profit-taking.

After the conclusion of major central bank decisions, the focus in the upcoming week will shift to a fresh batch of inflation releases.

The euro has enjoyed a strong month, capitalizing on expectations that the European Central Bank (ECB) will raise interest rates more aggressively than previously anticipated. Despite indications of cooling inflation and stagnant economic activity, the ECB has signaled its intentions for higher rates. However, this commitment may prove to be a mistake in the long run as it limits the ECB's flexibility. Nevertheless, the rally in European yields has made the euro a more appealing investment option. Additionally, the weakness of the US dollar and the Japanese yen has further boosted the euro, as foreign exchange is a relative game.

Looking ahead, the key question is whether the euro's rally still has momentum. This will likely be influenced by the inflation report scheduled for release on Friday and its implications for the ECB's future path. Inflation has been consistently declining this year, and recent business surveys suggest this trend continued in June, with selling prices rising at the slowest pace in over two years.

The DAX index has experienced a significant decline, primarily driven by a sharp drop in the shares of Siemens Energy, which fell over 30%. The company decided to withdraw its full-year guidance due to issues in its Spanish Gamesa operation.

Similarly, the FTSE 100 index has faced downward pressure, slipping below the 7,500 level and returning to levels seen earlier this year at the beginning of the trading period.

In the United States, the week will kick off with the release of durable goods orders and new home sales for May on Tuesday, followed by the core Personal Consumption Expenditures (PCE) price index, personal consumption, and income figures for the same month on Friday.

In recent weeks, there has been a game of chicken between Federal Reserve officials and market participants. Policymakers have signaled two more rate increases for this year, but investors are only pricing in one. The persistence of inflationary pressures will ultimately determine who is right, which will have implications for the dollar.

Overall, the US dollar has faced some downward pressure this month, partly due to market skepticism regarding the Fed's hawkish signals and partly due to the optimistic sentiment in stock markets, reducing the demand for safe-haven assets.

Gold has experienced a challenging couple of months as Wall Street anticipates more aggressive tightening measures from central banks across Europe. The strong demand for Treasuries has caused the dollar to rally, driven by investor concerns about the global growth outlook. As the stock market selloff intensifies, gold is starting to attract safe-haven flows after falling to the $1920 level.

Gold received an additional boost when Fed's Bostic stated his preference for no further rate hikes this year. However, the rebound lost some momentum when the latest PMI data failed to demonstrate sufficient weakness in the service sector to warrant a pause.

The upcoming week will be crucial for Fed rate hike expectations as we receive the PCE readings and hear from Fed Chair Powell once again. If swap futures begin to believe that the Fed is likely to implement two more rate increases, gold could remain susceptible. However, if risk aversion intensifies, gold may experience an influx of safe-haven flows. Key support for gold lies at the $1900 level, while resistance can be found around the $1960 region.