Wall Street Has a Dire Warning About Green Investments Under New ‘Endgame’ Rule

Economic

Summary:

Senior Wall Street bankers are warning that a plan by US regulators to rewrite the rules of tax-equity investing will deliver a major blow to a market dominated by JPMorgan Chase & Co. and Bank of America Corp.

At issue is the perceived risk of tax-equity investments, which are a form of financing in which banks provide capital to green projects in exchange for tax credits. It's a market in which JPMorgan and BofA have been estimated to do more than 50% of the roughly $20 billion worth of annual transactions.

Last July, the three agencies that decide bank capital requirements in the US (the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency) unveiled what's come to be known as the Basel 3 Endgame. Their goal is to wrap up the sweeping regulatory overhaul that started after the financial crisis of 2008, and ensure that banks have enough capital to see them through the next market meltdown.

A part of that broader proposal is a requirement that banks quadruple the risk weights they assign to tax-equity investments, forcing them to significantly raise the amount of capital they set aside for renewable energy projects.

Dermot McDonogh, chief financial officer at Bank of New York Mellon Corp., said if the rule goes ahead, it will “severely reduce” or even “eliminate” the capacity of banks to invest in renewable energy projects, according to a written consultation response.

It's an assessment that's in line with warnings put forward by the clean energy industry and legal experts.

Law firm Clifford Chance has warned that the risk-weight proposal would make it “prohibitively expensive” for banks to continue doing certain tax-equity investments, which is “certain to have a harmful” impact on green finance. ACORE, a trade group that represents renewable project developers, has said the plan threatens to “derail the clean energy transition.”

Bank of America and JPMorgan declined to comment for this story.

In connection with an earnings call earlier this month, JPMorgan's chief financial officer, Jeremy Barnum, said regulators “should just be aware of the likely consequences of what's happening here and make sure that the results are intentional and that we're looking around the corner a little bit.”

Last year, JPMorgan, Bank of America and Wells Fargo & Co. were involved in one of the largest single asset tax-equity financings ever, with a $1.2 billion allocation to an offshore wind project intended to provide renewable energy to Massachusetts. Barnum warned in October that JPMorgan is already rethinking such deals, in light of the risk-weight proposal.

Wall Street has been particularly vocal in its criticism of the wider Basel 3 Endgame proposal, warning that it will hit everything from mortgage lending to small-business loans. The campaign has been public and coordinated, encompassing everything from attack ads to appearances on Capitol Hill.

“The banking industry officially submitted comments to US regulators during the week of Jan. 15 over the rule known as the Basel III Endgame, which stands to increase capital requirements around 20% for big banks like JPMorgan, Bank of America and Citigroup. Yet our analysis of the comments shows that regulators will likely have to scale back the rule to finalize it in 2024, and that the threat of legal actions is real,” according to Nathan R. Dean, a senior government analyst with Bloomberg Intelligence.

Responses submitted by a Jan. 16 consultation deadline reveal the scenarios Wall Street is now anticipating. Crucially, bankers expect the planned risk-weight rules to undermine many of the green tax credits that the Biden administration's landmark climate law, known as the Inflation Reduction Act, sought to streamline.

US wind and solar developers have relied on tax-equity financing for years, with the IRA underpinning the model.But since most green project developers don't have tax liabilities that are big enough to take advantage of available tax benefits, they often end up selling equity stakes to a bank, which can then claim federal tax credits against that investment.

Opposition to the proposed risk-weight regulations is so intense that there's now speculation the Fed, FDIC and OCC will need to make changes before proceeding, according to industry executives.

Wall Street's “hope” is that the proposal is “either completely revised” or “very materially” reworked, Jane Fraser, Citigroup Inc.'s chief executive officer, said when asked about the planned risk weights in connection with the bank's quarterly results.

Capstone, an investment advisory firm, calls tax-equity investments a vital source of financing for clean energy projects, especially since passage of the IRA in August 2022. It notes that regulators have made exceptions in other corners of the economy, such as low-income housing tax credits, for which risk weights are capped at 100%. JPMorgan and BNY Mellon are among Wall Street firms who have publicly backed this idea.

Adam Gilbert, a partner at PwC who's a former head of regulatory policy at JPMorgan, said that if the goal of the US government is to channel more capital to clean energy projects, then “why would we try to make them more capital intensive and therefore less attractive from a business standpoint, from an economic standpoint?”

Gilbert, who's also been a vice president at the Fed where he was given the task of coordinating its work with the Basel Committee on Banking Supervision, said financiers who end up filling the gap created by the proposed regulations “will not be as stable as the banks themselves and therefore less reliable.”

Source: Bloomberg

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Zi Cheng

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Forex

Fundamental Analysis

Amidst heightened volatility, the British Pound is under pressure in anticipation of interest rate announcements by both the Bank of England and the Federal Reserve, along with escalating tensions in the Middle East. The GBP/USD pair is trading below 1.2700, with investors expected to make strategic moves following this week's policy updates.

Traders are foreseeing the Bank of England maintaining its interest rates at 5.25%, marking the fourth consecutive hold, as core inflation in the United Kingdom surpasses the targeted 2%. Market participants are closely monitoring the central bank's guidance on future interest rates.

The initial interest rate decision of 2024 poses challenges for Bank of England policymakers, given the persistent inflation and increasing likelihood of a technical recession. The deepening cost-of-living crisis has significantly impacted consumer spending, heightening the risk of a recession if the Bank of England adopts a hawkish stance.

Simultaneously, prevailing market sentiment remains negative as US President Joe Biden vows to respond to aerial drone attacks on US service personnel near northeastern Jordan. Iran refutes allegations of involvement in the drone attacks.

This week, it is anticipated that the Federal Reserve will maintain the current interest rates, yet the likelihood of a rate cut in March has shifted to approximately 50%, as indicated by Fed Fund futures. In terms of the Non-Farm Payrolls (NFP) report, the forecast suggests that the US economy is expected to have generated 180,000 jobs in December, a decrease from the 216,000 in the preceding month. Ultimately, the culmination of these significant events may contribute to heightened volatility for the USD, thereby impacting the GBP/USD pair.

GBP/USD Consolidates As Interest Rate Decision Awaits_1

Technical Analysis

GBP/USD has been forming bullish market structure since last year as the GBP was stronger than the DXY. However, GBP/USD did not start of the year interesting as it started consolidating within a tight range and as I have attached below, it is in an accumulation phase within a channel. Good news is that whenever this happen, it is actually preparing for a breakout or we call it distribution phase.

My bias for now would be break out towards the upside as the trend is still a bullish trend. Besides that, we also have confirmation from the 200 Day Moving Average that the current price still remains above the 200 Day Moving Average which increases the probability that the price could go higher.

From a technical perspective, an ideal situation entails an upward breakout that aligns with the current market trend, offering the potential to reach the pivotal supply zone at the 1.31 price level.

Concerning currency pairs with the US dollar, it is essential to keep a close eye on the upcoming Federal Reserve meeting slated for this Wednesday. Consequently, consolidation might endure until that day.

GBP/USD Consolidates As Interest Rate Decision Awaits_2

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Thomas

Stocks

India's stock market overtaking Hong Kong's market value reflects growing investor confidence in the world's most populous nation, but it also raises a more fundamental question: whether the momentum will continue.

Last week, India secured its position as the world's fourth-largest equity market. The market capitalisation of India's shares reached $4.33 trillion last Monday, compared to $4.29 trillion for Hong Kong, according to data compiled by Bloomberg.

India's markets have the potential to scale new heights this year, as the country remains one of the world's fastest-growing major economies.

Despite that, analysts warn that stock trading in India this year is going to be characterised by volatility amid global uncertainty and imminent elections in the country.

"The outlook for India's stock markets this year appears promising due to factors including robust economic growth, continued foreign investor interest and projections of rate cuts," says Sonam Srivastava, founder and fund manager at Wright Research, an investment advisory and portfolio management firm based in Mumbai.

"Given these favourable conditions, it's reasonable to anticipate that the Indian stock markets may explore new record highs."

Geopolitical instability and global economic weakness are among the factors that could disrupt market stability, she says.

The world's most populous country has a general election coming up in the next few months, which will be closely watched by investors as Prime Minister Narendra Modi bids for a rare third term in power.

"While the overall trajectory appears positive, investors should remain vigilant and be prepared for market fluctuations," says Ms Srivastava.

India's equity markets have boomed and the factors that have fuelled the Indian market's rise include the country's robust gross domestic product growth and strong corporate balance sheets, reflecting its strategic positioning as an attractive alternative to China.

The world's second largest economy has somewhat fallen out of favour with some investors as it is having entered an era of slower growth. Some of China's major firms are listed in Hong Kong, which has seen a historic slump in its stock market.

In contrast to the fortunes of Chinese stocks nine more Indian stocks were added in November to the MSCI Emerging Markets Index, a benchmark widely tracked by global investors.

All this has helped to attract strong foreign inflows, while domestic investor participation in Indian stock markets has also been surging.

Overseas funds invested more than $21 billion in Indian shares last year, according to Bloomberg.

India overtaking Hong Kong is therefore being viewed as a highly positive development for the country, whose bellwether S&P BSE Sensex is enjoying eight consecutive years of gains.

Is India's Stock Market Irrationally Exuberant?_1

"This accomplishment stands as evidence of the nation's robust economic expansion, the trust and confidence of investors, and the resilient performance of the market," says Anil Rego, chief executive and fund manager at Right Horizons, a wealth advisory and investment management company.

He believes that India will deliver "robust annual earnings growth over the next three years, driven by a multi-decadal growth outlook for the economy, healthier corporate balance sheets, an expanding capital expenditure trend focused around infra, an increasing trend in discretionary consumption and a dependable reservoir of domestic capital".

This year, "rate cuts globally will lead to inflows into emerging markets and India is relatively better positioned due to strong fundamentals and healthy corporate and bank balance sheets".

Nevertheless, he expects "the near term to be driven by volatility", with elections coming up.

"India's ascension to the position of the fourth-largest stock market in the world is a momentous achievement, signifying its growing economic prowess and attractiveness to investors," says Ms Srivastava.

"This milestone is significant as it reflects not only India's current economic strength but also its potential for future growth."

Asit Bhandarkar, senior fund manager, equity, at JM Financial Asset Management agrees.

"India's growth opportunity seems robust and offers a decadal runway," he says.

"We are confident of newer records for India along the way – although higher volatility is to be expected this year."

That volatility in India's markets was experienced last week.

The BSE Sensex declined by about 1,000 points last week ending at 70,700.67, as IT stocks fell on weaker-than-expected earnings, while financials stocks dragged markets lower after Indian bank HDFC reported disappointing margins.

"We are in a long-term structural bull run," says Divam Sharma, founder and fund manager at Green Portfolio. "With that being said, in the short term, we are in a fragile territory as much of the bullishness is priced in."

He expects the next market-mover to be the country's federal budget which will be presented on Thursday. This is the Narendra Modi government's last budget ahead of the general election, which is expected to be held by May.

"The budget will lay the groundwork for the next rally," says Mr Sharma.

Beyond that, "we are seeing an expansion of Indian markets with many small, mid, new age businesses lining up for getting listed", he says.

"We are also seeing a structural shift where savings are channelised more towards financial assets and the domestic participation towards markets is increasing."

Global developments are creating further uncertainties for the Indian markets.

"Domestic macros and fundamentals are strong, FIIs [foreign institutional investors] have again started buying in the markets, and we are expecting political stability after the Lok Sabha elections," says Mr Sharma.

"So, overall, the outlook seems positive but negative global cues might impact the Indian markets to some extent. Global inflation and recessionary trends are there and then there's the possibility of geopolitical tensions escalating."

While India's equity markets have been going from strength to strength, 2024 is also expected to be a pivotal year for the country's bond markets.

Global funds have already started buying into India's sovereign bonds on expectations of their inclusion in global debt indexes.

JP Morgan, the largest bank in the US, last year announced that India's local bonds will be added to its Government Bond Index-Emerging Markets from June 28. India's bond market is worth more than $2 trillion.

HSBC Asset Management, India, in a report published last week said that this development can be seen as Indian bond markets "coming of age", and it forecasts that the move could attract $100 billion of inflows over the next three to five years.

"2024 is likely to be a pivotal year for Indian bond markets, with the inclusion of Indian Government Bonds into a global bond index for the first time," HSBC wrote.

"Historically, this has been the first sign of strong incremental flows into the respective emerging market debt markets."

Sovereign wealth funds, central bank reserve managers and other large institutional investors including pension funds "are likely to closely track and get more familiar with the Indian bond markets, as part of their emerging market allocations", according to HSBC.

Overseas investors have already pumped more than 500 billion rupees ($6 billion) into index-eligible debt since JPMorgan's announcement of the inclusion, according to Bloomberg.

"The inclusion of Indian government bonds could be one of the supportive factors for domestic bonds," says JM Financial's Mr Bhandarkar.

"We have seen that foreign flows have already started to come in the debt market ahead of the bond inclusion. This could likely develop and deepen the domestic bond markets and help in attaining a better demand-supply balance of government bonds in the next fiscal year."

Still, Ms Srivastava warns that "the full impact on India's bond markets will depend on various factors, including global economic conditions, the relative attractiveness of Indian bonds compared to other investments, and India's management of economic policies and fiscal discipline".

But despite such risks, India's bond and equity markets are poised to excel, she believes.

Robust economic growth, a thriving startup ecosystem driven by innovation, investor-friendly government reforms, a young and expanding population with rising incomes, and a global market realignment due to geopolitical tensions and economic uncertainties in other regions will drive growth, she says.

"These factors collectively foster confidence in India's market and make it an appealing destination for both domestic and international investors," she adds.

Source: The National News

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Chandan Gupta

Traders' Opinions

Commodity

Fundamental Analysis

The Dow Jones Industrial Average didn't have the smoothest start on Friday; there was a slight pullback. However, despite the initial hiccup, the index continued its upward momentum. The driving force behind this resilience seems to be the influx of capital into the market, creating a sense of optimism.

Investors are placing their bets on a potential recovery, counting on central bank intervention to steer the ship. Specifically, they're eyeing the Federal Reserve, hoping for a market boost through monetary policy adjustments. Essentially, the idea is that when the Federal Reserve injects liquidity into the markets, industries start buzzing with activity fueled by readily available cheap money. Traders, in turn, gravitate towards prominent industrial stocks, seeing them as indicators of economic recovery.

The belief that the Federal Reserve will play the superhero with loose monetary policies is a significant driving factor for the ongoing climb in stock prices. It's a sentiment that resonates especially with the Dow Jones 30, which stands out from the broader indices like the S&P 500 and the NASDAQ 100. The Dow Jones, comprising only 30 stocks, provides a more balanced snapshot of the overall economy.

In the current landscape, the prevailing wisdom is to buy on the dip, a strategy that seems to be the norm for most stock indices, particularly in the United States. The Dow Jones, in particular, has broken through to fresh highs, prompting the possibility of what traders commonly refer to as "FOMO trading" or the fear of missing out.

Now, let's talk strategy. Every time there's a pullback in this market, the prevailing sentiment is to buy. It's not just my perspective; it seems to be a collective stance shared by the broader trading public. The market's attitude appears to be steadfast, and I don't foresee a shift in this mindset anytime soon. However, it's essential to acknowledge the potential for volatility in this market, necessitating preparation for all scenarios.

In a nutshell, the Dow Jones Industrial Average is displaying a robust upward trajectory, fueled by the injection of funds into the market and hopes of a recovery supported by central bank intervention, particularly from the Federal Reserve. The strategy of buying on the dip remains a prevalent approach, and the recent highs reached by the Dow Jones only add fuel to the fire of potential FOMO trading. While the market's overall sentiment seems unyielding, it's crucial to stay vigilant given the potential for volatility in the near future.

This market journey is akin to riding a rollercoaster – there are highs, a few twists and turns, and the occasional drop. However, the general consensus among traders is to enjoy the ride, and every dip in the market is an opportunity to hop back on. The Dow Jones Industrial Average is like the lead car on this rollercoaster, breaking through to new heights and enticing others to join in the excitement.

As we navigate through the market's twists and turns, it's evident that the belief in the Federal Reserve's supportive role is a key driver. The notion that the central bank will step in with loose monetary policies is the wind beneath the market's wings. It's as if the market is saying, "Hey, as long as the Fed has our back, we're in good hands."

The Dow Jones 30's unique position as a more focused index offers a clearer lens into the overall economic landscape. It's like having a magnifying glass – you can scrutinize individual elements more closely. And right now, those elements are pointing towards resilience and optimism.

In terms of strategy, the idea of buying on the dip echoes through the market like a familiar refrain. It's a harmonious chorus of traders, echoing the sentiment that every downturn is a chance to jump back into the market. The recent surge to new highs in the Dow Jones only intensifies this melody, creating a crescendo of potential FOMO trading.

Yet, amidst the harmony, a note of caution is sounded. The acknowledgment of potential volatility serves as a reminder that, while the journey may be thrilling, it's not without its uncertainties. Preparation becomes the key as we navigate the peaks and valleys of this market landscape.

In conclusion, the Dow Jones Industrial Average is in the spotlight, continuing its rally with the support of buyers. The optimism is fueled by the expectation of intervention from the Federal Reserve, maintaining a bullish but potentially volatile market environment. The prevailing sentiment is to buy on the dip, and the Dow Jones, with its recent surge to new highs, adds an element of FOMO trading to the mix. As we ride this market rollercoaster, the unwavering belief in the Federal Reserve's role is the constant companion, guiding the journey through twists, turns, and the occasional dip.

Technical Analysis

Recently, the Dow Jones Industrial Average experienced a brief retreat, only to make a turnaround and exhibit vitality around the 37,800 level. Notably, this level had previously posed as a substantial area of resistance, and the market's memory seems to have acknowledged this historical significance.

Observing this, it's reasonable to expect that the Dow Jones might be setting its sights on reaching the 40,000 level in the near future. Even in the scenario of a breakdown below the 37,800 level, there appears to be a robust support structure extending down to the 37,000 level. Adding to this support is the 50-day Exponential Moving Average (EMA), which is on the rise and aligning itself with the 37,000 level.

The 37,800 level, once a formidable barrier, has now become a point of interest as the Dow Jones charted a path of recovery from that point. The market's collective memory seems to recognize this as a significant juncture, underscoring the dynamic nature of support and resistance levels.

Looking ahead, the Dow Jones seems poised for an upward journey, with the 40,000 level looming as a potential destination. This optimism is supported not only by recent positive movements but also by the resilience displayed around key resistance-turned-support points.

In the event of a retracement below 37,800, a safety net appears to be in place, with substantial support extending down to 37,000. The 50-day EMA's upward trajectory toward this level adds an additional layer of reinforcement. This structural support provides a reassuring backdrop for traders and investors alike, mitigating potential downside risks.

In summary, the Dow Jones Industrial Average has navigated a recent pullback, showcasing a bounce-back around the 37,800 level. The historical significance of this level, once a major resistance area, is now evident as a notable point of support. The market's memory and current dynamics suggest a bullish outlook, with the 40,000 level emerging as a plausible target. Even in the face of a retreat, the Dow Jones appears well-supported, with the 37,000 level and the rising 50-day EMA acting as robust pillars of reinforcement. Dow Jones 30 Continues to Showcase Positive Market Sentiment_1

Dow Jones 30 Continues to Showcase Positive Market Sentiment_1

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Zi Cheng

Traders' Opinions

Cryptocurrency

The UK finds itself increasingly isolated as one of the few major global markets resisting the approval of retail access to cryptocurrency exchange-traded products. While Continental Europe, Australia, Brazil, and Canada have embraced such products, the recent introduction of spot bitcoin ETFs in the US prompted even Hong Kong to express its intention to join the trend.

Despite Prime Minister Rishi Sunak's promotion of the UK as a cryptocurrency hub and his advocacy for a regulatory framework supporting the sector, the country remains hesitant. Even small investors in the UK are restricted from purchasing these products listed elsewhere.

The high-profile launch of 10 spot bitcoin ETFs on Wall Street, managed by well-known entities like BlackRock, Invesco, and Fidelity, accentuates the UK's deviation from the trajectory followed by most other financial hubs.

The UK's position stems from a 2021 ruling by its regulator, the Financial Conduct Authority (FCA), prohibiting the sale of cryptocurrency-related derivatives, including exchange-traded products, to UK retail investors. The FCA's decision, seemingly driven by concerns about leveraged products like contracts for difference offering up to 100 times leverage on the volatile bitcoin, affected both leveraged and unleveraged products such as plain vanilla ETPs and futures.

Critics argue that the FCA's line-drawing is questionable, as it didn't intervene in the direct trading of digital tokens by retail investors on crypto exchanges. Bradley Duke, Chief Strategist of London-based ETC Group, notes that UK retail investors "can invest in crypto, just not through regulated products." For instance, ETC Group's $1 billion Physical Bitcoin exchange-traded commodity is listed on various exchanges but cannot be on the London Stock Exchange due to the retail ban. Continental Europe currently boasts 120 crypto ETPs with €8.4 billion in assets, as per TrackInsight.

Duke emphasized that small investors are resorting to unregulated or under-regulated exchanges where no broker is involved, and there's no oversight ensuring the suitability of their investments. In such scenarios, investors are compelled to personally manage their cryptocurrencies, exposing them to significant risks.

Despite these concerns, Prosser remains skeptical that the FCA, which declined to provide a comment for this story, will yield to the arguments presented. In 2021, when the regulator announced its ban, it expressed apprehensions about the "integrity" of the underlying crypto market, its inherent volatility, and its potential connections to financial crime.

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Economic

Stocks

Markets await direction from the Fed

Stocks were mixed on Monday amid a cautiously risk-on tone ahead of a very busy week for the markets that's expected to get heated up mid-week by the Fed's policy decision, culminating with the latest payrolls report on Friday. After a week of yet more upbeat economic indicators out of the United States, the soft landing narrative remained intact as the inflation data went in the opposite direction.

The slightly bigger-than-expected drop in core PCE on Friday underscored the view that price pressures in the US economy are cooling, paving the way for a rate cut sometime in the spring. But investors remain split as to the likelihood of the Fed chopping 25 basis points off the Fed funds rate as early as March, so the focus for the January meeting is entirely on what clues the FOMC statement and Powell's commentary will offer on the timing.

So far, the data has been moving in policymakers' direction, but the Fed has to tread carefully as the labour market is still churning out jobs at a solid pace. Chair Powell risks getting investors' hopes up by not reining in expectations, only for them to be dashed if Friday's jobs report surprises to the upside again.

Earnings and China risks for equities

Wall Street just enjoyed a third week of gains and although the major indices ended Friday mixed, the overriding mood is still positive amid the recent AI-driven optimism. Those bullish bets will be put to the test this week as the Big Tech earnings will continue in earnest, with Microsoft and Alphabet set to report their results tomorrow, followed by Apple and Amazon on Thursday.

Also helping sentiment today is the latest effort by Chinese authorities to bolster the local stock market. Chinese equities surged last week after the country's central bank cut the reserve requirement ratio for lenders and pledged more targeted stimulus to come. But the rally started to fizzle out on Friday and regulators stepped in today to announce fresh restrictions on short selling after the recent informal measures failed to spur much of a rebound.

However, even today's move may not go far enough as it's been overshadowed by the news that troubled property giant Evergrande has been placed under liquidation by a Hong Kong court. Moreover, Washington is considering forcing cloud service providers like Microsoft, Alphabet and Amazon to disclose the names of foreign companies developing AI on their platforms, potentially escalating frictions with Beijing.

China's CSI 300 index ended the session down 0.9%, bucking the trend in the rest of Asia, while most indices in Europe were in the red as US futures traded flat.

Euro struggles, pound flat as dollar holds firm

The US dollar, meanwhile, edged up slightly on Monday against a basket of currencies, but remained within the tight sideways range of the past two weeks. A breakout on either side of the range is likely imminent, with technicals supporting a move to the upside.

The euro continued to drift lower as investors are convinced that the ECB will begin cutting rates in April. Whilst President Christine Lagarde once again attempted to push back on early rate cut bets in her post-meeting press conference on Thursday, neither did she close the door completely to a policy shift before the summer. The euro is unlikely to find much support from this week's flash GDP and CPI figures due out of the Eurozone.

A dovish tilt is also possible by the Bank of England this week as inflation in the UK has fallen sharply in recent months and looks set to fall further in 2024. Although it's unlikely that Governor Bailey will be as forthcoming as Lagarde or Powell to talk about rate cuts, he may nevertheless tone down some of his hawkish rhetoric. Sterling was last trading flat around $1.27.

Heightened geopolitical risks lift oil and gold prices

In commodities, a flare up in tensions in the Middle East over the weekend sparked a jump in oil and gold prices on Monday.

Fears for a broader war in the region are rising after three US service members were killed and dozens injured from a drone attack on a US base in Jordan near the Syrian border, thought to have been carried out by Iran-backed militants. It comes after a Houthi missile attack targeted an oil tanker leaving the Red Sea on Friday.

Oil futures fell back after coming close to hitting a three-month high. Investors probably don't see a significant threat to oil supply for the time being despite the ongoing attacks, but the fragile situation nonetheless is supporting demand for safe havens like gold, which was up 0.5% on Monday.

To stay updated on all economic events of today, please check out our Economic calendar

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Chandan Gupta

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Economic

Forex

Fundamental Analysis

The euro saw a significant turnaround in Friday's trading session, reflecting the ongoing ups and downs that have been a hallmark of the currency market lately. This trend is particularly interesting given the increasing strength of price fluctuations in both upward and downward directions, adding complexity to the dynamics of the market.

In the United States, the Federal Reserve has started hinting at a possible easing of monetary policy later in the year. On the other hand, the European Central Bank has been more hesitant to adjust its monetary stance. However, with Germany facing an impending recession, there are concerns about how long the ECB can postpone similar policy measures. The currency market is currently grappling with these uncertainties, trying to assess the potential impact on the euro.

Potential shifts in policy by both the Federal Reserve and the ECB could have a negative impact on the market. In the event of a major geopolitical incident favoring risk aversion, the US dollar is likely to strengthen. Conversely, a move towards a risk-on sentiment in the market could boost the euro. Currently, the EUR/USD pair price seems to be in a state of indecision, moving within its established range as it gathers enough momentum for a significant directional shift.

Ultimately, the euro's rebound on Friday underscores the ongoing volatility in the currency market. The EUR/USD pair is navigating a complex environment shaped by central bank policies and global economic uncertainties. Investors and traders are closely monitoring these developments, as they carry significant implications for the future direction of the euro against the US dollar. As the market continues to grapple with these factors, the EUR/USD pair is expected to maintain its current pattern of fluctuating movements within the defined consolidation range.

In summary, the currency market is currently a bit like a rollercoaster ride, with the euro being the star player. The ups and downs in its value are not just random; they are influenced by the policy decisions of major central banks, particularly the Federal Reserve in the US and the European Central Bank. Picture this: the US is considering easing its monetary policy, while the ECB is a bit more cautious. Meanwhile, Germany's economic struggles are throwing a wrench into the mix, making everyone wonder how long the ECB can hold off on making changes.

Now, let's talk about the potential impact on the market. If there's a major geopolitical event that makes everyone a bit risk-averse, the US dollar is expected to flex its muscles and get stronger. On the flip side, if the market is feeling a bit more adventurous and leans towards risk-taking, the euro might catch a tailwind. It's like a tug of war between the two currencies.

Currently, if you check the price of the EUR/USD pair, it's like watching a tennis match where the ball keeps going back and forth. It's in this limbo, collecting enough energy for a big move in one direction. The market is on the edge of its seat, waiting for that significant shift to happen.

To sum it up, the euro's bounce-back on Friday is a clear sign that the currency market is not for the faint-hearted. It's a wild ride, influenced by decisions made in high-rise offices by people in suits. Investors and traders are like spectators at a tennis match, tracking every move as it holds the key to where the euro might head next. As the market juggles these factors, the EUR/USD pair is expected to keep us entertained with its unpredictable dance within the established range.

Technical Analysis

The EUR/USD pair had a bit of a shaky start on Friday, showing a decline initially. However, things took a turn for the better as it found solid support at the 200-day Exponential Moving Average (EMA). This shift suggests that the market is keeping up with its habit of bouncing around, a trend we've seen play out in recent weeks.

Now, let's talk about the technical side of things. The 50-day EMA might throw a bit of resistance the euro's way, but it's the 1.09 level that seems to be the real player in this game. As the trading range widens, and the currency pair gains some momentum, it looks like the market is gearing up for a big move. Which way it'll swing is the million-dollar question.

For the time being, the EUR/USD is playing it safe within a consolidation range. Picture this range like a comfy bubble with the upper limit at the 1.10 level and the safety net at 1.075. It's been hanging out in this range for a while now, and the reason behind this steady behavior is largely the anticipated monetary policies of the big shots – the major central banks worldwide.

So, to sum it up in simpler terms, the EUR/USD pair had a bit of a wobble at the beginning of Friday, but it found its footing thanks to the trusty 200-day EMA. Now, it's eyeing the 50-day EMA and the crucial 1.09 level, wondering which way to go. Meanwhile, it's comfortably chilling in a consolidation range, with the upper limit at 1.10 and the lower support at 1.075. The reason behind this calm is the looming influence of central banks and their monetary policies. It's like watching a game of chess – every move calculated, and everyone waiting for that strategic play. Euro Hopes for Economic Boost Ahead_1