War’s Aftershocks Force Israelis To Face Delayed Inflation Spike

Pound Sterling gapped higher against the Euro on Monday following Eurozone elections that prompted French President Emmanuel Macron to call an election and saw Germany's ruling coalition suffer a drubbing. Gains have been sustained after the ONS reported wages in the UK rose 6.0% in April, which is far too high for the Bank of England as it tries to bring inflation back down to 2.0%.To be sure, the UK unemployment rate has also risen and suggests an ongoing cooling in the labour market, but the Bank of England will have to proceed with caution when it comes to cutting interest rates. A slow and cautious rate cutting cycle is consistent with ongoing support for the Pound.

The more significant driver of the Pound-Euro equation at present is undoubtedly the Euro, where a noticeable political risk premium is emerging and has helped push Pound-Euro to 34-month highs at 1.1840, taking payments with competitive providers to the cusp of 1.18.

"The euro remains on the backfoot following Sunday’s European election results," says Achilleas Georgolopoulos, Investment Analyst at XM.com. "The snap parliamentary elections called in France have been generating the most headlines, but the key event of the weekend was the very weak result achieved by the three coalition parties in Germany."

The analyst explains there are notable implications for Germany from these elections: from earning around 51% of the votes in the 2021 federal elections, the coalition crashed to just 31% support, raising questions about the viability of the existing government.

"Germany is almost considered the “sick man” of the eurozone with the end-2023 court decision also limiting the government’s fiscal room for 2024. New federal elections are out of the picture, but a weakened German Chancellor could have severe repercussions," says Georgolopoulos.

Rising Eurozone political uncertainty contrasts with the UK's relatively mundane political backdrop, where investors are well prepared for a significant victory by the Labour Party on July 04.

Labour is actually relatively closely aligned with the current Conservative administration in terms of economic policy, suggesting continuity for businesses.

"Markets don’t have much to go on regarding Labour’s economic policies but are likely to take the view that a change from the policy chaos of recent years is welcome. The UK equity market could benefit," says Chris Iggo, Chair of the AXA IM Investment Institute. "Equities are cheap, sterling is cheap."

A Bloomberg survey of investors found that more than half of 268 respondents said a Labour win would be best for the British Pound.

So we have a contrasting pro-GBP political setup contrasting with a more uncertain outlook for the Eurozone, and this is reflected in a rising Pound to Euro exchange rate.

"Regional politics in Europe are currently loaded with challenges. The expected boost in the standing of far-right groups in the European parliamentary elections reflects the broadening of support for issues such as nationalism and cultural identity which may have implications for matters such as EU enlargement, common European initiatives (such as climate change) and policies related to Ukraine," says Jane Foley, Senior FX Strategist at Rabobank.

Rabobank looks for weaker Euro exchange rates from here, maintaining a one-month forecast of EUR/USD at 1.07, with losses also being expected against the Pound and Krona.

Global markets are on tenterhooks ahead of a Federal Reserve interest-rate decision and key US inflation figures. Bitcoin investors have reason to be particularly alert for potential volatility.

A 30-day correlation between Bitcoin and the US 10-year Treasury yield is at minus 53, one of the most negative readings in data compiled by Bloomberg since 2010. The metric suggests the largest digital asset at present is moving in the opposite direction to the benchmark bond yield to an unusual degree.

Bonds may be buffeted by the inflation data and Fed policy outlook, which are both due in the space of a few hours on Wednesday. The correlation study hints at the risk of Bitcoin being tossed around in the Treasury market’s wake.

Bitcoin wobbled on Tuesday, sliding as much as 3.2% to a one-week low and hovering at $67,780 as of 8:38 a.m. in London. Smaller tokens such as Ether and meme-crowd favorite Dogecoin also nursed losses.

Bitcoin hit a record of $73,798 in mid-March, lifted by inflows into dedicated US exchange-traded funds. But it struggled for new highs in the past three months. For Tony Sycamore, a market analyst at IG Australia Pty, Bitcoin’s recent failed attempts to crack all-time peaks rings “alarm bells.”

“The lack of upside progress in recent weeks is concerning given the significant inflows into Bitcoin ETFs recently which have thus far failed to turn the dial,” Sycamore said. “The next 36 hours is going to be crucial.”

A net $15.6 billion has poured into the ETFs since their January launch. On Monday, $65 million was pulled from the products, snapping a run of 19 straight days of subscriptions, according to data compiled by Bloomberg.

The inflation data are expected to show price pressures running well ahead of the US central bank’s comfort zone. At the turn of the year, investors were wagering on a slew of Fed rate reductions, but now the debate is whether future easing will amount to only a smallish tweak of policy.

An outlook of higher for longer borrowing costs could be a challenging backdrop for a speculative asset like Bitcoin, which has already more than quadrupled since the start of 2023 in a comeback from a deep bear market.

Fairlead Strategies LLC technical analyst Katie Stockton in a research note flagged “neutral” short-term momentum for the digital token based on chart patterns, while adding that long-term prospects are more positive.

The crypto market “is like a junkie that constantly needs bullish news to stay up,” said Anand Gomes, co-founder of Paradigm, a derivatives platform. “So when there is none, the path of least resistance is lower.”

The revision was due to private sector investments, at minus 0.4%, up from the previous minus 0.5%.

Seasonally adjusted real gross domestic product, or GDP, a measure of the value of a nation’s products and services, remained in negative territory, as exports and consumption declined from the previous quarter.

Quarter-to-quarter, the economy slipped 0.5% in the January-March period, according to the Cabinet Office, unchanged from last month’s results.

The annual rate measures what would have happened if the quarterly rate lasted a year.

Wage growth has been slow, and prices on imports have risen amid a decline in the Japanese yen against the U.S. dollar. The dollar is trading at nearly 157 yen lately, up from about 140 yen a year ago.

The weak yen has tourism booming. But it makes imports more expensive, a sore point for a nation that imports almost all its energy. Sluggish consumer spending has also been a drag on the economy. Private consumption accounts for half of Japanese economic activity.

Another negative is the ongoing scandal involving improper vehicle model tests at several major automakers, including Toyota Motor Corp., which form the pillars of Japan’s brand power. Production was halted on some models.

Last week, Toyota Chairman Akio Toyoda apologized for the wide-ranging fraudulent testing involving the use of inadequate or outdated data in collision tests, incorrect testing of airbag inflation, rear-seat damage in crashes and engine power.

The safety of the vehicles aren’t affected, but the companies apparently wanted to speed up the testing process.

Investors are also watching closely for the next action from the Bank of Japan, whose monetary policy board meets later this week. The central bank raised interest rates earlier this year for the first time since 2007, but only to a range of zero to 0.1% from minus 0.1%.

“The Japanese central bank’s stance will similarly be eyed closely, especially with the domestic currency weakness prevailing. Japanese manufacturers are facing the fastest rise in input costs,” S&P Global Market Intelligence said in a report.

Unemployment has stayed relatively low in the world’s fourth largest economy at about 2.6%. Japan suffers a serious labor shortage, as its birth rate continues to drop, hitting a record low last year. The number of marriages have also fallen.

Such demographic trends could prove more dangerous in the long run, according to some analysts, who worry Japan is especially weak in per capita output, and its dimming clout on the global stage might even lead to security risks.

Japan’s GDP is expected to slip to No. 5 in magnitude after the U.S., China, Germany and India next year, according to the IMF.

Bitcoin traded below $68,000 during the June 11 Asia trading session as analysis warned of further BTC price losses.

Data from Cointelegraph Markets Pro and TradingView showed a 3% dip taking Bitcoin to lows of $67,320 on Bitstamp after the daily close.

Lacking support at the key $69,000 level, Bitcoin bulls failed to stave off a downward move through thin exchange order book liquidity.

The day prior, Keith Alan, co-founder of trading resource Material Indicators, had warned that insufficient bids could be a warning sign for BTC price strength.

“Sure we have some laddered bid support in here, but not a heavy, heavy concentration of it — and really, it’s not even heavy down to $60,000 if I can be completely honest,” he said during his latest YouTube update.

An accompanying chart covered order book liquidity for the BTC/USDT pair on the largest global crypto exchange, Binance.

In a subsequent post on X, Material Indicators noted that with the latest move down, Bitcoin had formally rejected $69,000 as support and had also given up the 21-day moving average — a key short-term trendline.

“Support at the 21-Day Moving Average and the R/S Flip at $69k have both been invalidated,” it read.

“This move isn’t over. In fact I expect these killer whale games to continue up to and through JPow’s comments on Wednesday and economic reports on Thursday.”

As Cointelegraph reported, the week’s main potential volatility catalyst for Bitcoin and crypto price action is United States macroeconomic data — the Consumer Price Index (CPI) and Producer Price Index (PPI) — along with the Federal Reserve’s latest interest rate decision and accompanying press conference by Chair Jerome Powell.

“So far CPI/PPI has been around the highs of this range & FOMC resulting in local lows,” popular trader Skew continued on the topic.

In his own market analysis, meanwhile, fellow trader and commentator Credible Crypto suggested that the outcome of the down move may not be as radical as a trip to $60,000.

With liquidity being added and pulled from the market at will by large-volume traders, appetite for BTC could spare bulls any lower than even $65,000.

“We continue to see spot absorption on each and every move down, even on lower timeframes,” he summarized to X subscribers.

Credible Crypto noted that overhead resistance at $72,000 had been “pulled immediately” once Bitcoin began reversing.

“What are the odds we front run range lows and 62-65k and just reverse from here? I think they are decent,” he concluded.

“No guarantees of course, but we will know soon enough with developing PA over the next 24 or so hours.”

It’s telling that core bonds do not gain when markets are in risk-off. German bunds underperformed US Treasuries yesterday with a political risk premium boosting yields between 0.2 (2-yr) and 6.8 bps (30-yr) higher. Far-right advanced (sharply) in the European parliamentary elections in many countries including Germany, Italy and France. In a direct consequence, the president of the latter announced snap parliamentary elections. It’s bound to keep political uncertainty lingering for the time being. Sovereign risk premia vs Germany’s 10-yr yield rose across the bloc with France underperforming peripheral countries. The euro didn’t forget about the 2012 debt/political crisis and proved very vulnerable. EUR/USD slipped below the 1.08 big figure to close at 1.0765. That’s off the intraday lows of 1.0733 though. EUR/GBP since mid-May hovered close to but above 0.85. Sterling lacked the strength for a sustained break lower but a weak euro yesterday eventually took care of it. The combo closed at the lowest level since August 2022 (0.8456). US yields added up to 4.3 bps at the long end of the curve. Yesterday’s $58 bn 3-yr auction raises the stakes for tonight’s $39bn 10-yr and Thursday’s $22bn 30-yr ones. Investor demand was mediocre at best with a below-average 2.43 bid-to-cover and the highest dealer takedown since December. The auction carried a 1.1 bp tail. European bourses ceded ground with the French CAC40 the obvious underperformer (-1.35%). Wall Street gapped lower at the open but managed to close in the green after recovering throughout the session.

In between this morning’s UK labour market report and tonight’s US auction, markets will probably trade cautious and without a clear direction ahead of the Fed policy meeting on Wednesday. We expect a solid floor under core/European bond yields. ECB’s Lagarde in an op-ed published this morning clearly stated one should not expect rate cuts at a predetermined pace. She didn’t exclude the possibility of having multiple meetings between one rate cut and another and vowed to keep policy restrictive (= policy rate above an increased (?!) neutral rate) for as long as needed. The British labour market data were mixed. Employment in the three months to April dropped a bigger-than-expected 139k after an already weak March number. The unemployment rate ticked higher to 4.4% vs 4.3% expected. Wage growth remained sticky but the gauge that excludes bonusses at least didn’t surprise to the upside this time around (6%). The figure including bonusses, however, did come in at a higher-than-expected 5.9%, matching the previous month’s upwardly revised figure. After falling of a cliff yesterday, EUR/GBP is recovering marginally to 0.846. We don’t think the move has strong legs though.

The NY Fed’s May survey of consumer expectations were a mixed bag. They showed short-term inflation expectations (1-yr) declining slightly (3.3% to 3.2%) while remaining unchanged at the 3-yr horizon (2.8%) and rising from 2.8% to 3% on the 5-yr tenor. Labor market expectations were miscellaneous. Interestingly, households’ expectations for the stock market improved to a 3-yr high with households becoming also more optimistic about their financial situation a year from now. The share of respondents expecting to be financially the same or better off 12 months from now is 78.1%, the highest level since June 2021. Median expected growth in household income increased from 3%to 3.1%. Perceptions of credit access compared to a year ago were largely unchanged, while expectations about future credit access deteriorated.

Mexican president-elect Sheinbaum vowed to push through with proposed judicial reforms proposed by her predecessor, outgoing president Lopez Obrador. She wants them to be part of a first wave of legislation together with pension reforms for public workers, a ban on reelection to public office and assistance programs for woman and schoolchildren. The judicial reform would put judges elected by popular vote on the nation’s Supreme Court and other lower courts and is seen (by markets and opponents) as eroding checks on power. Ever since the Mexican presidential election earlier this month, Mexican assets have been underperforming. After the recent statements to push through, USD/MXN tested the recent tops around 18.50. This compares with pre-election levels of 17.

The ECB cut its key policy rates by 25 bps at the June policy meeting. A more bumpy inflation path in H2 2024, the EMU economy gradually regaining traction and the Fed’s higher for longer US strategy make follow-up moves difficult. Markets are coming to terms with that. The German 10y yield set a new YtD top at 2.7%.

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed Chair Powell indicated that further tightening was unlikely. However, the FOMC Minutes still showed internal debate on whether policy is restrictive enough. Sticky inflation suggests any rate cut will be a tough balancing act while several policy makers hint at a higher neutral rate. The US 10-y yield is stuck in the 4.3/4.7% trading range.

EUR/USD is stuck in the 1.06-1.09 range. The desynchronized rate cut cycle with the ECB exceptionally taking the lead, strong US May payrolls and a swing to the right in European elections pulled the pair away from 1.09 resistance. Focus turns to the US side of the story with May CPI inflation numbers and a more hawkish Fed looming on the horizon.

Debate at the Bank of England is focused at the timing of rate cuts. Slower than expected April disinflation and a surprise general election on July 4 suggest that a June cut in line with the ECB looks improbable. Sterling gained momentum with money markets now discounting a Fed-like scenario. EUR/GBP tested the 2023 & 2024 lows near 0.85. Euro weakness eventually pulled the trick after French president Macron called snap elections following a weak showing in EU elections.

The UK labor market was in focus on Tuesday (Jun 11). Labor market data for April could influence investor expectations of a June BoE interest rate cut.

Average earnings (incl. bonus) increased by 5.9% in the three months to April, year-over-year (3M/Yr). Economists forecast average earnings (incl. bonus) to rise by 5.7%. In March, average earnings (incl. bonus) advanced by 5.9% (3M/Yr)