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The yen and the Swiss franc follow the flow of safe shelters as the United States plunges into recession and Europe slumps

Safe shelter
Safe shelter concept in growing economic uncertainty – Photo: Shutterstock

Volatility exploded in the foreign exchange market after the United States officially plunged into a technological recession in the second quarter of 2022 and the European energy crisis kept inflation high. This was the first time since Paul Volcker’s tenure in the early 1980s, following the Fed’s second consecutive 75 basis point increase.

Today, the currency flow has shifted to the Japanese yen (JPY), confirming its role as a recession hedge by surpassing the dollar by 1.5%. The US dollar / yen pair fell to 134.4 yen, below the previous lows at the closing price of the European market.

The Swiss franc (CHF) also rose as the flow of safe shelters increased, rising 0.5% and 0.8% against the US dollar (USD / CHF) and the euro (EUR / CHF), respectively.

The Greenback (DXY Index) was a very volatile session, initially soaring towards 107-level resistance, but seeing a pullback in the range of 106.4 to 106.5 after the release of US negative GDP data. Was done.

The euro (EUR / USD) returned to 1,016 (-0.4% on the day) after reaching a daytime high of 1,023 at the beginning of the day. Negative macroprints in the euro area have influenced sentiment towards a single currency, as explained below.

Growth concerns weighed heavily on commodity currencies. WTI Oil fell slightly that day (-0.7%) and failed to break through the $ 100 resistance level per barrel. Norwegian krone (NOK) fell 0.4% today after recording a 1.7% rise against the dollar the day before. The Australian dollar (AUD / USD) also fell 0.4% and the Canadian dollar (CAD) fell 0.3%.

Currency Strength Matrix-July 28, 2022

Forex chart comparing nine major currencies with each other, including USD, EUR, GBY, JPY, CHF, AUD, NZD, CAD and NOKCurrency Strength Matrix-July 28, 2022 (16:30 UTC) – Photo: Capital.com

USD / JPY Live Chart (Exchange rate from US dollar to Japanese yen)

EUR / USD update: Germany yields lower than US Treasuries, widening US / EU interest rate gap

Let’s start with a lot of negative news that affects the euro area.

The Eurozone Economic Situation Index (ESI) fell to 99 in July 2022 for the fifth straight month, the lowest since February last year. It fell from 103.5 in June, below market expectations of 102. ESI below 100 was a very reliable predictor of a recession in the euro area.

Germany’s annual inflation rate fell slightly from 7.6% in July 2022 to 7.5%, despite the market expecting a 7.4% decline, but is still close to its decades high. It remains. On a monthly basis, inflation rose 0.9% in July 2022 and 0.1% in June, exceeding market expectations of 0.6%.

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Due to concerns over the impending recession in the euro area, German yields fell 23 basis points to 0.22% on the day of the two-year maturity and 10-year bonds fell 15 basis points to 0.80%.

The United States will enter a technological recession in the second quarter. This shows that the economy has shrunk by 0.9% (quarterly annually) compared to the forecast + 0.5%, a 1.6% decrease in the previous quarter, according to a preliminary estimate of GDP. Treasury yields fell 10 basis points across the curve, with 2-year yields of 2.9% and 10-year yields of 2.66% as markets revalued future interest rate hikes.

According to CME Group’s latest Fedwatch tool, investors are currently pricing at a federal funds rate of around 3.3% from the end of the year to the beginning of 2023, and then lowering interest rates in the first half of 2023.

The short-term yield gap between the US and Europe is widening as the market believes the ECB must stop raising interest rates much sooner than the Fed. If this trend continues, it could put further downward pressure on the EUR / USD exchange rate.

Today’s chart: EUR / USD and US / German short-term yield spreads

Chart showing two-year yield spreads between EUR / USD and the US and GermanyEUR / USD vs. US and Germany 2-Year Yield Difference-Photo: Capital.com / Source: Tradingview

Forex pair performance as of July 28, 2022

Forex table showing US dollar and euro performance against other currenciesPerformance of Forex Pairs as of July 28, 2022 (UTC 16:30) – Photo: Capital.com

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