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The second quarter brought with it a strong performance from the US dollar as it outperformed most of its major peers. Notable gains were seen against the Japanese Yen and the Australian Dollar. Meanwhile, the British pound maintained its gains as the euro managed to fend off pressure from the world’s most liquid currency.
Financial markets are starting to focus again on the optimistic outlook from the Federal Reserve. By the beginning of July, any hopes of a rate cut from the central bank this year had vanished. In fact, from June 1 through July 7, traders added approximately 4 price hikes to the forecast. However, markets have not fully recovered from the tightening since the collapse of the Silicon Valley bank.
Compared to the beginning of March and before the demise of the SVB, financial markets are still more pessimistic about the Fed’s one-year horizon outlook from July 7. But the near-term bets are getting tighter. As such, there is probably more room to go for the markets to recover the hawkish long-term bets since the fall of the SVB.
All this tightening and the rise in Treasury yields has done little to deter stock market bulls. With close to +40%, the first six months of 2023 were the best for the tech-heavy Nasdaq 100 since the late 1990s. This is where the S&P 500 rose nearly 16%. However, the breadth of the stock market recovery has been lackluster, with a handful of large-cap companies pushing higher.
The US labor market remains resilient and core inflation is struggling to push back significantly. The June Nonfarm Payrolls report showed that wage growth was surprising. This is likely to the dismay of Fed Chairman Jerome Powell and his associates, which opens the door to further weakness in gold. XAU/USD fell 2.5 percent in the second quarter.
Elsewhere, crude oil prices suffered in the second quarter despite a few attempts by OPEC+ to cut production. At the end of the day, major central banks around the world are practically working in unison to slow their economic engines, which is an effort to hurt domestic consumption. Chinese exports are slowing, along with the global growth outlook, taking crude oil lower with it.
All eyes remain on how central banks can continue to counter constant price pressures and how much damage can be inflicted on domestic demand and labor markets. Treasury yields have continued to rise, but the inversion of the yield curve is still present, indicating economic pain ahead. What’s in store for the third quarter?
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How Markets Performed – Second Quarter
Basic expectations:
Euro Q3 Fundamental Outlook: The deteriorating data to test the ECB’s solution
The deteriorating economic data in Germany and Europe in general makes for an interesting third quarter as the European Central Bank maintains its hawkish resolve.
JPY Q3 Forecast: Weakness is not likely to fade soon but FX intervention risks are increasing
The Japanese yen may remain bearish early in the third quarter in response to the monetary policy divergence between the Bank of Japan and other developed market central banks.
Australian Dollar Outlook: Central Banks Continue to Struggle With CPI
The Australian dollar ended the second quarter not far from where it started after breaking both sides of the established range. Although some domestic factors played a role in the direction of the AUD/USD, the US dollar remains a dominant factor in the currency.
Fundamental Oil Outlook: Q3 Is it the catalyst for Crude Oil?
Crude oil prices could be positive in the third quarter as OPEC+ continues production cuts through August.
Technical outlook:
Bitcoin Technical Outlook for the Third Quarter: Candlestick patterns indicate a possible bullish continuation
Bitcoin prices may see a short-term pullback in the early part of the third quarter, but it is still poised for more gains.
Gold technical forecasts for the third quarter: the recent collapse indicates more losses
The recent collapse in gold prices may herald more losses for the yellow metal in the early third quarter.
Technical Outlook for the British Pound for the Third Quarter – GBP/USD, EUR/GBP and GBP/JPY
As we enter the third quarter of the year, the outlook for the pound is mixed.
USD Technical Outlook for Q3 – External catalysts will affect the USD
The US dollar has been trapped in a five point range for the first half of the year and this is unlikely to change as we head into the third quarter.
Dow, S&P 500, Nasdaq Technical Outlook: No sign of a reversal
A break above key resistance of the S&P 500 and Nasdaq 100 confirms that the 2022-2023 downtrend is over, increasing the odds of a resumption of the long-term bullish trend. While the Nasdaq looks a bit tired, the Dow Jones Industrial Average is about to break out to the upside.
Q3 Major Business Opportunities:
The S&P 500 is vulnerable to a decline due to weak fundamentals and frothy markets
The S&P 500 has risen significantly in recent months, but it could face serious challenges in the third quarter, especially if fundamentals worsen due to tight monetary policy.
The US dollar may extend its rally against the Chinese yuan in the third quarter
The US dollar may continue to pressure the Chinese yuan in the third quarter as global growth continues to weaken in front of central banks keeping monetary policy tight.
Short USD/ZAR: Best Trading Opportunities
Rand strength could be the loudest deal in the third quarter of 2023 as the USD/ZAR hit an all-time high in the second quarter.
A short position in EUR/GBP in the form of a hawkish BoE and price action support for further downside
EURGBP looks well on its way to hitting new lows in Q3 as the Bank of England faces the toughest challenge out of all the major central banks. 0.8200 incoming?
Short DAX as German fundamentals deteriorate
Deteriorating European and German fundamental data is weighing on the DAX at a time when Germany is trying to recover from a technical recession and industrial downturn.
The Canadian dollar may rise further against the US dollar in the third quarter
CAD/USD’s rally above key resistance indicates further gains as risk appetite improves amid resilient global growth, signs of a turnaround in commodity prices, and hopes for more stimulus from China.
Bitcoin is looking to ignore regulatory concerns and push higher
Bitcoin is entering the third quarter of the year on top and is looking to post a new yearly high after a sharp rally in the last weeks of June.
– Text of the article by Daniel Dubrovsky, Chief Strategist at DailyFX.com
— Individual articles written by members of the DailyFX team
To connect with Daniel, follow him on Twitter:@employee