Hey There Income Hunter,

Cristine Lagard, the European Central Bank president, must have had dinner with Jay Powell on Wednesday night …

Lagard was like a bear that just came out of hibernation yesterday during the ECB meeting prepared remarks, which included blaming Putin for both weaker growth forecasts and higher inflation outlooks. (Yes the Fed is also very good at the blame game.)

Next she promised to end the bond-buying and start hiking rates in July, again similar to Powell’s story … 

However, it got interesting in the press conference when Lagarde was asked about the fragmentation of Italy’s bond yields away from the core. This is what she said …

 “We need to make sure there is no fragmentation.” 

That means she will defend Italian bond yields if they spike higher …

So, another talk-tough-and-be-ready-to-pivot-back. I just can’t believe how clueless the central banks are. Inflation is a demand destroyer, so why raise rates when the inflation itself is already pushing your economy into recession? 

Europe is in worse shape than the US, and today we’ll look at how you can take advantage of what’s ahead …

The Euro Versus the US Dollar

Yesterday, during the ECB press conference, the Euro immediately got weaker compared to the dollar …

  

Here’s why …

Italy has a debt-to-GDP of 135%. That is similar to the US, except that Italy’s bond market is not nearly as supported as the US. So if investors decide to sell their Italian bond holdings the market can unravel quickly. 

The problem is Euro inflation is incredibly high at 8.1%, so the ECB is in a similar situation as the US and must raise rates to fight inflation.

The ECB is even further behind the curve than the US. So, even though the Euro was hit today on Lagard’s comments during the press conference, the dollar is more in danger of weakening from here. 

Granted, the dollar is still the world’s reserve currency, but the sanctions and banning Russian imports have turned many nations into dollar sellers. 

So, this rally in the dollar is a good opportunity to set up a bear trade on the currency. 

Sell US Dollars 

The Invesco US dollar ETF (UUP) is a good proxy for the Euro/US exchange rate because the euro is the largest holding the UUP fund. 

As you can see in the chart below, UUP is now overbought after yesterday’s spike higher, which offers you a good location to set up a bearish strategy. 

Bring It Home

After a series of weak economic numbers over the past couple of weeks, Powell may let up on his hawkish rhetoric at Wednesday’s Fed meeting …  

That would bring in sellers of dollars, and UUP as a proxy, since less hawkish means lower interest rates, which makes holding dollar assets less attractive to foreign investors. 

Stay focused on the big picture because there is plenty of collateral damage done as inflation and interest rates rose. This has impacted housing, corporations and consumers very negatively.

We have yet to see the ramifications, but they are coming … and when they do the Fed will stop tightening and the market will begin pricing in a pivot back to QE. 

So, it’s dollar down, interest rates down and commodities and precious medals higher. 

Stay tuned and as always …

Live and Trade With Passion My Friend,

Griff