London 17/01/2022
IMPORTANT DISCLAIMER
The information of this report is of a general nature only. It is not a personal financial advice. It does not take into account your objectives, financial situation and personal needs.
a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.
INFLATION IN THE US AT A HIGH RATE OF 40 YEARS
Weekly Report: Indices, Commodities, Currencies and Cryptos
General Comment
High inflation continues to be a major issue for markets in 2022 as economies try to recover from the effects of the pandemic. Last Wednesday, US inflation for December was announced at 7%, a price we have been seeing since February 1982. Closed economies from continuous lockdowns and quantitative easing by central banks have created this effect and so there is an urgent need for tighter monetary policy, regardless of recovery and macroeconomic data. The Fed and the ECB have already announced the end of the quantitative easing program in March, while the Fed has also announced successive interest rate hikes throughout the year.
In the US, last week’s financial announcements were not positive, and in Europe, there were some reassuring statements by Christine Lagarde that citizens have confidence in institutions and that there is a commitment to stabilizing prices.
Most stock markets were stabilized, except for the United Kingdom where there has been a rise. The dollar weakened, the euro strengthened, and so did the pound. We saw significant profits for gold and oil while Bitcoin and most cryptocurrencies experienced a slight recovery. Yields on bonds continued their uptrend, with the US 10-year opening at 1.76% and closing at 1.79% although there was a deceleration.
This week, markets will continue to focus on inflation as there are corresponding announcements for the Eurozone, the United Kingdom, Germany, and Canada. Other important announcements that are eagerly awaited are the unemployment rate in the United Kingdom & Australia and interest rates in Japan and China. Earlier today, we had important announcements in China with GDP at 4% for the 4th quarter of 2021, retail sales to increase by 1.7% in December and industrial production to recover a lot by 4.3% in the same month.
SP500
The US SP500 closed slightly lower last week, at 4,663 points and marginal losses. The index started upwards but on Thursday there was a big correction and so the closing of the week was almost unchanged compared to the opening. New initial jobless claims rose, retail sales fell 1.9% in December and the University of Michigan’s consumer sentiment index fell short of expectations. This not-so-pleasant environment has created nervousness among investors, and it is clear that there is uncertainty amid high inflationary pressures and the Fed’s tight monetary policy and future interest rate hikes. If the correction continues, which started at the end of last year, below last week’s low of 4,605 points, the climate will probably be even heavier so short positions is what we’ll try this week.
DAX30
The German DAX40 index moved slightly lower last week, closing at 15,924 points, and small losses of -0.13%. After trying to exceed 16,292 points (high of all time) on January, 5th, slightly corrective trends prevail. Germany did not have significant economic announcements last week and the tone this week will be given by the announcement of inflation, with market estimates speaking of 5.7% in December. The tight monetary policy of the ECB does not generally favor the stock market, but let us not forget that Germany’s strong economy and the quality products it produces can withstand price pressures. Buyers’ target continues to be the all-time high, but a break below 15,700 points may give the correction scenario more chances. We may try long positions this week.
FTSE100
The British FTSE100 index moved higher last week, closing at 7,500 points and profits close to 1%. The UK performed well, with GDP up 0.9% in November, industrial output 1%, and manufacturing 1.1%. Although there is political unrest in the country due to the participation of Boris Johnson in pandemic parties, the picture from the pandemic looks encouraging and so many investors are optimistic about the 7,665 points, which is a high price of about 3.5 years. We may try long positions this week.
Gold
Last week was bullish for gold, which closed at $ 1,817 with profits above 1.10%. The report on high inflationary pressures worldwide favored gold and another strengthening factor was the weak dollar. Bond yields continued to rise (this traditionally does not favor gold) but this factor seems to have been outpaced by the others. $ 1,831 is the key resistance for gold in the current price range while a drop below $ 1,780 will give the correction scenario more points. Announcements for inflation in the Eurozone, Germany, and the United Kingdom on Wednesday will be crucial. We may try long positions this week.
US Oil
Last week was strongly bullish for oil with next month’s futures closing at $ 84.25, performing profits that approached 7%. It was the fourth consecutive uptrend week for oil, which has had a cumulative profit of over 20%, since 19/12. The pandemic and the Omicron mutation do not seem to scare investors as there are no serious restrictions on travel and transportation so far. OPEC is also reassuring, as it has been gradually removing production cuts. The information from Reuters is considered important that China may very soon release quantities from the strategic oil reserves in the market, to keep the prices low. Many banks, however, see prices close to $ 100 during the year, but first, the resistance of $ 85.40 must be broken, which is a high price since October 2014. We consider opening short positions this week.
EURUSD (Euro vs US Dollar)
The EURUSD closed higher last week, opening at 1.1355 and closing at 1.1415. The US currency was weak throughout the week, except on Friday when it attempted a recovery. There has been a slight uptrend in the pair since the end of November and the price range of 1.12 as the ECB also pursues a tighter monetary policy to combat inflationary pressures. The unemployment rate in the Eurozone remained unchanged at 7.2% but industrial production increased by 2.3% in November giving tones of strong growth. The key price zone is 1.15 because any solid excess will give an uptrend in EURUSD. On the contrary, in the case of strengthening of the dollar we need to see prices below 1.1270 for the correction to prevail. We prefer the first case so we may try buy positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Last week was bullish for the GBPUSD (4th in a row), which opened at 1.3569 and closed at 1.3676. The sterling has strengthened to around 450 pips in the last month with the Bank of England’s recent rate hike from 0.1% to 0.25%. This fact in combination with the recent weakness of the dollar has created a strong uptrend for the pair but overbought conditions at the same time as well. The week is important for the United Kingdom as the inflation and the unemployment rate are announced and so we have to see if the GBPUSD has the strength to continue its course for 1.40 (resistance at 1.3835 and 1.3915 are crucial) or if the sellers will prevail pushing the exchange rate to 1.35. We’re keen to try buy positions this week.
USDJPY (US Dollar – Japanese Yen)
The USDJPY was bearish last week after five consecutive bullish weeks, opening at 115.50 and closing at 114.19. The decline was sharp, taking back all the rise of 2002 due to rising bond yields and the weak yen. The dollar has strengthened considerably with tight monetary policy and the announcement of interest rate hikes by the Fed, but it seems that these developments have already been consumed and digested by the markets. Under this consideration, it is possible to see the pair turn to 112.50, but let us not forget that Japan, which continues with a loose monetary policy, is weakening the yen and therefore the 115.50 scenario will not come as a surprise again. Buy positions is our selection for the current week.
EURJPY (Euro – Japanese Yen)
Last week was bearish for the EURJPY which opened at 131.21 and closed at 130.34. The mini-rally of the past three weeks has stalled but the positive news for the pair rise is that the price remained above the milestone price of 130. The week contains announcements about monetary policy and interest rates in Japan and if there is no serious change or surprises, the yen will probably continue to be weak and buyers will aim for a break of 131.60 which is also a high price from the end of last October. We may try buy positions this week.
EURGBP (Euro – Great Britain Pound)
Last week was bearish for the EURGBP which opened at 0.8356 and closed at 0.8342. The pound continues to be strong after the recent hike in interest rates by the Bank of England, overcoming the also strong euro. However, we see the rate of decline is falling and this is logical since the pair is now very close to the price range of 0.8275 which is a low of about 5.5 years. This strong support combined with the six consecutive falling weeks that have created oversold conditions may bring bullish reactions so we may try buy positions this week.
USDCAD (US Dollar – Canadian Dollar)
USDCAD dropped last week, opening at 1.2636 and closing at 1.2547. The weak US dollar and the rally in oil prices have resulted in a mini downtrend in the last month, from the price range of 1.29. Canada does not have to contribute significant financial news but this week there are announcements of inflation and retail sales that will shake the waters more. Below 1.2450, the downtrend of the pair strengthens further but if there is a drop in oil prices, we will see bullish reactions, especially above 1.2620 so buy positions is our selection in the current week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week, as the opening was at 0.9180 and the closing at 0.9139. It is worth mentioning that the pair’s volatility was particularly high with a low of 0.9092 on Thursday and a high of 0.9278 on Tuesday. The weak dollar was the main reason for the fall as well as the rise in gold prices (gold is Switzerland’s main export commodity). The price zone at 0.9085 is crucial because below it, the correction may accelerate. In case of recovery of the dollar, the pair may approach 0.9280 again and by trusting this case, we may open buy positions this week.
AUDUSD (Australian Dollar – US Dollar)
Last week was bullish for the AUDUSD which opened at 0.7168 and closed at 0.7210. The US currency was certainly weak but the Australian economy appears to be on a good trajectory, with retail sales rising 7.3% in November and house loans 7.6% in the same month. The Bank of Australia in its reports aligns with the optimistic tone and emphasizes that in 2022 there will be a full recovery after the recession of the pandemic. Today’s positive announcements from China, however, do not seem to give a boost to the Australian dollar, so in case of a strengthening of the US currency, the pair may turn to 0.71 so sell positions is what we may open this week.
Bitcoin
Last week was slightly bullish for Bitcoin, which closed at $ 43,108 with profits approaching 3%. High global inflation does not seem to strengthen enough Bitcoin, which has been declining since November, after an all-time high of $ 69,000 on November 10th. Bitcoin is also beginning to acquire high-risk product features, so in times of risk aversion, it is not favored. However, there is also strong support at $ 40,000 since there have been attempts of bearish break-outs without success. There is a good chance of a further upward reaction above $ 44,500 but the sideways scenario between $ 41,500 and $ 44,000 cannot be ruled out. We may try some low-risk long positions this week.
