14/02/2022

THE RALLY OF INTEREST RATES HIKE BY CENTRAL BANKS IS HURTING THE MARKETS

General Comment

Inflation continues to rise in the United States and in January it was announced at 7.5%, a price we have not seen in the last 40 years. Inflationary pressures have now become the number one problem in the world economy as Europe, the United Kingdom, and most developed economies have more or less the same issues. Central banks are trying to take the necessary steps to tackle the problem, and rising US inflation has triggered scenarios that the forthcoming rate hike next month maybe 0.5% instead of 0.25% as most analysts had previously expected.

Another big issue of the days is the tension in the region of Ukraine with the situation escalating dangerously and there are serious fears of a military conflict through the invasion of Russia. There are dozens of diplomatic efforts to defuse the crisis but things are still very liquid. These fears exacerbate the already existing energy crisis, which mainly affects the European continent.

Most major stock markets fell as the dollar strengthened because inflationary pressures would lead to faster and more drastic measures by the Fed. The euro weakened, especially after Christine Lagarde told in German media that the European Central Bank would not rush interest rate hike because it could mean slowing growth and job losses. Bond yields remained unchanged, although they rose sharply until Friday. The yield of the American 10-year-old exceeded 2% for the first time after the summer of 2019 but on Friday it escalated and finally, the week closed at 1.92%. Profits for gold and oil were significant, while Bitcoin and most cryptocurrencies had stabilizing trends.

This week is also important in terms of the economic calendar: the eurozone announces GDP for the third quarter of 2021 and industrial production, in the US retail sales and producer price index and in the rest of the world, inflation, unemployment rate, and retail sales in the UK, inflation, and GDP in Japan, the unemployment rate in Australia and inflation and retail sales in Canada. The FOMC Minutes will be released on Wednesday but most of the analysts consider that possible actions may be taken in March.

SP500

The US SP500 index closed lower last week at 4,417 points with losses of 1.50%. The perception of the markets for immediate action by the Fed to combat inflation (tight monetary policy and rising interest rates) does not favor stock markets. The issue of the Ukrainian crisis has also caused great nervousness as American sources insist that it is a matter of days before we see a Russian invasion. There are direct threats of sanctions against Russia, but such a war will have a major impact on the psychology and investment sentiment of the markets. Rising bond yields are also a negative factor for stock indices, and in the middle of the last week, we saw the US 10-year bond yield exceeding 2%. A possible downward break of 4,400 points will bring to the fore scenarios of further correction, to 4,215 points so we may try short positions this week.

DAX30

The German index DAX40 stabilized last week, closing at 15,159 points and marginal losses. There was an upward reaction until Wednesday, but from there on, worries and nervousness prevailed due to the Ukrainian problem. In addition, in Germany, industrial production declined in December, the trade balance was reduced and only inflation indicators appeared stronger. According to Christine Lagarde, the rise in interest rates in the eurozone may not be as close as it is in the US, but the clouds of war in Ukraine may again have a negative effect on the index and a possible loss of 15,000 points may test support near 14,820 points which is a low price of about 11 months. We may try short positions this week.

FTSE100

The British FTSE100 index moved higher last week, closing at 7,526 points with profits above 0.70%. For another week, the index performed better than the other major stock indices in the world, despite the recent rise in interest rates by the Bank of England. The British economy based on recent announcements (GDP, industrial production, manufacturing production, trade balance) is in a good shape, raising the psychology of investors. Announcements of the unemployment rate and inflation in the UK are expected this week and will be factors that will affect the index, but concerns about a possible war in Ukraine may be the most decisive factor. The index is also approaching the price range of 7,665 points, which is a high price of about 3.5 years and so it makes sense for sellers – profit takers to appear. Below 7,400 points the positive climate will probably start to be disturbed and due to the general negative sentiment, we may try short positions this week.

Gold

Last week was strongly bullish for gold, closing at $ 1,860 and performing profits near 3%. This rise was accompanied by higher bond yields and a stronger US dollar, although there is a negative correlation between those two assets with gold. Inflationary pressures worldwide and fears of conflict in Ukraine favor the gold that had one of the biggest daily rises in recent months. The Ukrainian issue will be a barometer for gold movements in the near future. Prices exceeded last week the channel between $ 1,750 and $ 1,850 in which gold has been moving for about 3 months, but the uptrend needs a break out above the resistance at $ 1,880 to confirm. Any easing of tension in Ukraine could lead to a de-escalation of gold prices and if this scenario is confirmed, prices will probably return to $ 1,800. We may stay out this week as things are not clear enough.

US Oil

Last week was bullish for oil (8th in a row), with next month’s futures closing at $ 93.89, with profits exceeding 2%. The sirens of the war in Ukraine and the general energy crisis have pushed up oil prices lately. With economies recovering from the pandemic, demand has skyrocketed with US inventories falling by 4.8 million barrels last week to 410.4 million barrels, the lowest inventory levels since the end of 2018. The International Energy Agency (IEA) has revised its demand forecast for 2022 to 100.6 million barrels per day, which, if done, would be an all-time record. Oil prices have reached their highest levels since autumn 2014 and so the US continues to increase the number of active drilling rigs to deal with it. The Ukrainian crisis is the key to further price movements. A worsening of the situation could give prices at $ 100 but a de-escalation of the tension will probably mean a short-term de-escalation of prices. We may try some low-risk long positions this week.

EURUSD (Euro vs US Dollar)
The EURUSD was bearish last week, opening at 1.1463 and closing at 1.1347. The dollar strengthened, especially after the announcement of inflation in the US as the prevailing view of the markets is now that the Fed will tighten monetary policy even more and may raise interest rates by 0.5% in March. By contrast, Lagarde’s statements that there will be no rush in interest rates hike, have weakened the euro. The economic calendar in Europe did not have a lot to contribute to any major announcements or events, and the same happened in the US with the exception of the announcement of inflation. A key problem for Europe is the deep energy crisis, which is also being affected and exacerbated by the situation in Ukraine. Announced GDP and industrial production in the eurozone will be an indicator of the course of the European economy and these announcements may play a role in interest rate policy. If the dollar continues to strengthen, we may see prices below 1.13 while in case of a downtrend of 1.1220, the pair acquires characteristics of a downtrend. Sell positions is our selection for the current week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was bullish for the GBPUSD (2nd in a row), as it opened at 1.3534 and closed at 1.3556. The pound is strengthening in the wake of the recent increase in interest rates by the Bank of England by 0.25% while in the poll that took place, there were members who had proposed a 0.50% increase. This adds an extra dimension to interest rate policy in the near future to tackle the high inflation that is plaguing the UK as well. The macro announcements were also satisfactory: GDP grew by 6.5% in the 4th quarter of 2021, while industrial production and manufacturing improved last month. The pound, therefore, has several reasons to feel strong but even at this pair, the determining factor is the US dollar. In case of strengthening of the dollar due to the forthcoming increase of interest rates in the USA, we may see the pair turn downwards and if it falls below 1.35, the next critical support is in the price range of 1.3360. We may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

The USDJPY moved up last week, opening at 115.26 and closing at 115.53. The pair was favored by the good performance of the dollar and by the recent rise in bond yields. However, it is clear that the strong resistance at 116.35, which is the highest price in about five years, is an insurmountable obstacle for the further rise of the USDJPY, at least for now. Japan’s low inflation allows the country’s central bank to pursue a loose monetary policy, and this is something that weakens the yen. Important are the announcements of the GDP, industrial production, and inflation in Japan next week. The trend is bullish but it needs enough fuel to bend the resistance to 116.35. We’ll try buy positions for one more week, having our eyes on the major resistance.

EURJPY (Euro – Japanese Yen)
Last week was bearish for the EURJPY which opened at 132.15 and closed at 131.01. The yen is not particularly strong at the moment due to the Bank of Japan’s continued loose monetary policy but the euro lost ground after a sharp rise after Christine Lagarde cut expectations for a brief rise in eurozone interest rates. From August onwards, there is an obvious lack of trend in the pair that fluctuates around 130. This is exactly the value that makes the scales tilt in one direction or the other: above 130 the upward scenario prevails, in 130 the downward scenario prevails. We may try buy positions this week since the price is above 130.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP which opened at 0.8467 and closed at 0.8364. Lagarde statements on later interest rate hikes, the recent rise in interest rates in the UK, and the positive macroeconomic results in the UK, restored the downtrend that has started since the end of 2020. If the same picture continues, there will probably be an approach of 0.83 again. Important announcements of the week: GDP and industrial production in the euro area – inflation, unemployment rate, and retail sales in the UK. Sell positions is our selection for the current week.

USDCAD (US Dollar – Canadian Dollar)

Last week was slightly bearish for the USDCAD, which opened at 1.2846 and closed at 1.2735. The rise in oil prices, which almost always favors the Canadian currency, was offset by the strengthening of the US currency. The head of the Bank of Canada, Tiff Macklem, said that high inflation in the country will be addressed by raising interest rates and tighter monetary policy, trying to instill a reassuring climate. Oil prices will be a key factor in the pair, but in the case of a further strengthening of the US dollar and a possible bullish break out of 1.28, resistance at 1.2960 could be threatened with an obvious next target at 1.30 so buy positions is what we’ll try this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF stabilized last week, as the opening and closing were in the price range of 0.9250 – 0.9255. The US dollar was strong but the Swiss currency also had reasons to strengthen. After all, it is a currency that is preferred in times of crisis (Ukrainian problem) because it is traditionally considered a safe investment haven. In addition, the unemployment rate in Switzerland fell to 2.3% in January, while inflation was slightly higher, at 1.6%. If the bullish scenario prevails, a clear break of 0.93 is needed to conquer the resistance of 0.9375, which is a high value of about 10 months. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Last week was bullish for the AUDUSD which opened at 0.7076 and closed at 0.7132. There were specific reasons why the Australian currency outperformed the US dollar. The head of the Bank of Australia, Philip Lowe, said that the conditions for ending the quantitative easing program in the country have now been met. Other statements point to rising interest rates, but caution is needed as Lowe points out that there are discrepancies between central bank visions and actions and market expectations. Finally, rising commodity prices, which are Australia’s export goods, also favored the currency. These factors could push the pair to 0.7250 but if the US currency prevails, we will see prices again close to 0.70 so we may try sell positions this week.

Bitcoin

Last week was slightly bearish for Bitcoin, which closed at $ 42,078 with losses close to 0.80%. Bitcoin continued its uptrend until Wednesday, but with the announcement of inflation in the US, the perception of markets for higher interest rates in the US and tighter monetary policy harmed cryptocurrencies. The mild correction took place even though Russia finally agreed to a regulatory framework for the licensing of cryptocurrencies, as long as the exchanges have a physical presence in the country. However, the Swiss bank UBS expects that the creation of a legal framework in the US for cryptocurrencies will take a long time. Bitcoin failed to exceed $ 46,000 and seems to be turning back to $ 40,000. Short positions is our selection for the current week.

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.