18/04/2022

FAINT SIGNS OF DE-ESCALATION OF INFLATION BUT THE FED SEEMS DETERMINED TO TAKE ACTION

General Comment

The war in Ukraine continues unabated without any visible diplomatic solution at the moment and it is now a given that its consequences will be strong and long-term in most economies of the world and especially in the European ones. The situation looks even worse after the new lockdown in China that threatens to hit the supply chain again, as China is the absolute giant of world production.

Last week, inflation in the United States for March was announced at 8.5% slightly above expectations but for the first time in a long time the consumer price index, excluding food and energy, showed a slight decline compared to expectations of markets and was announced for March at 6.5%. It is the first crack to be seen in the high inflationary pressures plaguing most economies, although the climate from the Fed shows that there is a determination to raise interest rates several times this year. At the May meeting according to the FedWatch tool, the probability of raising interest rates by 0.50% has exceeded 90%.

In Europe, last Thursday, we had the meeting of the European Central Bank on interest rates and monetary policy. Interest rates remained unchanged in the Eurozone and Christine Lagarde in the press conference that followed reiterated how the quantitative easing program will end in the third quarter of this year. This anemic stance of the ECB was interpreted as dovish by the markets and thus the euro suffered losses against the US dollar which strengthened.

Most stock indices were bearish as the war in Ukraine was not conducive to risk-taking, the forthcoming interest rate hikes were not conducive to stock markets and the sharp rise in bond yields (the US 10-year closed at 2.83% while opening at 2.70%) are a big rival to investor choices. Gold and oil had significant profits while Bitcoin and most cryptocurrencies continued their downtrend for the third week in a row.

The current week following Catholic Easter is calmer in terms of economic announcements. The main event is the announcement of inflation in the Eurozone, while the announcements of inflation in Japan and Canada, the PMI indicators in the major world economies, the interest rates in China, and the speeches of central bankers Jerome Powell (Fed) and Andrew Bailey (BoE) are also considered important.

SP500

The US SP500 index closed last week, at 4,388 points and losses that exceeded 2%. It was the second week of intense correction, with international data burdened by the war in Ukraine and the recent hard lockdown in China. The announcements of the results of the companies of the index, mainly of the banking sector, are so far at a lukewarm level and rather weigh on the downward course of the index.  Also, the forthcoming interest rate hikes by the Fed, combined with the bond yield rally, create a highly competitive environment for stock markets, given the negative risk appetite. The SP500 futures have started a further correction this week too and considering that there is no obvious support in the nearby price range, the correction could be extended. We may try short positions this week.

DAX30

The German DAX40 index moved lower last week, closing at 14,106 points, with losses reaching 0.90%. The low volatility and the Catholic Easter holidays may have prevented a major downturn as the climate is not at all positive for European stock markets. The energy crisis and war in Ukraine have negatively affected investors. Inflation in Germany in March was announced at 7.6%, exactly as the markets expected, while the German 10-year bond reached 0.84%, which is the highest price since the summer of 2015. If there is a downtrend below 14,000 points, the index will probably have entered a strongly corrective cycle since much of the March recovery will have been lost. Short positions is our selection for the current week.

FTSE100

The British FTSE100 index was bearish last week, closing at 7,564 points and losses of more than 0.60%. The index to some degree, followed the course of the other main indicators, with nervousness due to the war and high inflationary pressures prevailing. The UK generally had negative results on last week’s economic announcements: GDP in February was barely 0.1%, while industrial production and manufacturing were below market expectations. The unemployment rate fell marginally to 3.8% but the very high inflation announced on Wednesday is likely to put pressure on the Bank of England for more drastic measures and this fact is not in the favor of stock investors. Today is a public holiday in the UK but if the pessimistic perception continues to prevail, we can see the index below 7,500 points so we may try short positions for one more week.

Gold

Last week was bullish for gold, closing at $ 1,977 and performing profits close to 1.40%. Geopolitical concerns and fears of persistently high inflation are currently favoring gold, which is very close to the $ 2,000 milestone price, which, if exceeded, may lead to a strong uptrend. The main competitor of gold which is Bitcoin and cryptocurrencies had a correction week and only the bond yields acted competitively. This week is dominated by the announcement of inflation in the Eurozone from the ECB and the statements of Jerome Powell and other Fed officials, but gold already continues to move upwards, expanding its profits from the beginning of April to $ 1,928. Below $ 1,965 and approaching $ 1,920, the bearish scenario will earn more points. We may try long positions this week.

US Oil

Last week was strongly bullish for oil with next month’s futures closing at $ 106.46, performing profits that approached 9%. The intervention of the US and the International Energy Agency (IEA), which release quantities of oil from their strategic reserves, worked calmingly in the past but prices could not be kept below $ 100 as rumors of an embargo on Russian oil caused a new rise. The IEA warned that 3 million barrels a day could be missing from the market if Russia is banned. Active drilling rigs in the US have risen to pre-pandemic levels in an attempt to boost production but prices seem to be heading in the $ 110 range. Supports for a possible reversal are at $ 104.40, $ 102.10, and of course $ 100. We prefer long positions for one more week.

EURUSD (Euro vs US Dollar)
The EURUSD was bearish last week, opening at 1.0915 and closing at 1.0810. Periods of crisis and war, such as the one we are going through, favor the US currency, which is considered a lower risk option. In addition, the Fed is showing more determination for tighter monetary policy and for interest rate hikes than the European Central Bank, which keeps interest rates unchanged with some expectations of an increase towards the end of the year. Retail sales in the United States fell in March and were in negative territory but this had little effect on the course of the dollar. Inflation in the Eurozone is announced on Thursday, with market expectations speaking of 7.5% in March but the ECB’s stance does not seem to be changing nor does it seem to be determined to accelerate action. If this picture continues, the pair can be found until the next support at 1.0635 and we need a steady upward break above 1.10 so that we can talk about calming the strong downtrend. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

The previous week was slightly bullish for the GBPUSD, which opened at 1.3027 and closed at 1.3052. The pair had reached the price range of 1.2970 on Wednesday but from there, we saw an upward reaction that brought it back above 1.30. The reason for the recovery is the announcement of inflation in the UK for March, at 7% significantly above the 6.2% in February. This has sent a message to the markets that the Bank of England will show more determination and will raise interest rates again after the three increases it has already made in recent months. However, after the rise of the GBPUSD on Wednesday, which brought it to 1.3150, pressures followed because the US dollar strengthened further and the rest of the macroeconomic picture of the United Kingdom was not very positive. It is self-evident that below 1.30 the pair is under intense pressure but if there is an upward break above 1.3150, the reversal of the trend has greater hopes. We prefer buy positions this week.

USDJPY (US Dollar – Japanese Yen)

The USDJPY moved up last week (6th consecutive bullish week) as it opened at 124.05 and closed at 126.38. Many factors point to the uptrend of the pair: the US dollar is strong based on the belief that the Fed will pursue a tight monetary policy and raise interest rates several times a year, bond yields are skyrocketing (yields are strongly correlated with the USDJPY) and the Japanese currency is extremely weak following the Bank of Japan’s continued loose monetary policy and the negative interest rates that remain. The announcement of inflation in Japan for March is expected on Friday, but if there is no big surprise, its price will not be such that it will make the leadership of the Bank of Japan changes its attitude. The price range at 126.85 is very important because, above this zone, the pair will be at the highest price of the last twenty years. The trend is strongly bullish but these inconspicuous heights can cause sellers to show up. We’d better stay out this week under these circumstances.

EURJPY (Euro – Japanese Yen)
Last week was bullish for the EURJPY which opened at 135.45 and closed at 136.65. After the slightly corrective trend that had preceded, the pair continued the strong uptrend that started at the beginning of March. The euro is not very strong but the Japanese currency is going through one of the biggest periods of weakness in recent years. The country’s relatively low inflation allows for a loose monetary policy that, according to Bank of Japan executives, will not change. The price range of 137.50 is the first target for buyers because above these levels, the EURJPY will be at the highest price since autumn 2008. We may stay out this week as the current condition is extreme.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP which opened at 0.8370 and closed at 0.8278. The session on interest rates and monetary policy at the ECB did not hide any significant developments and so the markets continue to realize that Europe will operate at the known slow pace and with any actions to tackle inflation to be identified by the end of the year. By contrast, the UK has already seen three rate hikes, and the high inflation that has been announced is likely to lead to more. If this perception continues, we may see prices close to 0.82, but the announcement of inflation in the Eurozone on Thursday may change the perception of the markets so we may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for the USDCAD, which opened at 1.2560 and closed at 1.2609. The pair has been rising slowly since the end of March, which was justified as oil prices fell but this mild uptrend seems to continue as long as oil recovers. The only “disagreement” in the uptrend was last Wednesday, where at the meeting of the Bank of Canada, it was announced an increase in interest rates by 50 basis points, from 0.50% to 1%. However, the pair could not hold it, and very quickly the trend returned if there is a bullish break out above 1.2680, this trend is consolidated and strengthened so buy positions is our selection for the current week.

USDCHF (US Dollar – Swiss Franc)
USDCHF was bullish last week, with the opening price at 0.9315 and the closing price at 0.9427. The strong dollar dominates the pair, which has been in a slightly upward channel since last summer. The high prices of producer price indices in March, do not seem to change the investors’ perception of the monetary policy of Switzerland, and the bet of the upward scenario, is the price range of 0.9475 because, in case of a break out in this zone, there is a strong possibility for further rise. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Last week was bearish for the AUDUSD which opened at 0.7454 and closed at 0.7391. The Australian currency was a surprise until the end of March because it has been on a strong uptrend since January but in recent weeks, the pair has been affected by the strong US currency and has adjusted accordingly. China has strong inflationary pressures and is plagued by the new hard lockdown, but Australia’s announcements do not continue in the positive climate we were used to, lately. The unemployment rate rose slightly to 4% and the Westpac Consumer Confidence Index went negative. The AUDUSD can continue downwards until the support at 0.7310 or to the next one at 0.7165. The positive announcements for China (GDP + 4.8% and industrial production + 5%) and the negative announcement of retail sales (-3.5%) with which the week opened have not affected the pair at the moment. We may try sell positions for one more week.

Bitcoin

Last week was bearish for Bitcoin, which closed at $ 39,691, performing losses close to 6%. Bitcoin has been affected by the negative sentiment of the markets as it is considered a high-risk option. It has also recently shown a higher correlation with stock markets and in particular with technology sector stocks. However, there is a general euphoria in the cryptocurrency markets because large investors (whales) seem to be accumulating quantities of Bitcoin, seeing for themselves a large increase soon enough. The loss of the $ 40,000 is certainly a negative fact, and for the reversal to begin to emerge (Bitcoin is already three weeks in a downtrend), we need to look at prices above $ 42,600. We may try long positions this 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.