02/05/2022

CRITICAL WEEK WITH FED INTEREST RATE DECISION AND ANNOUNCEMENT OF THE US LABOR MARKET

General Comment

There is an obvious concern in the markets based on recent developments. The war in Ukraine and the consequences it has already had on the economies is a big thorn in the side, as Russia’s ultimatum to pay for rubles in energy has already expired and Gazprom has cut off supplies to Bulgaria and Poland. Decisions are expected from other European countries, especially Germany. These problems are reflected in the picture of the major global markets.

Another major problem threatening the supply chain is the lockdown in China. This situation exacerbates the already severe problem of inflationary pressures in the world’s largest economies. Central banks are called upon to solve this problem. The Fed is expected to raise interest rates at Wednesday’s meeting and the Bank of England is expected to do the same the next day. The European Central Bank, however, seems to be holding a wait-and-see attitude with no clear commitments to interest rate hikes, although inflation in the Eurozone was announced at 7.5% and this is something that has weakened the euro very much recently. By contrast, the US dollar closed in April with one of the largest monthly percentage increases in recent years.

The stock markets continued their corrective course and especially the American ones had the fourth consecutive week of losses. Gold also suffered losses while we saw a small increase in oil prices. Bitcoin and most of the other currencies do not seem to be able to keep up with the pressures. Finally, bond yields continued their upward rally, with the US 10-year bond yield, closing at 2.94%, having opened the week at 2.89%. We have not seen such prices since December 2018.

This week is crucial because, in addition to the meeting of the Fed and the Bank of England on interest rates and monetary policy of the United States and the United Kingdom respectively, it contains several important announcements. Of course, the announcement of the unemployment rate and new jobs in the US (NFPs), the unemployment rate and retail sales in Germany and the Eurozone, the announcement of interest rates in Australia, and unemployment in Canada stand out.

SP500

The US SP500 closed last week with sharply declining trends, at 4,136 points and losses approaching 2.70%. It was the fourth consecutive week with correction which is now beginning and forming a trend and threatens the very significant support in the price area of ​​4,100 points. The index has many reasons for displaying this behavior. The negative investing sentiment due to the war in Ukraine is a key reason as no one knows exactly what the consequences will be for the world economies. The Fed’s aggressive policy with the expected interest rate hikes is not conducive to stock markets too. Bond yields, which have been rallying for several weeks now, are also competing, with the US 10-year bond yield approaching 3%, giving a safe but cost-effective alternative. A decisive factor, however, last week was the announcement of the results of many companies, especially Amazon, which due to negative results, fell 14.05% in one day. If the SP500 breaks out the 4,100 points, it will be at a low price of about 11 months. The trend is downward but upward reactions are not ruled out due to the oversold zone where the index is located so we may try long positions this week.

DAX30

The German DAX40 index moved lower last week, closing at 13,906 points, with losses of 1.20%. The DAX40 and most European indices had losses that were on average lower than those of the US indices. The economic situation is not better in Europe, but the policy of low interest rates continued by the ECB with some vague commitments for the end of the year, does not have such a strong impact on the stock markets. The business climate index improved in Germany, as did the price-import index, while German GDP for the first quarter of 2022 “ran” faster than market expectations. Inflation in Germany was announced at 7.8%, above the Eurozone average and this normally marks developments in monetary policy. The loss of 14,000 points is a negative development, especially in the psychological field and if the negative climate continues, it is possible to see even lower price levels for the index so we may try short positions this week.

FTSE100

The British FTSE100 index was mildly bearish last week, closing at 7,417 points, having lost more than 0.60%. The index followed the course of most major indices worldwide but with clearly smaller losses, more in line with European markets than with the US, which had a larger decline. The financial calendar in the UK did not have much to contribute last week but the negative climate remained. The Bank of England meeting next Thursday will certainly play an important role in the course of the index as we will learn more about the bank’s intentions concerning monetary policy and we will probably see a new rate hike. Any continuation of the downward trend will accelerate below 7,300 units and we prefer short positions for one more week.

Gold

Last week was corrective for gold, closing at $ 1,897 and losses close to 1.80%. Gold, like most commodities in the world, is valued in US dollars and therefore has an inverse relationship with it. The frantic course of the dollar lately, therefore, is pushing gold prices down. The aspirations and behavior of the central banks lately, and especially the Fed, show determination in dealing with inflation and so many investors are convinced that there will not be much needed in the future to offset inflationary pressures. Technically speaking, the next critical price level is close to $ 1,880 and a break of it may mean stronger downward trends. However, the climate is not so positive as to justify such low price levels and a return above $ 1,900 may signal stronger upward reactions so we may try long positions this week.

US Oil

Last week was bullish for oil with next month’s futures closing at $ 104.20, performing profits that approached 2.50%. Oil has returned to the upside amid fears that an embargo on Russian oil will eventually be imposed and that will seriously disrupt the supply chain in the market. Investors and analysts are mainly waiting for Germany to move on this issue. On the other hand, no significant corrective actions are expected from OPEC and the information says that there may be a small increase in production at the next meeting in early June. The rise in prices last week would have been even greater if oil had not fallen on Friday, mainly due to the sharp drop in heating oil contracts in the United States after the big losses in the stock markets. There has been a normalization of prices between $ 93 and $ 109 lately because it seems that the markets consider these levels fair and sufficient for the season. We’d better stay out this week as things seem unclear.

EURUSD (Euro vs US Dollar)
The EURUSD closed sharply lower last week, opening at 1.0803 and closing at 1.0541. The US dollar is going through one of its most profitable periods, with the US Dollar Index (USD Index) closing the week at 103.21 while midweek was even higher, reaching price levels we have seen for about 20 years. It is not only the negative investing sentiment that pushes many investors to safer solutions such as the dollar but also the important role played by the large divergence of the central banks of the two economies. The Fed is likely to raise interest rates at Wednesday’s meeting and is likely to raise more later in the year. On the contrary, the European Central Bank has only made unclear and vague promises to raise interest rates by the end of the year. Apart from the announcement of inflation in the Eurozone, the rest of the macroeconomic announcements in Europe and the USA (which were not too many) went almost unnoticed by the markets. The pair easily broke out the significant support at 1.0635 and while it was below 1.05, on Friday it recovered slightly. The next important support is at 1.0340 and many analysts see this value. If there is a continuation of the upward reaction on Friday, it will gain more momentum above 1.0750. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was sharply bearish for the GBPUSD, which opened at 1.2832 and closed at 1.2571. The week low was close to 1.24 but the weakening of the dollar on Friday, allowed the pair to show an upward reaction. The Bank of England has raised interest rates three times in recent months and may do so again at its meeting next Thursday but that does not favor the pound because on the one hand the dollar is very strong and on the other, it seems that based on the latest macroeconomic results from the UK, the country is affected by the war much more than originally estimated. The same situation continued this week with the announcement of public borrowing, which jumped well above market expectations, to 17.32 billion in March. This week may have very high volatility based on central bank announcements. The trend is bearish, and it is not ruled out that the pair will be close to 1.24 again. The continuation of the upward reaction goes through the break of the resistance of 1.2770. We prefer sell positions this week too.

USDJPY (US Dollar – Japanese Yen)

The bullish rally for the USDJPY continued, for the eighth week in a row, opening at 128.50 and closing at 129.66. On Thursday the price was above 131 for the first time in the last 20 years. The strong dollar, aided by a rally in bond yields, is pushing the pair to these inconceivable levels. The Japanese currency, on the other hand, continues the period of prolonged weakness after the Bank of Japan meeting last week, interest rates remained unchanged at -0.1%, and the statements referred to continued monetary easing, to achieve macroeconomic growth at levels before the pandemic. Japan’s very low inflation relative to other countries allows for this loose monetary policy. Despite Friday’s correction, the uptrend of the pair remains but there are some doubts because such high price levels are usually created by sellers who are profit-takers. We’ll go with the trend by opening buy positions this week

EURJPY (Euro – Japanese Yen)
Last week was bearish for the EURJPY which opened at 138.85 and closed at 136.94. The Japanese currency continues to be very weak due to the loose monetary policy and negative interest rates in Japan, but it seems that the euro had more reasons to be weak too. Inflation in the euro area stabilized at 7.5% and this was probably interpreted by the markets as an obstacle to faster decisions by the ECB. Japan, on the other hand, had a positive sign in economic announcements, with the unemployment rate falling to 2.6% in March from 2.7% in February. Uncertainty in the Eurozone is prevalent due to the energy crisis and the war, and the corrective trends may prevail again, with the next support being close to 134.70 so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP which opened at 0.8415 and closed at 0.8383. The weakness of the euro gave this downward tone to the pair combined with some greater favor of investors in sterling due to the impending meeting of the Bank of England on Thursday and the possible rise in interest rates by 0.25%, as analysts estimate. If this optimism for sterling prevails and is verified, we will probably see the pair heading to lower levels, perhaps to the price range of 0.8250 so we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for the USDCAD (5th in a row), which opened at 1.2715 and closed at 1.2857. It is striking that this rise was accompanied by a rise in oil prices, which usually favor the Canadian currency and cause downward pressure on the pair. The strength of the US currency prevailed obviously. The head of the bank of Canada Tiff Macklem also gave the tone, in his speeches underlining that there may be other interest rate increases during the year, but that this will depend on how the country’s economy will respond and on inflation rates. This was interpreted by the markets as a vague stance, weakening the Canadian dollar. It seems that the road is open for prices at 1.30 and this goes through the upward break of the resistance of 1.29. But if there is a large increase in oil prices the pair will likely react by declining. Buy positions is our selection for the current week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a strong uptrend last week, as the opening was at 0.9562 and the closing at 0.9732. The pair had a strong upward trend throughout the week, which continued on Friday even though the US dollar underwent a correction. This is due to the speech of the head of the Bank of Switzerland Thomas Jordan, who in his speech stressed how the levels of inflation are not such as to impose an increase in interest rates. We need to remind you that interest rates in Switzerland are at -0.75%, a very low price. Thus, the USDCHF was at its highest price in the last two years and seems to have bowed to 1: 1. The Fed meeting on Wednesday and the announcement of the United States labor market on Friday will play an important role but we prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Last week was strongly bearish for the AUDUSD, which opened at 0.7239 and closed at 0.7059. While the United States has already raised interest rates by 0.25% and is expected to raise them again this week, probably by 0.50%, Australia looks more hesitant and so is expected to see a slight increase in interest rates on Tuesday, from 0.1 % to 0.25%. This creates a divergence between the two central banks, strengthening the US dollar against that of Australia. In addition, quarantine in China poses many problems for the Australian economy as the two countries are closely linked in this area. Australia’s macroeconomic performance had a mixed sign and so was a neutral factor. After falling for 5 consecutive weeks, the pair has reached the critical levels of 0.70 and so while the trend is strongly downward, there may be bullish reactions, especially in such an intense week that includes the US and Australian interest rates and the labor market announcements in the US. We insist in sell positions for one more week.

Bitcoin

Last week was bearish for Bitcoin, which closed at $ 38,458 with losses approaching 2.50%. The strong US dollar does not allow Bitcoin and most of the cryptocurrencies take deep breaths and any upward efforts do not continue. Concerns have been raised among cryptocurrency investors since the transfer of Three Arrows Capital (a well-known and large hedge fund) from Singapore to Dubai, as there is a widespread impression that the regulatory framework in Singapore will be too tight for cryptocurrencies. The DeFi lender Rari Capital of the Fei protocol was attacked by hackers, losing tens of millions of dollars. However, most investors argue that the trend may change, and Bitcoin may move higher. To confirm this, a strong move above $ 43,000 is needed. 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.