09/05/2022

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

General Comment

The war in Ukraine along with the actions of the central banks worldwide are the dominant issues that concern the financial markets at the moment. In the field of military operations, the clashes continue unabated and President Putin’s speech on the anniversary of the victory in World War II is expected, where many analysts are waiting for news on the development of the war. On the central bank front, the Fed raised interest rates in the United States by 0.50% as expected, leaving clear hints as to what will happen in the next two meetings. What partially disappointed the markets was the rejection of the case for a 0.75% increase in interest rates in one of the next two meetings and since there was this hidden hope from the markets, this led to a temporary fall of the dollar which was not able to reverse the positive climate for the US currency for another week. Important news that helped the dollar recover was the announcement from the United States on the labor market – Non-Farm Payrolls (NFPs), according to which 428K new jobs were created in April, a number that exceeded market expectations.

We also saw an increase in interest rates from the Bank of England by 0.25% but the press conference of Andrew Bailey that followed caused great concern. More specifically, the head of the Bank of England said that there is a very high probability that the country’s economy will sink into a recession by the end of 2022 and throughout 2023 and that this could be accompanied by double-digit inflation. These statements were interpreted as a precursor and forerunner for the future not only of the British economy but of all major economies. Sterling, of course, collapsed after that, with very large losses. The Bank of Australia opened the round of interest rate hikes earlier this week, which raised interest rates more than expected, so we saw a relative strengthening of the country’s dollar. There has been no development in Europe on these issues, so loose commitments by the European Central Bank on a possible rate hike by the end of the year remain on the table. The news from the European area has to do with the strong possibility of a full embargo on Russian oil, although Hungary’s refusal to consent has caused upset as there must be unanimity.

The major stock indices had another correction week as the mixture of war along with interest rate hikes is not something that favors stock markets. Gold continued its downtrend while oil had significant gains. Bitcoin and most cryptocurrencies have fallen while it is worth noting the continuing rally in bond yields. More specifically, the US 10-year bond rose to 3.14%, a price we have been seeing since November 2011. The price of 3.27% is now threatened, which is a high of about 11 years.

The main topics of the week that has just begun are the inflation announcements, primarily in the United States and secondarily in Germany. The announcement of the British GDP, the speech of Christine Lagarde, and the announcement of industrial production in the eurozone also stand out.

SP500

The US SP500 index closed last week with downward trends, at 4,112 points and losses approaching 0.60%. The only breath the index took was on Wednesday, with the announcement of interest rates by the Fed and the exclusion of the case for a new increase of 0.75% soon (probably the increase will again be of the order of 0.50%). Even the announcement of the NFPs with the positive results, could not help the SP500 even if it was an additional indication that lowers the chances of the US being in recession. Earlier this week, the index lost 4,100 points which was a significant support in the surrounding price range and now the 4,000 points seem like a realistic scenario. The announcement of the US inflation on Wednesday is the central event of the week and will probably increase volatility and/or determine the short-term course of the index. We prefer short positions for one more week.

DAX40

The German DAX40 index moved lower last week, closing at 13,685 points, with losses of 1.60%. The DAX40 had a slight uptrend all the first three days of the week but suffered significant losses on Thursday and Friday, with the European Commission announcing it was proposing a full oil embargo from Russia. Germany is highly energy-dependent on Russia and the economic results are already showing negative performance: retail sales fell sharply, the job balance was negative, the trade balance fell to 3.2 billion euros in March from 11.1 billion in February, the factories orders fell by 4.7% and industrial production by 3.5%. The yield of the German bond in Wednesday’s auction was 0.93% while it has already exceeded 1.14%, a price we have had to see since 2014. The above justifies the downtrend of the index and only some possible positive developments from Ukraine or some investors who will evaluate these low levels as an opportunity, can reverse the situation. We may try short positions this week.

FTSE100

The British FTSE100 index was bearish last week, closing at 7,383 points, having lost more than 0.40%. The full drop came essentially after the Bank of England meeting on Thursday and the strong possibility of a recession presented in the announcement of the minutes and the press conference that followed. All other economic announcements were overshadowed by this development that shook the markets, although there were signs and hints in recent weeks that the war in Ukraine would eventually have a greater impact on the UK economy than originally expected. The GDP for the first quarter of 2022 is announced on Thursday and we will have a better picture. Below 7,300 points, however, the decline may accelerate so we may try short positions this week as well.

Gold

Corrective was the last week for gold (the 3rd in a row), with a closing at $ 1,883 and losses close to 0.80%. Several developments do not favor gold prices. The rise in interest rates by the Fed is a serious reason as well as the heavy rise in bond yields which is a competitive low-risk product for gold. The US dollar, in which gold is valued, has been showing an explosive rise lately and so as it is the denominator in the price, it is causing a fall. The Bank of England’s announcements of a possible recession in 2022 were a deterrent to the fall, as such fears could deter central banks from tight monetary policy and successive interest rate hikes. The most important support in the surrounding price range is near $ 1,850 and we may try short positions for one more week.

US Oil

Last week was a bullish week for oil with next month’s futures closing at $110.53, performing profits of more than 6%. Two countervailing forces are affecting the price of oil at this time. The war in Ukraine and the possibility of extending sanctions on Russia with a full embargo on Russian oil is causing a hit to production. On the other hand, the lockdown in China is causing demand jitters although the slowdown in the spread of COVID-19 is creating optimism that the quarantine could end sooner than anticipated. The countervailing forces, combined with the significant resistance near $110 that oil has reached, cannot be ruled out to bring about price corrections. For this to be confirmed there must be a break of $108 and perhaps even $106.40 in the first instance. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Last week was a stabilizing week for the EURUSD which opened and closed in the 1.0445 price area. The dollar continued its frantic run after having its 5th consecutive bullish week even though it had some losses on Wednesday after the Fed meeting and the subsequent statements that any interest rate hike of 0.75% is out of the question. This transient weakening of the dollar resulted in a neutral week. In Europe, the problems continue and maybe exacerbated after the European Commission proposed a full embargo on Russian oil. The news was positive from the US labor market with the unemployment rate remaining low but PMI indicators reflecting the psychology of the economy were released in the US below expectations. In Europe the mood is no better as the sign of the Eurozone economic sentiment, investor sentiment and retail sales releases were negative. Of course, these macroeconomic announcements take a back seat as central bank decisions are in the spotlight. The pair needs a clear bullish break above 1.0640 to have a chance of further recovery but any loss of 1.0470 could take it to the next critical resistance of 1.0340. Sell positions is our selection for the current week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was a sharply bearish week for GBPUSD, which opened at 1.2577 and closed at 1.2235. The Bank of England raised interest rates on Thursday by 0.25% as expected but Andrew Bailey’s subsequent statements caused a major uproar as the recession in the economy and double-digit inflation were assessed as serious possibilities. In addition, many analysts are predicting how UK interest rates will end the year much lower than initially estimated because there will be a pause in the rise due to fears of a worse and bigger recession. The pair has taken a sharp downward slope since the beginning of the year, losing over 10% and reaching a low of around two years. These oversold levels, combined with a possible weakness in the dollar may lead to bullish reactions otherwise it seems that GBPUSD has set its sights on 1.20 so we may try sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

The USDJPY continued its bullish rally for the ninth week in a row, opening at 129.75 and closing at 130.54. The strong momentum of the US currency combined with the frantic rally in bond yields has taken the pair to a price range that is a high of about 20 years, but we might have seen a stronger rise if there were no signs of a change in monetary policy in Japan. Inflation in Japan was announced for April at 2.5%, almost double the 1.3% in March and this may give Bank of Japan policymakers some food for thought as continued loose monetary policy and negative interest rates may create high inflationary pressures even there. However, given the strong bullish channel, the next resistance lies in the 131.25 price area so we may try buy positions for this week too.

EURJPY (Euro – Japanese Yen)
Last week was a bullish week for the EURJPY which opened at 137.05 and closed at 137.65. The weakness of the Japanese currency continues, with loose monetary policy and negative interest rates, although there are already some signs that this could change in the future. In Europe on the other hand, the situation is not good with the energy crisis affecting most countries and the European Central Bank continuing to take a wait-and-see approach. However, expectations of a rate hike towards the end of the year in the Eurozone are creating a more positive sentiment than that of Japan and so we see a bullish channel being established since the beginning of March. There are therefore more than a few analysts who predict that the pair could reach 140 in a reasonable time so we may try buy positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was a strong bullish week for the EURGBP which opened at 0.8383 and closed at 0.8545. The euro was not particularly strong, so this big rise was due to the collapse in sterling triggered after the Bank of England’s head said there was a high probability of a recession and double-digit inflation by the end of the year. Until then, the pair had been stabilizing but since Thursday the losses for the pound have been big and the rate touched the important resistance at 0.86. If of course, this pattern continues we could see prices heading towards the next resistance at 0.8660 – 0.8670 but if the statements from the Bank of England are consumed and digested by the markets, the pair could return to its long-term downtrend. Our selection for the current week is buy positions.

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for the USDCAD (the 6th in a row), which opened at 1.2831 and closed at 1.2907. Oil, which is Canada’s main export commodity, strengthened quite a bit last week but this was not reflected in the pair’s price as the strength of the US currency is very heavy. The sentiment did not improve with the release of the Canadian labor market and unemployment data, as new jobs created in April were just 15.3k, well below the 55k most analysts had estimated. The USDCAD has made three attempts to approach 1.30 in the recent past: in August 2021 it reached up to 1.2949, in December of the same year it reached up to 1.2963, and about two months ago, it exceeded 1.29. This is the fourth attempt for the USDCAD and while the trend has been strongly bullish for a month and a half, this technical picture we have described creates some hesitation. We may try some low-risk buy positions.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was strongly bullish last week, opening at 0.9714 and closing at 0.9885. It seems that Switzerland will continue its loose monetary policy and negative interest rates because the low inflation in the country (at 2.5% announced in April on an annualized basis) allows for this. Also, the PMI was announced at very high levels, the unemployment rate was unchanged at 2.2% and foreign exchange reserves approached 1 trillion, giving a picture of a strong economy that may not be so badly affected by the war crisis. In the US, on the other hand, several interest rate hikes by the end of the year and tighter monetary policy are forecasted. With all this, the possibility of a 1:1 exchange rate soon cannot be ruled out so buy positions is our selection for one more week.

AUDUSD (Australian Dollar – US Dollar)

Last week was a stabilizing week for the AUDUSD, which opened and closed near 0.7070. Logically, the pair should have continued its downtrend that has been underway since late March as the US dollar continues to be strong but a mini surprise prevented this from happening. Last Tuesday, the Reserve Bank of Australia (RBA) announced a 0.25% interest rate hike instead of the 0.15% that markets were expecting so the Aussie found a foothold. Australia’s economy also seems to be on track, with PMI, retail sales, and trade balance indicators being released above market estimates. However, it is possible that this braking of the decline could be temporary and the pair could return to its downtrend, on its way to 0.70 and the support of 0.6970 which is also a low of about 22 months. We may try sell positions this week.

Bitcoin

Last week was a strongly bearish week for Bitcoin, which closed at $34,025 with losses of close to 11.60%. US-based high-tech firm MicroStrategy, through CFO Phong Le, said last Tuesday that the company, which holds 129k Bitcoins, could be driven to a margin call if the Bitcoin price falls to $21,000. Much consternation was caused in the world of cryptocurrency investors following this development. An upset was also caused by the news that decentralized finance (DeFi) funds have fallen by around 18% in the last month, from $221 billion to $182 billion, and there seems to be a transfer of funds to other investment solutions, particularly in the last week. With such a climate, and if there is a break of $33,000, more than a few analysts see $30,000 on the horizon so 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.