London 27/05/2022
A part of the missing risk appetite seems to return to the markets as the week closes in. More specifically, the US stock indices perform a profitable week (more SP500 – less NASDAQ100) and the US dollar most likely will have its second bearish week in a row. The remaining economic announcements of the week are mostly the personal consumption expenditures price index and the Michigan consumer sentiment index but those two results are very difficult to change the outlook of the markets this week. Yesterday, the US GDP for the 1st quarter of 2022 was announced at -1.5% which is negative but worse than the markets’ expectations of -1.3% but the markets did not react accordingly.
In Europe, all the markets’ interest is around the war in Ukraine and the ECB plans and decisions. Regarding the Ukrainian war, the concerns of a higher energy crisis along with the high inflationary pressures have created a negative sentiment. On the other hand, the ECB seems determined to tighten the monetary policy and to raise the interest rates in the next few months, for the first time after 2016, even if it may cause further hurt to the economic growth.
EURUSD (current price at 1.0710) will close higher this week, compared to the last week’s closing price (unless something exceptional happens) but all the profits come mostly from the very first two days as later on in the week, there are signs of exhaustion and pullback. There is a hawkishness in the euro area after the perception of certain actions from the ECB but it seems that the markets count more on Fed’s next interest rate hikes and more robustness in its monetary policy. Markets’ sentiment improvement also gives some help to the euro. Any bullish breakout above 1.0765 gives a sign for a further uptrend and a possible retracement back to 1.06 may give more credit to the bearish scenario.
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GBPUSD (current price at 1.2533) is strongly bullish this week (+150 pips since the beginning of the week), following last week’s uptrend. The UK government is taking a series of actions to face the high inflation and the energy crisis: a one-off tax will be applied to the big oil and gas companies and the amount that will be gathered will fund a national package for supporting the UK households. Most of the vulnerable households will receive the amount of 1,200 pounds as help with the higher cost of living. Many financial analysts warn that since UK growth is weaker than the growth of the US, the Bank of England should now follow the same tight monetary & interest rate hikes that Fed will implement. It is obvious that in such a case, the GBP will weaken. It is critical for the pair’s bullish course to solidly surpass the critical resistance at 1.2640 otherwise below 1.25 the mini uptrend that started 2 weeks ago will enter a consolidation phase.
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USDJPY (current price at 126.88) continues the bearish trend for the third consecutive week, forming a mini downtrend. It is a very correlated situation with the bond yields: the US 10-year bond yield keeps on dropping for the third week in a row, moving to 2.73 and having opened the week at 2.81%. Of course, the weakness of the US dollar in the same period helps the pair’s bearishness. Today there’s an attempt for recovery though because there was the announcement of the Japanese inflation in May at 2.4% which is lower than the markets’ expectations of 2.7% and even lower than the previous month’s rate of 2.5%. Some market analysts may consider that this lower inflation will make the Bank of Japan continue for a while the ultra-loose monetary policy and the negative interest rates. Below 126.35 the downtrend may become stronger.
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