London 22/06/2022

After a very volatile week that passed by with many interest rate decisions and other important announcements, this week is calmer and this can be found out to the lower volatility of the currency pairs. On Monday, it was a public holiday in the US (Juneteenth) and the trading volume was low but as the week moves on, things will become hotter. The US dollar is mildly bearish but still very close to its multi-year highs. In Europe, Christine Lagarde in her speech at the European Parliament mentioned that the recession scenario is possible but not the baseline one but there’s still a high risk of the real estate prices correction. Furthermore, Olli Rehn (ex officio member of the governing council of the ECB) stated that with inflation rising sharply, there has been a good reason to expedite the normalization of monetary policy. He also repeated the scenario for a 0.25% rate hike in July and hinted at a bigger increase in September to fight inflation, which hit a record high of 8.1% in the Eurozone.
The major stock markets in US & Europe perform good profits, gold shows signs of recovery and the oil prices are in a heavy downtrend, following the big losses of the previous week. Finally, a correction is taking place to the bond yields with the US 10-year bond yield dropping to 3.18% which is significantly lower than the 3.50%, a few days ago.

EURUSD (current price at 1.0540) performs an important recovery after three bearish weeks in a row. After the promise of the ECB that there will be tools for dealing with the high yields in the Eurozone and after the perception of the markets (based on ECB officials’ statements) that there will be another interest rate hike in September after the expected one in July, the euro seems to escape from the support zone of 1.0350. This zone is very dangerous for a further drop, even to the exchange rate of 1:1. A few minutes later, Jerome Powell in his testimony in the Congress, said that the process of interest rate hikes is ongoing and appropriate. Above 1.0640 the bullish recovery may become stronger and below 1.0470 the 1.0350 scenario returns.

GBPUSD (current price at 1.2272) is mildly bullish this week, based on the dollar’s weakness and sterling’s recovery. After the 0.25% interest rate hike from the Bank of England last week, today the inflation in the UK was announced at 9.1%, which is a very high rate but well expected by the financial markets. This announcement reversed the mini-bearish trend that had been developed since the beginning of the week because the markets’ perception is that the Bank of England will become more aggressive to fight the high inflationary pressures. An enhancive factor in this perception is the statement from the Bank of England Chief Economist Huw Pill who said that policymakers would sacrifice growth to bring down inflation in the UK. The critical price area is around 1.2150 because in case of a bearish breakout, the road to 1.20 is open and some say that even prices at 1.15 are possible to see. On the contrary, above 1.24 and even more, above 1.2650 we expect the development of an uptrend.

USDJPY (current price at 135.81) has managed to perform new multi-decades high prices, breaking out of another resistance at 135.15. It makes sense that this new bullish rally is taking place while the US dollar gets mildly weak and the bond yields drop. So it is obvious that all this heavily bullish rally comes from the weakness of the Japanese currency. As we’ve mentioned several times in the past, the Bank of Japan is in divergence with the other central banks, keeping an ultra-loose monetary policy and negative interest rates. Furthermore, the Bank of Japan published the monetary policy meeting minutes earlier this week and it was revealed that all board members agreed on taking additional easing steps if needed. The last time that we saw prices for USDJPY around 135, was in October 1998 so it’s difficult to define when and how this bullish rally could stop. Just for the records, during 1998, the pair had approached the price area of 148.

DISCLAIMER: The information produced by a-Quant is of a general nature only. It is not personal financial advice. It does not take into account your objectives, financial situation, and personal needs.

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