04/07/2022

CRITICAL MONTH FOR CENTRAL BANK DECISIONS

General Comment

The race in most of the world’s economies between high inflation and a possible recession continues unabated. Central banks in the face of this crucial crossroads are carefully measuring their movements with the month that has just begun to be particularly important as markets expect interest rates to rise in both the United States and the Eurozone. In the United States, the decision to raise interest rates is expected towards the end of the month, with a strong probability of another 0.75% increase. On the contrary, in the Eurozone things are much more complicated and there may be an increase of 0.25% this month. At the European Central Bank Economic Forum held in Portugal last week, Christine Lagarde tried to give a tone of optimism about controlling inflation by highlighting that all the necessary actions will be taken. But it does not seem to have been able to convince the markets and so the euro has not been able to recover. The announcement of inflation in the eurozone on Friday at 8.6%, well above May’s 8.1% shows that the situation is extremely difficult.

In the other economic announcements of the week in the United States, the sign was not particularly positive. Only durable goods orders exceeded expectations while the country’s GDP and PMI indicators had disappointing results. In Europe things were better with the unemployment rate falling to 6.6%, PMI indicators relatively good and business sentiment improving. However, the ambiguity and indecision of the European Central Bank do not allow the euro to breathe in contrast to the dollar, which strengthened for another week.

Most stock indices in Europe and America moved correctively, gold continued to decline, while oil showed strengthening trends. Bitcoin and most cryptocurrencies were unable to continue the recovery and so found themselves for another week in sharply negative territory.

This week begins with a public holiday in the United States (Independence Day), but the announcements that follow are particularly important. On Wednesday there is the announcement of the minutes of the Fed (FOMC) and on Friday new jobs (NFPs) are announced. Other economic news that stands out is the announcement of the PMI in the United States and China and retail sales in the eurozone.

SP500

The US SP500 index closed last week with downward trends, at 3,827 points and losses that approached 2.20%. To market concerns about the international energy crisis and the possible slowdown in growth through expected Fed rate hikes, came a series of bad economic announcements that act as harbingers of negative developments. The US economy slowed in Q1 2022 by 1.6% and PMI indicators in manufacturing were announced below estimates. We are now on track to see the quarter results for many companies, and if these announcements do not satisfy, investment sentiment may be weighed down further. The key points through the month will be the path of inflation and the Fed’s decision on interest rates. 3,640 points is the key area of defense for the index that probably prevents further fall while in the event of an upward reaction above 3,950 points, the climate will improve. We may try long positions this week.

DAX40

The German DAX40 index moved downward in the previous week, closing at 12,900 points, with losses of 2.30%. All days except Friday were bearish, which proves the strong market fears and the negative investment sentiment. The DAX40, as well as many European indices, have aligned their losses with the American ones because the blow to economies will be mutually big, even if the attitudes of central banks diverge regarding the policy of raising interest rates. Inflation in Germany (harmonized index of consumer prices) was announced at 8.2% in June, down significantly from 8.7% in May, retail sales fell by 3.6% and the unemployment rate rose sharply from 5% to 5.3%. The landscape does not, therefore, allow for many optimistic thoughts, especially if we see a price below 12,600 points. The improvement of the climate requires in the first instance values for the index above 13,370 units. We prefer short positions for one more week.

FTSE100

The British FTSE100 index declined last week, closing at 7,177 points, with marginal losses of 0.20%. Although the UK index suffered losses, it performed better than most of its European and US indices. This phenomenon is not so simple to explain, but it seems that the recent losses of the index due to Brexit and the forced shift of the economy to sectors that are not so affected by the war, create comparative advantages. The index is held above 7,000 points, with total losses compared to the recent pre-war highs of almost 6%, which is less compared to the rest of the main indices. The results in the United Kingdom were neutral: the economy ran in the 1st quarter with 0.8% compared to the previous one while business investment was slightly depressed. Andrew Bailey’s speech had a negative impact but as long as the index remains above 7,000 points, the climate does not deteriorate seriously and may improve if there is an upward break of 7,300 points so we may try long positions this week.

Gold

Last week for gold was bearish, closing at $1,812 and losses close to 1%. The strengthening of the US dollar is a key reason for the declining attitude of gold in the last period. Other factors are rising bond yields that are a competitive choice and the perception that inflation will be drastically combated by rate hikes, mainly by the Fed. The announcement of the Fed’s minutes on Wednesday and new U.S. jobs on Friday will influence the outlook of gold investors. Last Friday we saw prices well below $1,800, something that had not been done since the beginning of January but quickly there was an upward reaction. If this happens again, however, the chances of immediate and dynamic recovery are limited so we prefer short positions this week.

US Oil

Last week was bullish for oil with next month’s futures closing at $108.34, up about 1.20%. Many factors affect the price of oil lately in many, different and contradictory ways. The war in Ukraine and the embargo on Russian oil are driving up prices, but fears of a global economic downturn and the potential drop in demand are pushing prices down. OPEC, on the other hand, seems to be sticking to its initial plan and will increase production by 648K barrels per day in July and August. The issue of oil prices is further complicated by the political crisis that has broken out in Libya, with exports unable to take place due to the blockade of ports and there is an announcement of a strike by workers on oil and gas platforms in Norway that will probably inflict a new blow on production. So, it is not excluded that the supply-demand balance will cause a new increase in price and if we see an upward split above $114, the probability of creating an uptrend will be increased. Long positions is our selection for the current week.

EURUSD (Euro vs US Dollar)
Last week was a downward one for EURUSD which opened at 1.0547 and closed at 1.0426. It seems that after the rest of the US dollar, its strengthening continued and so the EURUSD came very close to the critical price zone of 1.0350 which is the last main obstacle and the most important support before the 1:1 parity. Regular economic announcements seem to have gone into the background and the most important role is played by central bank decisions. Given that markets expect interest rates to rise by 0.75% in the US and 0.25% in the Eurozone, a divergence between the two currencies is creating that pushes the pair lower and lower. Europe is more afraid of recession and so is more cautious in its movements, although in general, it operates more slowly and more inactively than other central banks. The announcement of the Fed’s minutes on Wednesday and the unemployment rate in the United States on Friday along with retail sales in the eurozone make up this week’s puzzle. Any downward break of 1.0350 may lead to much lower levels while hopes of recovery exist above 1.0615. We may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was bearish for GBPUSD, which opened at 1.2177 and closed at 1.2088. Sterling focused its interest mainly on the speech by Andrew Bailey, Head of the Bank of England, at the Economic Forum in Portugal. The British central banker stressed that the country has suffered a shock to the real income of citizens and that everything possible will be done to address the huge problem of inflation. Fears of a recession in the United Kingdom are creating a sense in markets that the Bank of England will be less aggressive in raising interest rates than the United States Fed. So sterling is weakening relative to the dollar and the pair has touched the milestone price of 1.20. Below it, there is the support at 1.1930 which is also a low price of about 2.5 years. The trend is bearish and hopes of an upward recovery may appear above 1.2330. We may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved slightly upward last week, opening at 135.06 and closing at 135.24. For the second consecutive week, the same pattern appeared for the pair. The beginning of the week had strong upward trends and from the middle onwards the corrections dominated. From this behavior, it is extracted how the biggest factor affecting the USDJPY currently is bond yields. The U.S. 10-year bond started the week up but then fell sharply and closed at 2.89%. The counterforce that boosted the pair and led it to close slightly positively was the strengthening of the US dollar. The situation in Japan remains unchanged and the very loose monetary policy continues while interest rates remain in a negative area. Tokyo’s Consumer Price Index, which is an indicator of inflation, was announced at 2.3%, a value that does not particularly worry Japan’s central bank. Retail sales and industrial production were reported to be performing well, and so all factors suggest that there is no need to change the policy. The next apparent resistance is at 137 while many analysts are already talking about 140 in the next period so we may try long positions for one more week.

EURJPY (Euro – Japanese Yen)
Last week was bearish for EURJPY which opened at 142.49 and closed at 141.02. It was the first downward week after six upward weeks, which had created overbought conditions that may have driven some investors to profit-taking. Christine Lagarde, in her series of speeches in Portugal, failed to be convincing about the course of the European economy and the fight against inflation, and so the euro weakened even though Japan’s currency has shown no signs of recovery. Based on continued loose monetary policy in Japan, even small signs of strengthening the euro may bring the pair back into its upward channel, especially if we see prices above 142 so we may try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8592 and closed at 0.8615. Both European and UK currencies have been anemic but expectations of an interest rate hike in the Eurozone in July have given the euro a slight head start. An uptrend has developed for about 2.5 months, which has brought the pair very close to some significant resistances such as that of 0.8660 and 0.8720. If it can exceed these price levels, the upward channel will have strengthened so buy positions is our selection in the current week.

USDCAD (US Dollar – Canadian Dollar)

Slightly bearish was the last week for USDCAD, which opened at 1.2889 and closed at 1.2883. The strengthening U.S. dollar was balanced by rising oil prices that helped the Canadian dollar. Canada’s GDP rose by 0.3% in April, as markets estimated, and this was the country’s only major announcement last week. Therefore, beyond oil prices, the main factor for the pair is the US currency, which will have serious developments this week with the announcement of the Fed’s minutes and the labor market in the United States. The recent strengthening of the US dollar could not be reflected in a rise for the USDCAD which means that the pair may be vulnerable to downward movements, especially with prices below 1.2820 so we prefer sell positions for one more week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a mild uptrend last week after the opening price was at 0.9575 and the closing price at 0.9593. The recent unexpected increase in interest rates in Switzerland has caused a drop of about 5% in the pair, but the situation seems to be stabilizing and any new possible strengthening of the dollar may bring the USDCHF back to the levels it was a few weeks ago. Swiss retail sales had an unexpected decline in May of 1.6% but the KOF index, which measures future trends in economic activity, and the PMI index, showed positive investment sentiment dominating. If there is a bearish breakout below 0.95, the scenario of a further decline is strengthened, otherwise, in each strengthening trend of the dollar, a rise is expected for the pair, which may strengthen above 0.9650. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bearish was the last week for AUDUSD, which opened at 0.6941 and closed at 0.6815. The strengthening of the US dollar was a decisive factor in this downward move. Economic news in Australia and China did not have negative signs because retail sales and the PMI index in Australia had better results than expected, while in China, the PMI indices were announced with satisfactory performance. The decision on interest rates in Australia is expected next Tuesday with markets talking about an increase from 0.85% to 1.35%. Such a move would logically boost the country’s dollar unless it has already been digested by the markets or fears of a recession prevail. The important thing for AUDUSD is that there was a bearish breakout and a weekly close price, below the significant support of 0.6830 which was the lowest value for about 2 years. If the rate remains below these levels, the downward scenario is favored. It takes a 0.70 approach to start changing the perception of markets and my trusting this case, we may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $19,294 with losses close to 8.30%. The upward reaction effort did not have the corresponding continuity because the problems for the cryptocurrency market are continuous and large. After the recent shock in Luna and Terra, the withdrawal freezes by Celsius (a company that gives large interest to cryptocurrency holders) and the bankruptcy application of Three Arrows Capital (a large hedge fund in cryptocurrencies) in the US followed. It is now believed that the recent large price increases in Bitcoin and most cryptocurrencies were a product of central banks ‘ large supply of liquidity, which allowed many investors to try out high-risk investment products. The supply of large liquidity is already over, central banks are raising interest rates, so the pressure on cryptocurrencies is great. Below $17,500, we may see sharper and greater pressures and we may try short 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.