London 13/07/2022

Earlier today, the US inflation was announced for June at 9.1% which is a significantly higher rate than the 8.6% of the previous month and even much higher than the 8.8% that the markets had estimated. The immediate reaction regarding the currency pairs market is the strengthening of the US dollar which already had developed a strong uptrend during the last week. More specifically, the USD Index has climbed above 108 which is its highest price since 2002. There’s a wide perception amongst the investing community that the Fed will carry on with new interest rate hikes (starting in July) and the year may end with an interest rate of 3.50% – 4%.
In Europe, the situation is very difficult as many predict that there will be a permanent stop of the Russian natural gas and specifically from Nord Stream 1. If this case comes true, Europe will be sinking into a deep recession with consequences for many areas of the European economies. It means that the ECB will be more hesitant to tighten the monetary policy and raise the interest rates because these actions may cause more recession. The most probable scenario so far is a 0.25% raise within July as inflation is a hot issue as well but beyond this, nothing else is safe to be estimated.

EURUSD (current price at 1.0025) touched the parity (1:1) for the first time in the last 20 years as the strength of the dollar is catalytic. It is considered a safe-haven asset in times of concern and uncertainty in a period full of issues: high inflation, high probability of recession, energy crisis, and war in Ukraine. On the other hand, the shared currency (euro) seems unable to react as the energy crisis, a possible recession and other problems are stronger in Europe. Moreover, there’s an obvious divergence between the Fed and the ECB regarding the monetary policy and the policy of interest rates. Moreover, the economic sentiment in the Eurozone and Germany was announced below market expectations while the industrial production in the Eurozone rose by 0.8% in May (MoM) but it seems that this economic news does not affect the currency pairs lately. It is obvious that the 1:1 price zone is very strong support for the pair and we may see technical-wise bullish reactions but we cannot think of many reasons, at least for the moment, that may help the uptrend of the pair.

GBPUSD (current price at 1.1858) remains strongly bearish, having broken out of many multi-year supports. The current price of the pair is very close to the price of March 2020 when the pandemic was beginning. Yesterday, the head of the Bank of England Andrew Bailey said that there may be a more aggressive interest rates policy in the next months because the main target is the return of the inflation rate to the area of 2%. Also, today there was a series of positive economic announcements in the UK, as per GDP, industrial & manufacturing production, and trade balance. The pledge of more interest rate hikes and the good macroeconomic picture of the UK normally should help the sterling to recover but in contrast, the downtrend has not changed. Many analysts estimate that the bearish rally will not stop before 1.14.

USDJPY (current price at 137.55) is bullish for one more week, as it is already moving above the major resistance of 137, which was a multi-decade high price. According to the latest news, the Bank of Japan intends to continue its ultra-loose monetary policy and the head of the central bank Haruhiko Kuroda said that there may be more easing and even lower interest rates as there is very high uncertainty. The producer price index (an index that measures inflation) was announced at 9.2% in June and as the previous month’s rate was 9.3%, it does not change anything. There are no other obvious obstacles/resistances until the price of 140 if the pair keeps on its bullish trend.

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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