01/08/2022

FED DECISIONS AND RECESSION FEARS MOVE THE FINANCIAL MARKETS

General Comment

The Fed’s meeting on U.S. interest rates and monetary policy took place last Wednesday with significant surprises. The Federal Reserve raised interest rates by 0.75% as expected, but at the press conference, Bank chief Jerome Powell said interest rates had reached a neutral level and that tighter monetary policy would begin to slow. These statements trimmed year-end interest rate expectations of 3.5% -4% by at least half a percentage point. The immediate results were a weakening of the dollar and a rise in stock indexes.

These Fed decisions and plans continued to affect markets through the end of the week, even though second-quarter U.S. GDP was announced as negative, continuing the first-quarter negative. which technically means recession for the American economy. This, of course, is refuted by the statements of Jerome Powell, Janet Yellen, and Joe Biden, who, based on their statements, consider that this does not exist.

Despite the weakening of the dollar, the euro could not benefit and develop a strong upward trend because Europe also showed a weak macroeconomic picture. Consumer confidence and investment sentiment were announced in sharply negative territory, while inflation in the Eurozone stood at 8.9%, a new multi-decade high. The only positive surprise was the GDP growth for the second quarter in the Eurozone of 4%, but developments with the supply of natural gas from Russia do not allow much optimism for the next two quarters.

The weakening dollar and a new line in Fed monetary policy have helped commodities recover as well, with gold and oil performing gains this week. The de-escalation in bond yields was strong, with the U.S. 10-year falling to 2.65%. We recall that a few weeks ago it had risen to 3.5%. News from the Fed has helped Bitcoin and most cryptocurrencies recover, validating that a strong correlation has now been established between cryptocurrencies and the rest of the markets.

The central theme of the week that has just begun is the announcement of the United States labor market and the unemployment rate (NFPs) that will give a better picture of the state of the American economy. This is followed by the decision on interest rates in the UK, the announcements of PMI indicators in many economies of the world, and retail sales in Germany and the Eurozone.

SP500

The US SP500 index closed last week with upward trends, at 4,132 points and gains that approached 4.30%. The Fed’s recent decision to raise interest rates by 0.75% somewhat calmed down the markets that expected to some extent a larger increase. More reassuring though was Fed chief Jerome Powell’s speech following the decision, in which there was talk of a slowdown in further interest rate hikes and tight monetary policy. The markets did not seem to be alarmed by the negative US GDP as announced on Thursday, and the statements of several central bankers were in a reassuring direction. In a positive climate, US President Joe Biden’s talks with his Chinese counterpart Xi Jinping continue, even if there are some recriminations and verbal excesses, mainly from the Chinese side. The index’s companies’ earnings announcements also gave a favorable wind, with Apple and Amazon exceeding expectations. With all these parameters, the SP500 closed one of the most profitable months of recent years but it needs attention because the problems of the global economy, especially the energy one, still exist and there may be corrections towards 4,000 points so we may try short positions this week.

DAX40

The German DAX40 index moved upward in the previous week, closing at 13,538 points, with gains of 2.85%. The index was favored by the generally positive climate that prevailed in the equity markets, mainly on the other side of the Atlantic, and seems to be reacting upward after the lows it recorded near 12,400 points, a few weeks ago. It is encouraging that this rise took place in a week of negative announcements for Germany: the business climate worsened, inflation rose to 8.5%, job losses appeared and GDP in the 2nd quarter of 2022 was at 0%, well below the 0.8% of the 1st quarter. Several German companies announced impressive results last week but the downtrend has not yet been reversed and so the index is vulnerable to corrective moves, especially if there is a loss of support of 13,000 points and we may try short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,398 points, gaining more than 2.80%. The index was strengthened by the overall positive climate but also by the positive results announced by British companies, mainly from the banking and mining sectors. Major companies such as British Airways, Astra Zeneca, and National Westminster Bank had significant profitability and reassured markets beset by a strong possibility of a recession. A possible recession with inflation as high as the one the UK has suffered in recent months will be a very negative development for the country’s economy. The climate, however, improved and so the FTSE100 found a breath of 7,400 points. Several analysts see a further rise to 7,640 points, but a return below 7,200 will probably bring back the pessimistic side of the markets so we may try short positions this week.

Gold

The previous week was bullish for gold (2nd in a row), closing at $1,783 and gains close to 2.30%. The weak dollar, in which gold is valued and usually has an inverse correlation, was a major factor in the rise. The other factor has to do with bond yields that are competing products toward gold. Yields had a significant de-escalation and so a portion of investors turned to other safe investment solutions. This week’s announcements in the US, mainly of PMI indicators and the labor market (NFPs), will largely demonstrate the state of the US economy and will affect gold prices to a significant extent. The price range around $1,785 is important because a solid upward split could further boost gold to the next resistance at $1,880. Below $1,750 though, gold is rather vulnerable to downward movements. We may try long positions this week.

US Oil

Last week was bullish for oil with next month’s futures closing at $98.12, with gains close to 3.20%. The Fed’s announcements of a less aggressive policy on raising U.S. interest rates gave oil price support. The decisive factor, however, was the announcement of inventories in the US, which fell by 4.5M barrels last week, showing that demand remains high, despite high prices. At the scheduled OPEC meeting on Wednesday, no plan change is expected and oil production will probably be kept at current levels, despite the urging of the US and President Biden personally, to increase production to control prices. However, as long as prices are kept below $100, there is a sense of further de-escalation, with the next supports being at $95, $93, and $90.50 and we may go for these targets with short positions this week.

EURUSD (Euro vs US Dollar)
Slightly bullish was last week for EURUSD which opened at 1.0209 and closed at 1.0226. We saw a balance between the two currencies, the euro, and the US dollar. The dollar weakened after the Fed said interest rates in the United States at the end of the year would be significantly lower than markets had expected. The negative announcement of US GDP also put pressure on the dollar. The European currency, however, has not been able to benefit from these developments because the signs for the course of the European economy are discouraging. Inflation is on the rise, investment sentiment and market sentiment are negative, and uncertainty over whether Europe will be able to meet the energy needs of its businesses and citizens this winter dominates. Slowly entering the heart of the summer, it makes sense for trading volume to decline and we may see increased volatility. The central theme this week will be the announcement of the NFPs in the US, and given the weakness of the euro and the structural problems of the European economy, any strengthening of the US dollar is expected to push the pair lower. Sell positions is our selection for the current week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the previous week for GBPUSD, which opened at 1.1994 and closed at 1.2181. The US currency suffered losses for the second consecutive week and for the second consecutive week the British pound was able to develop a mini-upward trend and perform profits. US central banker Jerome Powell trimmed the investment community’s expectations for interest rates of 4% at year-end. In contrast to this, the UK is expected to raise interest rates by 0.50% at the Bank of England meeting this week, and it is this divergence in behavior between the two central banks that creates the uptrend for the pair. The UK had no other macroeconomic announcements in the past week and apart from interest rates, there are no major announcements in the current week as well. The statements of Andrew Bailey, Head of the Bank of England, about the bank’s intentions shortly as well as the announcement of the unemployment rate in the United States on Friday will have the most important role in shaping the trend and volatility of the GBPUSD and if we see prices above 1.2330, then the mini-upward trend is not ruled out to continue further. We may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved sharply lower last week, opening at 136.11 and closing at 133.21. It is noteworthy that this fall occurred even though the Bank of Japan, in its monetary policy announcement last Tuesday, decided to continue the very loose monetary policy and negative interest rates. Critical factors, however, which strongly influenced the pair and led it to a downtrend, were the weakening of the US dollar and the large de-escalation of bond yields. The U.S. 10-year reached levels of 2.65%, well below the critical level of 3%. In the rest of the news about Japan’s economy, inflation remains low, close to 2.5% while the unemployment rate has risen slightly, from 2.5% to 2.6%. Finally, the Japanese economy’s performance in industrial production increased by 8.9% in June, recovering impressively. The pair came very close to the critical resistance of 131.50 and any downward breakout of those levels may sink it even further. An upward reaction above 137 is needed so that the upward trend that has been forming for several months stops tampering. We may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Last week was bearish for EURJPY which opened at 138.97 and closed at 136.23. The pair moved well away from the milestone price of 140 after the euro had a very anemic picture following the disappointing economic announcements in the Eurozone and Germany. The Japanese currency does not have a better picture as the continued loose monetary policy by the Bank of Japan weakens the yen but bond yields have been decisive lately. The German 10-year bond yield fell for the third week in a row and in that time has lost 38% of its value, falling from 1.33% to 0.82%. The next critical support for EURJPY is at 132.65 and that is the target of several sellers of the pair so sell positions is our selection for the current week.

EURGBP (Euro – Great Britain Pound)

Last week, EURGBP was bearish as it opened at 0.8505 and closed at 0.8393. The euro, with its weakness, based on the negative macroeconomic picture in Europe, and sterling, which strengthened due to the anticipation of the markets for a rise in interest rates this week by the Bank of England, brought about this result. The pair has moved away from 0.85 and it is not ruled out that it will approach even lower levels if this picture of the two currencies continues so we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, which opened at 1.2917 and closed at 1.2794. The weak US currency allowed the pair to move lower for the 2nd week in a row, while this move was helped by the rise in oil prices that is usually associated with the Canadian dollar. The positive for the Canadian currency is the announcement of the country’s GDP for May at 0%, as markets expected a negative figure. The US announcements this week (mainly of the labor market), the announcement of the unemployment rate in Canada, and of course the oil prices, are expected to set the tone for the USDCAD trend and volatility this week as well. Any strengthening of the US currency may bring the pair back to 1.30 again. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week after the opening was at 0.9614 and the closing at 0.9513. The US currency, with its downward trend, mainly after the Fed on Wednesday, led to a fall in the pair to the 0.95 range, where it had reached again a few weeks ago when the Swiss National Bank had suddenly raised interest rates. Retail sales in Switzerland rose 1.2% in June but the KOF index, which measures future trends and economic activity, was announced at 90.1, well below the 95.2 estimated by analysts. The picture in Switzerland was therefore mixed, leaving room for the dollar to take over as far as the exchange rate is concerned. It makes sense, then, that a new strengthening of the dollar could push the USDCHF to higher levels, away from the critical support of 0.95. Any loss of 0.95, however, will probably intensify the downward trend but we prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was last week for AUDUSD, which opened at 0.6919 and closed at 0.6989. The rise could have been greater too, helping the pair to exceed 0.70 but Australia’s macroeconomic picture did not allow for it. Inflation was announced at 6.1% in Q2 2022, slightly below market estimates, and so there is a confidence that the Bank of Australia will be milder on interest rate increases. The first increase of 0.50% is expected on Tuesday and this event is the most important for the country’s currency this week. Retail sales in June rose by just 0.2%, which shows the economy is still pressed. During the weekend, the PMI indices in China were announced, with a mixed sign and so there is no significant change in the pair. If the US dollar strengthens based on the expectations of the announcements for the US and as long as the AUDUSD is below 0.70, the scenario for a return to the downtrend gains points so sell positions is our selection this week.

Bitcoin

Last week, Bitcoin closed at $23,323 with gains close to 3.25%. This rise, for the most part, came after the Fed’s announcement on Wednesday on interest rates and monetary policy in the United States, which pushed markets up in general. It is therefore even more evident that a strong correlation has developed between the cryptocurrency market and the equity markets and more so the technology industry. This development is generally considered positive because it prevents sharp and abrupt changes in cryptocurrencies from exogenous factors such as statements of eminent Bitcoin holders, etc. Bitcoin had a positive month, starting below $20,000 and managing to stabilize above $22,000. The most critical resistance remains close to $24,500 and a solid upward breakout above these levels may be a harbinger of even higher prices. We may try long 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.