London 03/08/2022

The risk mood of the financial markets changed sharply yesterday after the visit of Nancy Pelosi (US House of Representatives) to Taiwan. It has been considered from the Chinese side a violation of the territorial integrity and right away, we saw a rally of attacking statements from both sides. Many analysts fear that the trip of Nancy Pelosi may have a deeper impact on the markets as it can be the kick-off of a long conflict between the two biggest economies on the planet. The impact of this crisis was the strengthening of the US dollar, as the investors were looking for safer investing solutions. We also saw a mild correction to the US stock indices.
The most likely scenario after the latest Fed’s decision is to see a 0.50% interest rate hike in September and this is confirmed by many bankers and counterparties.
The important Manufacturing PMI in the US was announced at 52.8 which is something above what markets estimated and today the Services PMI is expected and we will know more about the markets’ anticipation of the US economy. Of course, the big event is the Non-Farm Payrolls (NFPs) released on Friday, concerning the jobs market in the USA. In Europe, the retail sales in the Eurozone dropped by 3.7% in June and it seems that a recession probability is getting bigger.
Interesting enough is the bearish trend of the oil prices this week, given that the OPEC meeting today may hide surprises. Finally, the bond yields are performing a bullish reaction, as the US 10-year bond yield is recovering from last week’s close price of 2.66% to 2.78% currently.
EURUSD (current price at 1.0190) is slightly bearish this week, after yesterday’s strengthening of the US dollar. The sour risk mood in the markets favors the safer USD from the riskier shared currency. The bad macros in Europe (retail sales and producer price index) and the general feeling that the next winter will be very tough for people and companies due to the energy crisis are against the euro. Markets have put their eyes on the NFPs, released on Friday because a strong macroeconomic picture in the US, may allow Fed to be more aggressive in its monetary policy. Technically speaking, below 1.01 the downtrend becomes heavier and the price may break out even the 1:1 parity.

GBPUSD (current price at 1.2181) is neutral this week so far because both USD and GBP have reasons to be stronger. As per the US dollar, the latest crisis between US and China has pushed many investors to favor the US currency instead of other risky options. Regarding the sterling, markets expect the Bank of England to raise the interest rates tomorrow by 0.50%. Beyond those two developments, the US NFPs on Friday will also have a critical role. It takes a solid breakout above 1.23 for the exchange rate to develop a bullish trend while any pullback to the price area of 1.20 gives more credit to the downward side.

USDJPY (current price at 133.68) seems to recover after two weeks of a heavy bearish trend. The US dollar appears stronger but the most critical factor that affects USDJPY in the recent week is the bond yields. The US bond yields have performed a bullish reaction during the last days, helping the pair to escape from the price area of 130 that had dropped earlier this week. The PMIs in Japan were announced below markets’ expectations and given that the Bank of Japan carries on with the ultra-loose monetary policy, the Japanese currency has no important reasons to recover. The next resistances of the USDJPY are 135.50 and 137.

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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