London 17/08/2022
The US dollar has strengthened significantly this week after the big fall it suffered since last Wednesday, with the announcement of inflation in the United States. Most investors have returned to a risk-averse mood given the world’s poor economic situation and the belief that many economies will go into recession. Also, the macroeconomic results announced in the United States show that the country’s economy is much less affected than other economies, such as the European and British economies. Retail sales in the US, which were announced a few hours ago with a marginally positive sign, showed that there are still no significant problems.
On the contrary, things are not looking good in Europe, with the spectre of the energy crisis and the difficult winter being the big fear for many European countries.
Stock indices in the United States perform a slight decline, European markets perform greater losses, while commodities such as gold and oil have strong losses this week. Bond yields are also rising, with the U.S. 10-year at 2.87%.
For the rest of the week, the Fed’s meeting dominates in a few hours, but no decisions on interest rates are expected except for the publication of the minutes of July.
EURUSD (current price at 1.0164) is bearish this week, following the strength of the US dollar. Investment sentiment that has worsened worldwide is not favoring the euro as many investors are turning to safer foreign exchange investment solutions, such as the US dollar. The economic announcements on the European continent this week are not positive. The index of economic sentiment in the eurozone was announced in sharply negative territory, while below market estimates, European GDP for the second quarter of 2022 was also announced. Finally, the trade balance for July touched a deficit close to 25 billion euros. The most important announcement of the week for the European continent is July inflation to be announced tomorrow and any deterioration above last month’s 8.9% may boost the euro as many investors think the ECB will pursue a more aggressive policy. If there is a downward breakout below 1.01, then the upward reaction of the last few weeks should probably be considered to have come to an end.
GBPUSD (current price at 1.2062) is bearish this week, having approached the milestone price of 1.20, very dangerously. The Bank of England’s ominous forecast for the price of inflation through the year is confirmed after July inflation announced today was in double figures, at 10.1%. That price is well above the previous month’s 9.4%, even from the 9.6% markets had expected. Under normal circumstances, this would mean a strengthening of the sterling because now the need to fight inflation through interest rate increases is great. The markets believe though, that the bad economic situation of the UK will not allow this and that interest rates in the United States will be higher at the end of the year. A short breath in British sterling was given by the announcement of the unemployment rate for the United Kingdom announced yesterday, with an unchanged value at 3.8%. If the US dollar continues to strengthen, the exchange rate will hardly hold above 1.20.
USDJPY (current price at 135.22) is recovering this week and it has managed to climb above 135. Japan has had negative economic announcements so far. The country’S GDP was announced at 0.5%, below the expectations of markets and in a negative territory fluctuating the July trade balance. Industrial production for the same month fell 2.8%, a value that is above market estimates but still in negative territory. This modest situation of the Japanese economy gives additional incentives to the Bank of Japan to continue its very loose monetary policy and negative interest rates. So the strengthening of the US dollar this week combined with rising bond yields have contributed to the uptrend in the exchange rate. If the USDJPY manages to overcome the resistance of 137, then it is not excluded that the way has been opened even for 140.
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