22/08/2022

FED SHOWS DETERMINATION – DOLLAR STRENGTHENED

General Comment

Fed minutes released on Wednesday showed central bankers in the United States are determined to hit inflation, continuing aggressively with repeated interest rate hikes. The slight de-escalation of inflation that had preceded had put a brake on the thoughts of many analysts, but it seems that we are heading for a continuation of hard and tight monetary policy. While the U.S. is typically in recession with two-quarters of negative growth already, its macroeconomic results are positive: the labor market, retail sales, and most of the rest of the announcements were positive, above market estimations. So, there are serious doubts about whether there will be a recession in the real economy and a deterioration in macroeconomic outcomes, and if these doubts prevail, they will leave a lot of room for the Central Bank of the United States to move even more aggressively on monetary policy and interest rates.

The above picture greatly strengthened the US dollar, with the corresponding index reaching a value of 108 and now very close to 20-year highs. On the contrary, the euro came under great pressure last week as the probability of a recession on the European continent is greater due to the great energy crisis and the possibility of energy shortages in households and businesses next winter, but also the results announced in the Eurozone are disappointing, as we will see below.

One of the highlights of this week is certainly UK inflation, which was announced at 10.1% for July, a double figure for the first time since 1982. Nevertheless, British equity indices rose in contrast to the rest of the main European and U.S. indices which had corrective trends. Most commodities such as gold and oil also moved correctively, while bond yields had significant strengthening with the US 10-year approaching 3% again. Big losses, finally, performed Bitcoin and most cryptocurrencies that were unable to take advantage of the recent upward reaction.

This week is dominated by the Jackson Hole symposium, organized annually by the Federal Reserve Bank of Kansas in Wyoming, where various economic issues are discussed by central bankers and academics. Also important is the announcement of the United States GDP for the second quarter of 2022 and durable goods orders. In Germany, GDP and business climate are announced, while the results of PMI indicators in the world’s largest economies are expected on Tuesday with great interest.

SP500

With corrective trends, the US SP500 index closed last week, at 4,228 points and losses of just over 1.20%. The index had been trending upward until Wednesday and the announcement of the Fed’s minutes. But the US central bank’s intentions to continue raising interest rates and to tighten monetary policy do not favor equity markets and so we saw corrective trends prevail. The increase in bond yields also contributed to this correction as many funds were directed towards bonds. Of course, the strengthening of the US dollar, which had one of the most upward weeks in recent months, also played an important role. The correction could continue at a stronger pace below 4,200 points if the belief of continued aggressive policy by the Fed is further consolidated but given the better state of the US economy than the rest of the economies, especially the European ones, US stocks may be more attractive and so the upward trends prevailing from mid-June onwards are not excluded. In any case, we prefer short positions this week.

DAX30

The German DAX40 index declined last week, closing at 13,533 points, with losses of 2.50%. The DAX40, like most European stock indices, suffered bigger losses than the U.S. ones, showing that markets are convinced that economies like Germany’s are more affected by the energy crisis and have a greater chance of recession. Germany, which is heavily dependent on Russian gas, is one of the candidate countries that could have an energy shortage next winter, which will create huge problems. Germany’s announcements continue to cause skepticism after economic sentiment is at very low levels and the producer price index rose last month by 37.2%, year-on-year. The wholesale price index also increased by 20%. Below 13,440 points and as we get closer to 13,000 units, it is possible to see stronger corrective pressures but if the index enters an approach to 14,000 units, the upward scenario gains more points. We may try short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,549 points, gaining more than 0.30%. This index was one of the few exceptions that had profits since most of the corresponding indices in Europe and America performed corrective trends. Inflation in the UK has been announced for the first time in 40 years, in double figures, but the country’s poor economic outlook is doubtful whether it will allow the Bank of England to pursue a policy of many more interest rate hikes. The unemployment rate remained unchanged at 3.8% but many jobs were lost in July, retail sales fell 3.4% year-on-year in the same month and the GfK Consumer Confidence Index slumped to very low levels. A large portion of investors, therefore, believe that the Bank of England will be forced to continue providing liquidity to cope with the upcoming possible recession. The price range of 7,665 points is a high of about four years and so it needs attention since several sellers may appear who will want to secure profits since the index has been strongly upward trends for about 4.5 months. We prefer short positions this week.

Gold

The previous week was sharply bearish for gold, closing at $1,760 and losses close to 3.20%. It was gold’s biggest weekly loss for the last 1.5 months. The Fed minutes released on Wednesday, coupled with statements from several central bankers, paint the picture that the aggressive rate hike will continue despite the slight de-escalation of inflation we saw in the United States last week. This scenario does not favor gold, which had fallen all five days of the week, while of course the large strengthening of the US dollar and the increasing bond yields also played an important role. Gold had a strong rise from mid-July to early August but from then on, the fall is intense and steep so there are no obvious support and resistance zones throughout this period. Continued strengthening of the dollar could push gold to even lower levels so we may try short positions this week.

US Oil

Last week was bullish for oil with next month’s futures closing at $89.93, with losses approaching 2.10%. Concerns about slowing growth in the global economy or even recession in many countries continue to affect oil prices since if these scenarios are confirmed, they will significantly reduce demand. We saw a slight upward reaction on Wednesday and Thursday following the announcement of crude oil and gasoline stocks in the United States that fell significantly and far beyond market expectations, which means that for now at least, demand remains high. U.S. oil exports were also at record rates, which reached their highest levels since 1991. China, however, due to the ongoing lockdown, has limited refining capabilities, limiting supply somewhat. It is a given that the scenarios for a recession in the world economy are quite strong and so it is not excluded that we will see even lower prices for oil, so we prefer short positions for one more week.

EURUSD (Euro vs US Dollar)
Last week was a downward one for EURUSD which opened at 1.0254 and closed at 1.0041. The strong strengthening of the US dollar had a catalytic role in this movement. The positive outlook of the US economy, based on the results announced, combined with market expectations for new interest rate increases by the Fed, creates a particularly favorable climate for the US currency. The situation for the euro is quite different, as there is great concern and pessimism about next winter and the consequences of a possible energy crisis, but also the macroeconomic results in the eurozone are negative, with the result that there is doubt about whether the ECB can make new increases in interest rates after last month’s 50 basis points. Inflation in the eurozone was unchanged at 8.9% but GDP and employment were announced below market estimates. Having reached very close to 1: 1, EURUSD can move much lower if this picture remains, while possible upward reactions that may remove parity from this difficult price zone will have a greater base above the resistances of 1.0280 and 1.0370. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Sharply bearish was last week for GBPUSD, which opened at 1.2130 and closed at 1.1826. The weekly decline was very significant and one of the strongest in recent months. The US currency rebounded impressively and drove the pair below the milestone price of 1.20 with extremely great ease. The climate in the UK is not good at all as negative announcements follow one another. Inflation hit red, climbing to double figures in July, and the worst part is that Bank of England expectations are talking about even higher rates. There are also estimates of an upcoming recession in the United Kingdom that is preventing the Bank of England from moving aggressively with interest rate hikes. It is therefore creating a very difficult climate for the British economy with recessionary pressures and very high inflation rates. Under the support of 1.1760, which is at the same time a low value of about 2.5 years, the downward movement may take the form of a free fall. Only above 1.20 does the climate begin to reverse. We may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 133.36 and closing at 136.91. The exchange rate was greatly favored by the strengthening of the US dollar, which showed an impressive recovery based on expectations for new interest rate increases by the US central bank and the country’s positive macroeconomic results. An important strengthening factor was the rise in bond yields with the US 10-year closing the week near 2.98%. The Japanese economy, on the other hand, does not show a positive picture. The country’s GDP strengthened by 2.2% in the second quarter, a value that is well below what markets expected, while the country’s industrial production fell by 2.8% in June, on an annual level. As long as Japan’s macroeconomic picture does not appear strong and inflation remains at controllable levels, the Bank of Japan will continue its very loose monetary policy and negative interest rates. If this is combined with a solid upward breakout above the resistance of 137, then the probability of values close to 140 is large so we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Slightly bullish was last week for EURJPY which opened at 136.80 and closed at 137.46. Given the weakness of both currencies (the euro and the yen), the European currency slightly prevailed as many factors contributed to the heavy pressures on the yen. Europe is hit by an energy crisis, but the Japanese currency is very weak due to continued loose monetary policy by the Bank of Japan. But the decisive factor in the rise was the yields on European bonds which have a strong correlation with the exchange rate. The German 10-year started the week at 0.98% and closed Friday at 1.23%. If the upward reaction continues and there is an approach of 140, it seems that the downward trend that began at the end of June will end. The opposite scenario will apply if we see prices well below 135. We prefer sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8449 and closed at 0.8485. It was the third upward week in a row for the exchange rate, which has returned to its break-even point for several months, near 0.85. Large losses and pressures for the British sterling for some weeks now outweigh the losses of the euro and so the EURGBP is developing an uptrend. High inflation and a high probability of recession afflict the UK without this meaning that Europe is in much better shape. As the exchange rate approaches the price range of 0.85, some sellers will appear, which may result in corrective movements so we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Strongly bullish was the last week for USDCAD, which opened at 1.2766 and closed at 1.2991, a breath below the significant price of 1.30. The strengthening of the US currency helped to lift the exchange rate, while a strengthening factor was the correction of oil prices that almost always affect the Canadian dollar. Canada’s inflation was announced for July at 6.1%, lower than the previous month’s 6.2% and well below the 6.7% estimated by markets. The translation of this result was that the Bank of Canada has room to stop aggressive interest rate hikes, given the country’s problematic macroeconomic picture. More specifically, industrial production in July shrank by 2.1% while the raw material price index announced a huge fall to -7.1%. The only positive exception was retail sales, which increased by 1.1%, but this figure is lower than the 2.3% of the previous month. Logically, these considerations lead to the conclusion that a solid upward breakout above 1.30, increases the chances of a further rise so we may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a strong upward course last week as the opening price was at 0.9398 and the closing price at 0.9590. In addition to the strengthening of the US dollar, which boosted the exchange rate, the news from the Swiss economy also gave an upward boost. The producer price index rose by just 6.3% in July, a figure considered particularly small and thus consolidating the belief that the Swiss National Bank has no serious reasons for an aggressive policy of raising interest rates. In addition, industrial production increased by 5.1%, significantly lower than the 7.5% in the previous quarter, while the trade balance was announced below market expectations. Of key importance is the price range of 0.9650 because above it, the exchange rate develops upward trends. A loss of 0.95, however, restores the downward scenario but we prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bearish was the last week for AUDUSD, which opened at 0.7113 and closed at 0.6876. The strong US dollar dragged the pair with impressive ease below the milestone price of 0.70 after the Australian dollar weakened correspondingly. Falling commodity prices, and negative market investment sentiment, are not favoring Australia’s currency. The announcement of the minutes of the Bank of Australia last Tuesday showed that there is a will to raise interest rates further but at the same time there is a monitoring of the country’s economy to avoid a recession. Disappointing was the picture of economic results in the country as well as in China. In July, about 41K jobs were lost in Australia. Too many of them have been replaced by part-time jobs and this proves the concerns of the business world. China also had industrial production and retail sales results well below market estimates and that is something that worries not only Australia’s economy but the global economy as well. If the downtrend continues, the target is the significant support at 0.6680 and of course, they need a return above 0.70 to stop the strong fall. We may try sell positions this week.

Bitcoin

Last week, Bitcoin closed at $21,514 with losses close to 11.50%. During the whole week, there were strong pressures on Bitcoin, but the big drop took place on Friday when there was a correction of more than 10%. However, this fall on Friday makes no sense because there was no apparent reason that day. The impression among cryptocurrency investors that liquidity will continue to be limited in the coming period, after the announcement of the Fed’s minutes on Wednesday, had already created a negative climate, but Friday’s big drop should probably be attributed to massive sales and panic phenomena that took the form of a snowball. Bitcoin withstood just above $20,700 support, having a slight upward reaction from those levels found on Friday but needs a further rise, above $22,400 to reassure investors somewhat. Any loss of $20,700 and even more than $20,000 can lead to uncontrolled decline so we prefer 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.