12/09/2022

General Comment

The European Central Bank, at its meeting last Thursday, raised interest rates by 0.75%, as markets had expected during the last period. At the press conference that followed, the head of the Bank Christine Lagarde said that high inflation will remain in many European countries and that this is the main concern of the actions that need to be taken in the future. She also stressed that any decisions taken in the near future will be in relation to the economic situation since the energy crisis in Europe can lead to a growth slowing of economies or even a recession and this fact will not allow the ECB to conduct tight monetary policy with relative comfort.

Unlike Europe, the United States seems more determined to tame the inflation monster and three more rate hikes are expected this year, with the first likely to be a 0.75% increase in September. That’s what Fed chief Jerome Powell hinted at in his speech last week, stressing that the 2% inflation target remains. The picture of the economy in the US continues to be strong. The service PMI indicators had a very positive result while initial jobless claims were announced reduced.

However, a positive shift in the investment and economic climate has taken place since last Wednesday, which was reflected in the strong rally recorded by the main stock indexes in Europe and America, the weakening of the US dollar, and the strengthening of other currencies such as the euro and sterling, which are traditionally considered higher risk selections. The slight rise in gold prices was also a result of this shift, while oil, although it ended the week with slight losses, also strengthened from the middle of the week onwards. Bond yields continued upward for the sixth consecutive week with the US 10-year bond yield exceeding 3.30% and Bitcoin, like most cryptocurrencies, was aligned on improving market sentiment, performing significant gains.

The week, which has just begun, is dominated by investor interest in inflation announcements in the United States, the Eurozone, and the United Kingdom. The results of inflation will be a guide for central bank actions in the near future.

Also important are the announcements of US retail sales, trade balance, industrial production, and economic sentiment in the eurozone as well as GDP, unemployment rate, and retail sales in the UK.

SP500

The US SP500 index closed last week with upward trends, at 4,066 points and gains of 3.40%. The index had slipped by midweek, down to 3,900 points but the upward reaction from Wednesday onwards was strong. The markets have evaluated several events positively. Rumors of a resolution of relations with China through the lifting of some previously established curbs were one of the reasons. Also, the drop in oil prices that we saw until Wednesday, seems to have had a positive effect on the markets, with the logic of limiting inflation. Finally, perhaps the markets are assessing that the Fed, after the new increase in interest rates it plans for September 21, which will probably be 0.75%, is going to relax and so liquidity will not be so limited. Of course, the dollar’s losses from Wednesday onwards were also important. Early this week, however, there are reports of new curbs on China by President Biden and thus have somewhat limited the big gains that the SP500 had at the start of the week. If the index manages to exceed 4,200 points, it will be a significant jump in the psychology of the markets so we may try long positions this week.

DAX40

The German dax40 index moved up sharply last week, closing at 13,132 points, with gains of 3.60%. Germany had a series of negative announcements after factory orders and industrial production were dropped in July, and PMI (Composite and Services) indicators were in August, well below 50. However, the DAX40 index throughout the week, except for Thursday, has been on the rise. On Thursday, the announcement of an interest rate hike by the ECB put pressure on equity markets, but it seems that improved psychology prevailed and the index quickly returned to a profitable direction. The problem of energy adequacy remains a dominant issue in Germany, but it seems that the country’s government is determined to toughen its stance with Russia, whatever that entails. The German finance ministry said in a statement that the cap on energy prices is in line with the country’s positions. If the index consolidates above 13,000 points and manages to be above 13,400 points, then an upward trend will have better luck. We may try long positions this week.

FTSE100

The British FTSE100 index moved significantly upward last week, closing at 7,387 points, gaining almost 2.60%. The index was in line with the generally positive climate that prevailed from the middle of the week onwards, managing to react upward after two weeks of intense pressure. The week that has just begun is particularly important for the British economy since, in addition to the decision on interest rates by the Bank of England, GDP, unemployment, inflation, and retail sales in the UK are announced. After the gloomy picture outlined for the future of the economy, by bankers and analysts, any positive news can turn the climate and cause a euphoria (at least for the moment) in the markets. The index was above 7,570 points in August and this is the first bet to be won, for the further upswing of the FTSE100. We prefer long positions this week.

Gold

Gold moved slightly higher last week, closing at $1,728 and gaining close to 0.30%. Prices had been above $ 1,740 on Thursday but it proved how difficult the upward reaction of gold is at the moment because the pressures exerted in this price range were big. Gold should have performed better, based on dollar losses, but markets, assuming inflation will start to fall after central bank actions, do not think gold would be a good investment option at this time. The fall from the $1,824 that had been found in early August was rapid and even came to threaten the multi-month support at $1,678. The announcement of inflation in the US on Tuesday will be crucial, and if it seems that inflation prices continue to decline, then gold will likely suffer new losses. In contrast, inflation rates above the expected 8.1% may boost gold. We may try long positions this week.

US Oil

Last week’s oil futures closed at $86.07, with losses approaching 1.15%. The main reason why oil prices have been pressed for about three months is the perception that the global economy will perform a growth slowing or even a recession in the following months. Such a slowdown in growth or worse, a possible recession would reduce oil demand. In this direction, we saw last week a negative record of twenty years in demand from China but this development is based on the lockdown imposed to limit the pandemic but also on the curbs imposed by the USA. In the opposite view, the conflict between most Western countries with Russia and president Putin’s threats to completely stop supplying oil and gas to Europe is causing concern about the supply of oil. The reduction of production by 100K barrels per day, as announced by OPEC, is imperceptible and did not significantly affect prices. Many analysts described this reduction as symbolic and expect more developments at the next OPEC meeting on October 5. If we consolidate the downward break in support of $85.70, which was also the lowest price level since the beginning of the year, we may see even lower prices so we prefer short positions this week.

EURUSD (Euro vs US Dollar)
Bullish was last week for EURUSD which opened at 0.9923 and closed at 1.0046. Until Tuesday, the exchange rate had a slight downward trend which led it to new 20-year lows well below 0.99 but from Wednesday onwards there was a strong upward reaction and a return above the parity. The partial weakening of the US dollar and the strengthening of the euro following the rise in interest rates by the European Central Bank were important reasons for the recovery of the exchange rate. An important role was also played by improving economic sentiment, which almost always favors higher-risk currencies such as the euro. The Eurozone continues to have a strong macroeconomic picture in terms of the results of the previous quarter and so GDP and employment changes were positive. But the closer we get to the present, the more the announcements get worse. Retail sales in July were in negative territory, while PMI indicators were also well below market expectations. It seems that the European Union intends to completely break with Russia and so the small energy supply that is still maintained will probably be cut off. This will bring about a very difficult winter for many countries in Europe and may lead to a large contraction in economic activity. The downward trend for EURUSD has not changed, and any reset below 1: 1 will awaken a new interest in further decline so we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was last week for GBPUSD, which opened at 1.1476 and closed at 1.1588. The central event for the United Kingdom was undoubtedly the report on monetary policy and the speech of the head of the Bank of England, Andrew Bailey. In this speech, Andrew Bailey stressed that Russia is responsible for a possible recession, not the decisions of the country’s central bank. He also predicted that inflation may rise to higher than the current levels and that there will be a slowdown in economic activity because the economy is already weak after the pandemic and is further affected by high prices and the energy crisis. The Bank of England’s anticipated interest rate rise this week coupled with a weakening US dollar helped lift the rate reaction above the very critical support of the 1.14 price range. We need to remind that in the area of 1.14, GBPUSD had been found at the beginning of the global adventure of the covid pandemic. The Fed, however, seems more determined than any other central bank to attack inflation, so there is a possibility that the dollar will strengthen again and the exchange rate will test the critical support mentioned above for the second time in a few days. Sell positions is our selection for the current week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 140.12 and closing at 142.62. It was the fourth straight upward week for the pair, which was able to close positively even though there was a sharp downward spin on Friday. On Wednesday, the USDJPY touched 145 for the first time in 24 years and was very close to the highest value of all time. However, the weakening of the U.S. dollar triggered corrective trends, which were also reinforced by a relative strengthening of the yen. Japan’s economic announcements were deemed positive by markets after the country’s GDP strengthened by 0.9%. A more important role in the recovery of the yen, however, was played by the statement of the Japanese Finance Minister, according to which the foreign exchange market is closely monitored by the bank’s officials and that nothing is ruled out regarding future actions. This statement was interpreted as a slight departure from the very loose monetary policy pursued by the Bank of Japan for some time and thus the Japanese currency strengthened transiently. But if these statements and rumors are not followed by concrete actions, then the exchange rate will continue to strengthen, given that the dollar will remain strong. We prefer buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Strongly bullish was the last week for EURJPY which opened at 139.05 and closed at 143.28. Both the European and Japanese currencies showed signs of recovery after the European Central Bank raised interest rates by 0.75%, and Japan is beginning to show the first audible signals of a change in loose monetary policy. It is obvious, however, that the acts are stronger at this stage than the indications and rumors and so the exchange rate had a jump that brought it above 140, for the first time since the end of July. However, there was a reaction to this rise through significant resistance to 144.30 which was also the highest value since the beginning of 2015. Given how the problems in the Eurozone continue to persist, and given that the price of the exchange rate can be considered to be at overbought levels, we may see corrective trends prevail this week so we may try sell positions.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8642 and closed at 0.8666. There was a slowdown in the uptrend compared to the previous week, even though the euro strengthened through the ECB’s interest rate hike. Sterling, too, was helped this week by improving investment sentiment and expectations of a more aggressive policy of raising interest rates. The Bank of England chief’s speech last week set such a tone. Technically speaking, the most serious obstacle to further rise is the resistance of the price range of 0.8720 while below 0.86, markets will consider that perhaps the balance point for EURGBP, which has recently been at 0.85, can return. We may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, which opened at 1.3129 and closed at 1.3019. The weak US currency from the middle of the week onwards had a catalytic effect on the movement of the exchange rate. The fall of course could have been greater but starting on Wednesday, the rise that had been recorded so far had to be absorbed first. The strengthening of oil prices from Wednesday onwards helped the Canadian dollar, which was also boosted by a rise in interest rates by the Bank of Canada. The decision was for an increase of 0.75% and so bank interest rates in the country stood at 3.25%. In the last hours of Friday, however, we saw a mini-upward reaction for the exchange rate, mainly due to the unexpected increase in unemployment in Canada, which moved in August to 5.4%, from 4.9% in July. The return of the exchange rate to its upward course is also reinforced by the fact that the landmark price of 1.30 could not be broken and a possible return of the US currency to an upward trajectory may lead the USDCAD to the price range of 1.32 again. We prefer sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week after the opening price was at 0.9797 and the closing price at 0.9604. The main reason for this decline was the large weakening of the US dollar which took place from the middle of the week onwards. In addition, the Swiss currency also had reasons to be bullish since the results of Switzerland were quite satisfactory. More specifically, in the second quarter of 2022, the country returned to growth of 0.3%, after the recession of 0.5% that it had in the first quarter. The unemployment rate in Switzerland in August fell to 2.1%, slightly lower than July’s 2.2%. According to all information and analysis, however, the Fed is expected to move more aggressively in the near future than the Swiss National Bank and this may return the exchange rate to its upward trend. Under this consideration, we may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6779 and closed at 0.6843. In addition to the fall in the US dollar, an important factor in the rise in the exchange rate was the strengthening of the Australian dollar through the increase in interest rates by the country’s central bank by 0.50%. Australian interest rates are now at 2.35% but the press conference that followed pressed the Australian dollar because it seems that the bank’s intentions are not to continue the same aggressively with new interest rate increases. On Thursday, the trade balance was announced, at a price well below market expectations but catalytic was the announcement of inflation in China on Friday, at 2.5%, a price well below what the markets were estimated. Support at 0.6680 seems to be holding up for the moment, although it is not ruled out that it will be tested again this week if the US dollar strengthens. On the other hand, a bullish breakout above 0.70 is needed to remove the continuation scenario of the downward channel. We may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $21,835 with profits exceeding 9%. Bitcoin, like most cryptocurrencies, followed the path of most high-risk markets, which strengthened strongly from the middle of the week onwards. This strong correlation that has been formed for several months, outweighs the rest of the news specific to cryptocurrencies. On Wednesday, about 15,000 Bitcoins were transferred from major investors ‘ wallets to the Kraken exchange. This is usually done to liquidate cryptos, and such news in the past would have negatively affected prices, but nowadays, rumors about monetary policy from the Fed seem to have a greater effect on cryptocurrency markets. The positive news is that MicroStrategy (a software & business intelligence company), plans to sell shares worth 500 million euros in order to increase its position in Bitcoin. Generally speaking, if international markets continue the upward rally that started in the middle of last week, cryptocurrencies will probably continue upward so we prefer buy positions this week.

IMPORTANT DISCLAIMER

The information of this report is of a general nature only. It is not a piece of 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.