19/09/2022

General Comment

A turning point was hidden last week that triggered major turbulence in the markets while increasing volatility. The Fed has been taking concrete action for several months to address the problem of high inflation, which is considered the most important problem of the US economy at the moment. The United States Central Bank has raised interest rates four times since the beginning of the year and tightened monetary policy. In July there was a de-escalation of inflation that encouraged these efforts and not a few analysts considered that we have already seen the highest inflation rate. But the announcement for August was disappointing in this area as markets expected inflation of 8.1% and finally, the figure announced was 8.3%. This development has brought major reversals in market behavior and investment assets. The Fed is now expected to toughen its stance further with new and bigger rate hikes and perhaps tighter monetary policy. This has led to a rise in the dollar and pressure on the world’s leading equity indices as reduced liquidity does not favor equity markets.

The above picture also hit European markets, since Europe is much more vulnerable due to the great energy crisis and the high probability of recession in many European countries in the winter. On the front of the war in Ukraine, there are rumors that Ukrainian forces are recapturing territories, but there is no visible end to the war at least for the time being.

The United States continues to have a markedly better macroeconomic picture than Europe. Retail sales rose in August while the number of initial jobless claims fell. On the contrary, inflation in the eurozone remained unchanged at 9.1%, while the rest of the announcements had a negative result in most European countries.

In the foreign exchange market, the strength of the U.S. dollar is given due to the Fed’s determination, while higher-risk currency options are pressured based on market conditions and negative risk mood. Commodity markets also had a corrective picture, with gold and oil squeezed. Bond yields had an increasing trend with the US 10-year, reaching 3.50%, while finally, the negative investment sentiment hit the market of cryptocurrencies that had significant losses last week.

With particular interest are the news and announcements in the week that have just begun. Of course, the Fed’s decision on interest rates and monetary policy in the US dominates, while similar decisions are expected from the Bank of England, the People’s Bank of China, and the central banks of Japan and Switzerland.

SP500

With strong corrective trends, the US SP500 index closed last week, at 3,900 points, and losses exceeded 4%. The high inflation announced on Tuesday in the US had a catalytic role, as everything shows, the Fed is now forced to harden its stance, proceeding with larger-than-expected interest rate increases. There is already talk of an increase of even 1% at Wednesday’s meeting, but the prevailing scenario remains the increase of 0.75%, which is also high if one considers that two more such similar increases have been made in recent months. The expensive money and low liquidity entailed by the above actions, do not favor the equity markets and a slight recovery from Friday’s lows at 3,853 points, is due to the consumer confidence index of the University of Michigan that was announced well above the estimates. Markets are also worried about a possible deterioration in the U.S. – China relations, perhaps to a worse extent than in 2020, with measures and countermeasures from both sides. Below 3,850 points, we may see even stronger pressures, while above 4,000 points will partially return a more optimistic climate. The announcement of interest rates by the Fed will be a decisive factor. We prefer short positions this week as well.

DAX40

The German DAX40 index declined last week, closing at 12,802 points, with losses of 2.50%. European markets were strongly pressured from Tuesday onwards by developments in high inflation in the US. Europe, which has high concerns about energy adequacy in the coming winter, has developed negative investment sentiment and is therefore vulnerable to negative news. Inflation in Germany in August remained unchanged at 8.8% (harmonized index of consumer prices), with slight signs of de-escalation after the wholesale index was lower than in the previous month. Economic sentiment, however, remains particularly negative. The ZEW index (Zentrum für Europäische Wirtschaftsforschung) which measures institutional investor sentiment, was announced with a value of -61.9. The region of 12,600 points remains the main support for the index as it is the lowest value for about two months and we’re keen to try short positions for one more week.

FTSE100

The British FTSE100 index declined last week, closing at 7,270 points, with losses of almost 2.60%. The FTSE100 has been aligned with the rest of the world’s main stock indices, following the persistence of high inflation in the US, as shown in last Tuesday’s announcement. The FTSE100, however, had smaller losses than the US indices because the strong possibility of a recession in the UK does not leave much room for the Bank of England to proceed with large interest rate increases. The Bank of England is expected to raise interest rates by 0.50% while the corresponding estimate for the Fed speaks of 0.75% or 1%. The negative macroeconomic results and the slight decrease in inflation in the United Kingdom support this divergence. If that sentiment persists and prevails this week, the index could threaten two-month lows of around 7,130 points so we may try short positions this week.

Gold

The previous week was sharply bearish for gold, closing at $1,684 and losses close to 2.50%. The dollar that strengthened was the very main reason for the downward movement of all commodities valued in the US currency, therefore also in gold. Counterweight to this situation is the deterioration of US-China relations, focusing on Taiwan and statements by Chinese officials and President Biden, about the use of military force. In addition to geopolitics, the Fed is determined to fight inflation (this is what most politicians and bankers say) and therefore gold is losing a share of investors who believe that investing in inflation hedging products is no longer of great value. The improvement in the Michigan Consumer Confidence Index helped gold recover on Friday, but to strengthen this recovery, the price needs to remain above support of $1,678 (a 2.5-year low until Friday) and an upward breakout of $1,700. But if prices are consistently below $1,678, then the downward scenario becomes more likely. We may try short positions this week.

US Oil

Last week was slightly bearish for oil with next month’s futures closing at $85.32, with losses approaching 0.90%. Within the week, oil was even above $90 but on Thursday strong corrective pressures prevailed and the price returned to the $85 range again. These changes are to some extent normal since there are conflicting views on demand in the near future. Economic analysts are talking about a possible recession or a slowdown in growth that will severely hurt oil demand. This is also supported by the expensive money that is expected to be, through the increases in interest rates of the central banks. But on the other hand, international organizations appear reassuring. OPEC and the International Energy Agency (IEA) estimate that demand will increase by 2-3% this year, while for 2023 they predict just a slight slowdown in growth. OPEC, however, has not yet opened its cards concerning the October 5 meeting and so any scenario is possible. If price pressures intensify and oil finds itself below $84.20, then it is not ruled out that a nine-month low price, below $81.20, could threaten so we may try short positions this week.

te 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)
Last week, EURUSD was bearish as it opened at 1.0101 and closed at 1.0014. The focal point of the week was the announcement of inflation in the US on Tuesday caused a big drop in the pair and brought it well below parity. The next three days of the week were slightly bullish after some more dispassionate glances dominated and the drop began to catch up. Markets are confident that the Fed will move more aggressively in the near future, and the most likely scenario for Wednesday’s meeting is a 0.75% increase in interest rates, not excluding even a 1% increase. The European Central Bank, after the recent 0.75% increase, seems willing to continue aggressively and so markets are trying to estimate the divergence in interest rates between the two central banks in the next period. This divergence, or a possible convergence, will largely judge the course for EURUSD. The high inflation that persists in the Eurozone, industrial production that fell sharply in July, and the sharply negative trade balance of the same month, create negative sentiment for the euro. The fact is, however, that as long as the exchange rate remains above 1:1, the hopes of recovery are greater, but at a technical level, support in the price range of 0.9860 remains critical. Short positions is our selection for the current week.

GBPUSD (Great Britain Pound – US Dollar)

Sharply bearish was the last week for GBPUSD, which opened at 1.1637 and closed at 1.1416. The strengthening of the US dollar after the high inflation announced in the US on Tuesday strongly pressed the exchange rate, which had no signs of recovery from Wednesday onwards, as did the euro. In contrast, there was a downward breakout in significant support in the price range of just above 1.14, resulting in GBPUSD being at its lowest price since 1985. Markets estimate that the UK will not avoid recession, while inflation, which was announced as slightly lower to 9.9%, compared to 10.2% last month, was a negative development for sterling because markets believe that the Bank of England may relax, in relation to the expected interest rate increases. The UK had other important announcements this week: the unemployment rate fell slightly to 3.6% in July, but retail sales, industrial output, manufacturing, and GDP had bad results, and this fact performed strongly against the sterling. The central banks of the two countries (the Fed and the Bank of England) are announcing new interest rates this week and so high volatility and great uncertainty are expected. GBPUSD managed towards the end of the week to regain the critical price of 1.14 and this gives some hopes of optimism for a possible upward reaction, but it must be accompanied by prices at least above 1.1590. But if there is a new downward momentum below 1.14 then it is not excluded that we will see much lower price levels. We prefer sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 142.12 and closing at 142.92. The strengthening of the US dollar, following the assumption that the Fed will move with new aggressive interest rate increases as inflation seems to persist in the US, was a very important reason for this upward move. Of course, the rise in bond yields also made a significant contribution since their prices are strongly correlated with the exchange rate. There is also a rumor circulating in the markets that the Bank of Japan will soon be forced to change its line concerning its very loose monetary policy. Inflation in Japan may remain relatively low, but the large devaluation of the yen has alarmed the government and central bank. However, this has not yet been reflected in USDJPY prices but there is uncertainty about the announcement of interest rates next Thursday, not so much in terms of a possible change (which is also excluded) but about the possible statements on the actions of the central bank in the coming period. Above current prices, stands the all-important resistance of 145 that can bring the USDJPY close to all-time highs, above 147. For any corrective movements to prevail, a drop below 141.50 is needed in the first phase and of course in the second year below 140 but we prefer buy positions this week as well.

EURJPY (Euro – Japanese Yen)
Slightly bearish was the last week for EURJPY which opened at 143.62 and closed at 143.15. The exchange rate at the beginning of the week performed high prices that we have not seen since late 2014 as the yen continues to be pressured based on the loose monetary policy pursued by the Bank of Japan. From the middle of the week onwards, however, a strong corrective reaction developed mainly related to the weakness of the euro. Below 142.20, this reaction could accelerate, especially as we get closer to 140. An important factor in shaping the trend and volatility will be the announcement of interest rates by the Bank of Japan next Thursday and the monetary policy to be announced. We may try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8678 and closed at 0.8765. This rise in total was mainly achieved on the last two days of the week, based on sterling weakness. The negative macroeconomic results from the UK, the general perception that an intense and lasting recession will not be avoided and the Bank of England’s expected 0.50% rise in interest rates this week, which is lagging behind the 0.75% announced by the ECB last week, are the reasons. The exchange rate has reached the high price levels that we have not seen since the beginning of 2021 and the upward trend that has developed can bring an approach of even 0.90. The fact is, however, that sterling is at very low levels and so buying trends that may cause reactions cannot be ruled out but we prefer buy positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Sharply upward was the previous week for USDCAD, which opened at 1.3031 and closed at 1.3261. The strengthening of the U.S. dollar, based on markets ‘ perception that the Fed will aggressively raise interest rates in the near future to cope with the high inflation that persists in the United States, was a factor in the rise in the exchange rate. A strengthening factor was the decline in oil prices, which most often have a positive correlation with the Canadian dollar. The current week is important for the Canadian economy because in addition to the retail sales announced on Friday and which will show to the markets the performance of the economy in domestic consumption, on Tuesday inflation is announced and a deviation from expected prices can generate quite large movements for the exchange rate. Markets expect inflation of 6%, a price slightly lower from 6.1% last month. If the uptrend continues, we may see prices even at 1.34. Any downward pullback below 1.32 and of course below 1.30, can reverse the trend. We may try buy positions for one more week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an uptrend last week after the opening was at 0.9584 and the closing at 0.9641. The week had started with a continuation of the downtrend that had developed before but on Tuesday with the announcement of US inflation, the picture reversed and the exchange rate developed a bullish reaction. This was supported by the announcement of the Swiss producer price index, which recorded a relatively small increase of 5.5% compared to the previous year and thus reinforced the view that the Swiss National Bank will not take any actions in the near future. The USDCHF is on the significant resistance of 0.9650, which if it manages to overcome in a solid manner, then the buyers of the exchange rate, can dream of the next resistance at 0.9870 so we prefer buy positions this week too.

AUDUSD (Australian Dollar – US Dollar)

Last week the AUDUSD was bearish, as it opened at 0.6829 and closed at 0.6720. The exchange rate on Friday, tested the very strong support in the price range of 0.6670-0.6680, an area that is a more than two-year low. Australia’s strong macroeconomic picture is starting to fade out after the unemployment rate jumped slightly to 3.5%. China, on the other hand, performed a better picture with investment, retail sales, and industrial production recovering well in August. The head of the Reserve Bank of Australia, Philip Lowe, said in a speech on Friday that the primary goal remained to fight high inflation in the country but unlike other central banks it appeared that Australia does not intend to reduce inflation at the expense of growth. A bearish breakout of the support we mentioned could bring even greater downward pressure on the exchange rate. An upward reaction towards the 0.70 area is needed to develop trend reversal momentum. We may try sell positions this week.

Bitcoin

Last week, Bitcoin closed at $19,419 with losses exceeding 11%. Bitcoin and most cryptocurrencies were heavily affected by the high inflation announced for the US on Tuesday. Therefore, the correlation that has developed recently between cryptocurrencies and other markets, mainly those that have high-risk characteristics, has been confirmed once again. Thus, news related to the world of digital currencies and DeFi, are passing into the background. Last week the Ethereum Merge was successfully implemented. This is the transition of the protocol from Proof of Work to Proof of Stake that will reduce mining energy consumption by 99.95%. Such news should create euphoria in the ranks of crypto investors, with a corresponding imprint on the prices of cryptocurrencies, but the perception that the Fed will raise interest rates more than expected seems to have a greater effect. The downtrend seems to continue this week, with two main supports dominating: $18,600 and $17,600. We may try short 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.