London 02/12/2022

Volatile enough was the current week for the Foreign Exchange markets as well as for the stock indices and commodity markets. The major event that caused this volatility was the speech of the Fed’s head Jerome Powell at the Brookings Institute on Wednesday. Jerome Powell said that “The time for moderating the pace of rate increases may come as soon as the December meeting”  and he added that “Despite some promising developments, we have a long way to go in restoring price stability”. After these words, the markets had a relief rally as the prevailing anticipation was that there will be no more 0.75% interest rate hikes and the final rate could be lower than it was initially estimated. Additionally, the US dollar dropped significantly compared to the other major currencies.
This market’s direction carried on during the two following days, assisted by some macro announcements. On Thursday, the personal consumption expenditures in the US were announced below the markets’ expectation and this was another hint for the inflation de-escalation. We also saw yesterday, the US manufacturing PMI falling below 50 and this fact caused a small pullback to the markets although it didn’t change anything. Earlier today, the US NFPs (new job positions) were announced at 261K vs 200K expected and the immediate reaction of the markets is an important strengthening of the dollar and losses in the stock markets.
In Europe, there are certain signs that inflation is dropping: the harmonized index of consumer prices in the Eurozone was announced in November at 10% vs 10.6% in October, and the producer price index at 20.8% vs 41.9%. We should also mention that on a monthly basis the consumer price index in Germany and the producer price index in the Eurozone had negative rates after many months. Christine Lagarde reiterated though that the focus on fighting the high inflation remains and that they must all work to make sure that the inflation falls back to target.
Overall, the main stock indices are bullish, commodities such as gold and oil perform important profits, and the bond yields keep on dropping as the US 10-year yield has landed at 3.50%.
EURUSD (current price at 1.0453) is bullish this week as the dollar’s weakness has favored the pair’s uptrend. Most likely, the high interest rate hike by the Fed will stop soon (starting in December’s decision as Powell said) and this makes the dollar less attractive. On the contrary, the euro has more reasons to get stronger. Although inflation appears lower in the Eurozone, it is still a double-digit figure so there’s a good chance that we’ll see new interest rate hikes by the ECB. Macros in Eurozone and Germany, regarding the unemployment rate and the PMIs, were not positive but the weak dollar prevailed on the pair. If the EURUSD manages to break out the important resistance of 1.05, the next target for the buyers is the next resistance at 1.0790.
GBPUSD (current price at 1.2149) is bullish this week, having four consecutive weeks of a strong uptrend. The US dollar turned bearish after Powell’s speech on Wednesday and this was the main reason for the current week’s upward trend. The sterling keeps on rising although there were dovish comments from Huw Pill (BoE chief economist): “Base case does not involve rates reaching 5.25%” and “Much of the fiscal tightening starts beyond the BoE horizon”. There were no important economic announcements in the UK this week and if the pair manages to surpass 1.23 solidly, the uptrend becomes stronger.
USDJPY (current price at 135.80) has had a strongly bearish week as it is 350+ pips lower than the weekly open price. Two obvious reasons are the weakness of the US dollar and the fall in bond yields. But what changed the market’s mood was a statement by Bank of Japan board member Asahi Noguchi who said on Thursday that the Bank of Japan could pre-emptively withdraw monetary stimulus if trend inflation, which takes into account wage and services prices, overshoots expectations and stays above its 2% target. Markets considered this statement as a forerunner of changing the loose monetary policy in Japan and the yen getting stronger. If the pair loses the milestone price of 135 again, it can move lower to 130 if the same conditions continue.

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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