London 06/01/2023

The first week of the new year closes with significant changes in financial markets and with high volatility returning. A lot of economic news and developments moved the markets but the fact is that nervousness and worries about 2023 remain. High inflation, the risk of an economic slowdown or recession, the ongoing war in Ukraine, and the new mutations of the pandemic are just some of the issues that concern the planet.
As for the United States, the Fed’s minutes released Wednesday showed the central bank intends to continue its tough policy of raising interest rates. Bank members have welcomed the decline in inflation lately but believe that the problem still exists and needs to be addressed. It was preceded by the announcement of PMI indicators, slightly below market expectations. A few hours ago, new jobs (NFPs) were announced in the United States: 223K new jobs were created in December against expectations of 200K. The unemployment rate fell slightly to 3.5%.
In Europe, inflation was announced earlier today at 9.2% for December, sharply lower from 10.1% the previous month. However, it is uncertain whether anything will change concerning the policy of raising interest rates by the European Central Bank this year.
Big was the strengthening of the US dollar and correspondingly big was the fall of other currencies such as the euro and British sterling. We saw downward trends in the United States in terms of equity indices, while in Europe and the United Kingdom, equity indices performed remarkable gains. The commodities world is mixed after gold continued its upward direction but oil had significant losses. Finally, the trend in the bond market is slightly downward with the yield of the US 10-year falling to 3.75%.
EURUSD (current price at 1.0506) is bearish this week, mostly based on the strength of the dollar. The U.S. dollar has strengthened significantly this week because Fed minutes showed that the central bank is intent on continuing to raise interest rates to combat high inflation. In Europe, inflation declined sharply in December but remains high in relation to the United States. Also, the Fed has already raised interest rates well above the European Central Bank. This week is the most downward week since mid-September and it remains to be seen whether this marks a change in the upward trend in the exchange rate that has been going on for about three months. Technically speaking, this bullish trend will be practically over if the rate falls below 1.02 and will have reasonable hopes of continuing if there is an upward breakout above 1.0720.
GBPUSD (current price at 1.1903) is bearish this week and since there is no important news from the UK, it should be addressed to the strength of the dollar. Only the PMI indicators had some significance in the UK but after being announced below market expectations they did not particularly favor the sterling. The exchange rate has had a strong upward trend since the end of September. Before that, there was an unprecedented decline that had driven GBPUSD to an all-time low price. This uptrend shows that it braked in the area of 1.25 and reasonable suspicions are beginning to arise that it may even be reversed once the milestone price of 1.20 has been lost. If the exchange rate stays below these levels and widens its losses, the reverse trend will have an even bigger probability.
USDJPY (current price at 133.35) is bullish this week, helped by the strength of the dollar and by the weakness of the yen. A slight de-escalation in bond yields was not able to alter the weekly uptrend since the dollar was very strong and the currency of Japan shows it is returning to its known weakness. After recent interventions by the Bank of Japan in relation to bond purchases, seen by many as moves to change loose monetary policy, came statements from central bank officials and the president himself assuring that monetary policy will not change. Based on these developments, the exchange rate reacted upward to an extent that it had not done for several weeks. Since there has been a sharp decline since mid-October, for this fall to continue, the rate will have to drop below 130 again. On the contrary, if the bullish reaction continues above 140, it will probably mean that the decline is over.

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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