London 13/01/2023
The US dollar has been under strong pressure since the beginning of the week, but more so since the announcement of inflation in the United States yesterday. Inflation appears to have strong de-escalation trends after falling further to 6.5% in December from 7.1% the previous month. This information, combined with statements by Fed officials and members, gives the impression to the markets that interest rate increases are coming to an end. The most likely scenario is the next increase in February will be just 0.25%. Based on these market scenarios, in relation to liquidity and money costs, the perception of a possible recession or at least a slowdown in growth is improved. Earlier in the week, Fed chief Jerome Powell said the bank was not taking climate change rumors into account in making its decisions. In addition to falling inflation, the overall picture of the US economy shows encouraging: initial jobless claims were announced below market expectations.
Europe did not have such significant developments but the euro strengthened mainly as a counterweight to the weak dollar. The only major news so far has been unemployment in the Eurozone, which was announced unchanged at 6.5%. Industrial production and trade balance are announced tomorrow.
Stock indexes in Europe and the United States record significant gains while gold continues its upward rally. Significant gains were recorded this week for oil as well. In terms of bond yields, we saw a further drop with the U.S. 10-year moving to 3.44%.
EURUSD (current price at 1.0838) is bullish this week, mostly after the inflation announcement in the US yesterday. The perception of markets that interest rates in the United States are not going to rise much more than their current prices has weakened the dollar since in many other economies including the Eurozone, there is a long way to go to fight inflation and new rate hikes are very likely. There is a general optimism that the recession may be avoided or at least will be of small intensity and duration. The pair has managed to break out the significant resistance at 1.0740 and to exceed 1.08 as well. Based on this data and if the weakness of the dollar continues, the pair could approach even 1.10.
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GBPUSD (current price at 1.2232) is bullish this week, mostly based on the dollar’s weakness. The dollar suffered sharp losses following the announcement of inflation in the US and the markets ‘ belief that a rate hike won’t last much longer. The UK has had several major economic announcements this week. The country’s GDP strengthened in November marginally by 0.1% compared to the previous month and even if this value is not something special, it gave a positive boost to the sterling because at least it is not a recession rate. Industrial production and manufacturing had mixed signs but there was a great improvement in the trade balance which in November dropped below 5 billion pounds and significantly below market estimates. The price range of 1.2450 is the most critical resistance in case of continuation of the rise.
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USDJPY (current price at 128.50) is heavily bearish this week. The weakening of the US dollar and the de-escalation of bond yields are key causes for this sharp downward movement. The move, however, was also helped by the strengthening of the Japanese currency after various rumors circulated in the market that the very loose monetary policy by the Bank of Japan is set to change in 2023. In addition, Japanese bond yields have performed at high prices for several years, which helps the yen even more. Having missed the milestone price of 130, the pair is in a downward movement which technically at least has no other support barrier until the price zone of 126.35.
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