London 16/03/2022
There is certain progress in peace talks between Russia and Ukraine and this is obvious, not only through the statements from the officers of both countries but through the reaction of the markets as well. US and European stock indices are in a bullish rally during the last two days while many commodities like Gold and WTI are in a sharp decline. The Volatility Index (VIX) of SP500, aka the Fear Index, has dropped below 30 which is still a relatively high price but it’s indeed a de-escalation from its recent highs of 36. Also, the bond yields keep on rising and the US 10-year yield has climbed to 2.18% which is almost 10% higher, compared to the previous week.
The other big issue of our days is the high inflationary rates. All eyes are on Fed’s rate decision in a few hours. According to the FedWatch tool, the probability of a 0.25% interest rate hike is 96.3% and the probability of a 0.50% interest rate hike is 3.7%. In other words, the hike seems sure but a 0.25% looks like a very likely scenario. Before the war in Ukraine, most of the analysts supported the 0.50% scenario but now Fed and all the central banks need to be very careful not to hurt the economic growth and other macroeconomic entities.
EURUSD (current price 1.1018) has managed to surpass the milestone price of 1.10, mostly helped by the weakness of the US dollar. The improved market sentiment favors the risk-on assets like the euro and does not favor the safest solutions like USD.  The eurozone did not have any important economic announcements so far but the US just released the retail sales in February at 0.3% which is significantly lower than the 4.9% in January so the USD is pressed, ahead of the very important Fed’s decision on the interest rates. We estimate that a 0.25% hike is already consumed by the markets and it will not affect the dollar very much but a 0.50% hike may strengthen it a lot. Also, as long as the positive sentiment for a solution is being retained, the pair has good chances for a further upwards movement. The next resistance is on the previous week’s high price, a bit above 1.1120.
GBPUSD (current price 1.3108) has reacted from its weekly low price, close to 1.30 and it is already moving above 1.31. The weak dollar due to the improved investing sentiment has helped the pair to recover. Today there’s the interest rate decision by the Fed while tomorrow the Bank of England will release the decision for the UK interest rates as well. Both central banks are expected to hike interest rates, most likely by 0.25% and anything else (other things being equal) will be a surprise. Sterling has also been helped by the announcement of the unemployment rate in the UK, which dropped to 3.9% in February from 4.1% in January. Most analysts estimate that the US will end 2022 with significantly higher rates than the UK. Scotiabank in a recent market commentary underlines that “The outlook for the remainder of the year is clearly tilted in the USD’s favor as the BoE may only deliver as much as an additional 75bps by end-2022 compared to up to 175bps more from the Fed (as our economics department projects)”. If this analysis comes true we may see the GBPUSD in a downtrend again, much below 1.30.
USDJPY (current price 118.37) keeps on rising after the recent breakout of the very important resistance and multi-year high at 116.35. The strong uptrend comes mainly from the heavy rise of the bond yields and by the risk-on mood that many investors apply, based on the hopes for a solution at the war in Ukraine. The Japanese currency has more reasons to be weak though: as the Japanese media (nippon.com) mention that “Japan’s Prime Minister Fumio Kishida signaled a fresh stimulus package on Wednesday, saying the government is ready to take further steps to cushion the economic blow from rising energy costs driven by the Ukraine crisis.” Japan can offer a new stimulus package because the inflation is relatively low but certainly this is something that weakens the yen. The uptrend is strong and we may see prices like 120 pretty soon. The most critical resistance until 120, is in the price area of 118.60.
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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