London 08/06/2022

As the bond yields keep on rising and the US 10-year bond yield has returned above 3%, the US dollar strengthens again, following the previous week’s uptrend. This dollar’s rising though does not seem to be very strong because other currency competitors strengthen too and many investors keep their appetite for the major upcoming events such as the US inflation announcement on Friday and the session of the ECB regarding the monetary policy and the interest rates in Eurozone on Thursday.
Yesterday, US Treasury Secretary Janet Yellen in her testimony in Congress, mentioned that the US has unacceptable levels of inflation and she underlined the problems that have occurred in the supply chain.  This could be another message for a tighter monetary policy and many interest rate hikes throughout the year by the Fed.
There was no other important news for the US economy so far, but other economies have already released important announcements. The GDP in the Eurozone in the 1st quarter of 2022, rose by 5.4% compared to 2021 and the employment change rose by 2.9% in the same period, implying that the European economy could be more resilient than expected. Of course, these announcements helped the euro to recover partially.
We expect higher volatility in the next two days for the currency pairs that contain the euro and/or US dollar due to the aforementioned important announcements.
EURUSD (current price at 1.0737) is slightly bullish this week with low volatility so far, having the same outlook as it had the previous week. Of course, the important announcements are ahead and this image most likely will change. Since the US has no important announcements in the first three days of the week, beyond the markets’ perception regarding the central banks and their possible actions, the news from Europe dominated the pair. Besides the Eurozone’s GDP and employment change,  Germany had released industrial production and factory orders in April, below expectations but it almost had no impact on the pair. The next two days are crucial: any possible hints for interest rate hiking may help the euro and a high inflation rate in the US may help the dollar because the markets may anticipate that the Fed will be more active. Above 1.08, an uptrend will start to format while below 1.06, most likely the EURUSD returned to its long-term bearish trend.

GBPUSD (current price at 1.2526) has a very anemic bullish reaction after last week’s drop. British Prime Minister Boris Johnson had the no-confidence vote on Monday which passed successfully for him but since many members of parliament from the conservative party voted against Johnson, markets anticipated that there might be a political crisis in the UK during the following months. As per the economic news, the UK had only the PMIs released this week with a mixed image so it did not influence the sterling and the pair. The GBPUSD will be heavily affected by the US inflation announcement on Friday and it needs a solid breakout above 1.2670 (the highest price in the last 1.5 months) for a bullish trend. In the case of the US dollar strengthening, below 1.24 the pair may return to the downtrend for good.

USDJPY (current price at 134.34) is in a crazy bullish rally, reaching the highest price in the last 20.5 years. Above 135.16 which is the next resistance, it will be the highest price in the last 24 years. As the US dollar strengthens and the bond yields keep on rising, the pair returns to the sharp uptrend channel that started 1.5 years ago, from the price area of 103. Also, it seems that the Bank of Japan will continue the ultra-loose monetary policy and the negative interest rates as the inflation in Japan remains relatively low, around 2%. The different approaches of the Fed with tight monetary policy, continuous interest rate hikes, and high inflation rates in the US have created a divergence between the two central banks with a strong USD and a weak JPY. The price area of 135.10 – 135.20 could be the next obstacle for the pair on the road to ultra-high price levels.

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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