20/06/2022

AN ECONOMIC SLOWDOWN OR HIGH INFLATION? THE FED HAS CHOSEN

General Comment
With its move to raise interest rates by 0.75% in the US last Wednesday, the Fed showed how it intends to address high inflation, with a higher priority over growth. So, interest rates in the United States after three increases in a row over the past few months are at 1.75%. This move of course does not come without side effects. The increase in interest rates and the new expected increases, which are considered almost certain for the upcoming months, will cause a blow to the country’s growth and possibly a recession.

In Europe, the European Central Bank convened an emergency meeting on high bond yields in eurozone countries. The central bank intends to use tools that will prevent bond yields, especially in southern countries, from escaping beyond the permissible limits. As for interest rates in the eurozone, there is a suggestion of an increase of 0.25% next month that may be followed by other increases without anything being considered certain so far. Inflation in the eurozone was announced on Friday at 8.1%, as much as markets had expected. The recent pandemic and the war in Ukraine have made the economy in Europe vulnerable enough to pursue very tight monetary policy and repeated interest rate increases, resulting in the European Central Bank lagging behind the actions of other central banks. The Bank of England made a new rate hike of 0.25% while unannounced the Bank of Switzerland raised interest rates by 0.50%. The only source of much liquidity through very loose monetary policy is now Japan, which left interest rates unchanged at -0.1%.

The result of central bank actions and market perception of new interest rate hikes and a possible global recession is the big correction in equity markets. The dollar continued to rise while the euro after the session of the European Central Bank limited its weekly losses. Gold and oil have had strong downward trends while Bitcoin and most cryptocurrencies are experiencing one of the hardest moments in their history with prices in free fall. Bond yields at the beginning of the week had strong upward trends but limited their rise towards the end of the week.

After so much important news and announcements, a relatively mild week follow. Stand out are the regular testimony of Fed chief Jerome Powell to Congress, the announcement of inflation in the UK, the summit of European Union leaders, and the announcement of inflation in China.

SP500

The US SP500 index closed with a strong downtrend last week, at 3,683 points and losses that approached 5.80%. Pressures on U.S. equity markets continued this week, especially after the Fed decided to raise interest rates. It is obvious that as a central decision, American bankers prefer the fight against inflation, with a counterweight and acceptable risk, the blow to growth, and this is now strongly reflected in the losses of the SP500 index and other stock indices such as the NASDAQ100. Retail sales also unexpectedly fell in May into negative territory, a sign that tight monetary policy and bad psychology are starting to affect U.S. consumption. The next support for the index is in the area of 3,580 points and below these levels, at 3,400 points but upward reactions are not excluded, especially above 3,810 points. By believing that the markets maty recover, we may try long positions this week.

DAX30

The German dax40 index moved downward in the week that left, closing at 13,107 points, with losses of 4.80%. The global stock market crisis and fears of recession have affected European indices, even if the ECB is not pursuing a de facto very tight monetary policy and has not yet raised interest rates. The supply of natural gas from Russia has been visibly reduced, and there are obvious concerns in Germany about a major energy crisis that will greatly hurt growth. Inflation in Germany was announced at 8.7% (harmonized index of consumer prices) while economic sentiment hovered in sharply negative territory. Within the past week, the index was below 13,000 points but was able to recover on Friday. If this is repeated, however, the next apparent support is close to 12,400 points. We may try short positions this week.

FTSE100

The British FTSE100 index declined last week, closing at 6,937 points, with losses of more than 4.80%. It was the third week of losses in a row since there are strong concerns that the UK economy will enter a recession along with double-digit inflation. The Bank of England has made a new 0.25% rate hike and, based on the statements of bankers, it is likely to proceed with others, starting next month. All eyes are now on the inflation announcement on Wednesday, with markets expecting a price above 9%. If there is a solid downward decay of 6,720 then we will now be talking about a free fall phenomenon for FTSE100. A technical bullish reaction is not excluded though, so we may try long positions this week.

Gold

The previous week for gold was bearish, closing at $1,841 and losses close to 1.80%. The massive strengthening of the dollar has affected gold, and since the Fed’s intentions are still tighter monetary policy and new interest rate hikes, a strong dollar may further depress gold prices. High inflation is something that usually favors gold but this does not seem to be the case at the moment since from the beginning of March onwards there are strong downward trends. We need to remind you that in early March we had seen prices well above $2,000. The most important support zone is in the region of $1,785 but any upward reaction above $1,880 may raise hopes of a trend reversal. We may try long positions this week.

US Oil

Last week was bearish for oil and the next month’s futures closed at $110.17, with losses of 8.50%. The main reason for this decline is the strong concern of the markets about a slowdown or even a recession in the global economy. If these scenarios are verified, then there will be a big decrease in oil demand, and doing so will push prices down. After the Fed announced a 0.75% rate hike, that markets ‘ belief became more pronounced and so we saw a weekly price drop that we hadn’t seen in several weeks. The current week has already started with strong downward trends and if there is a break out below $103.20, then the oil is probably heading towards $100. On the contrary, above $113 – $114, we are probably returning to the long-term uptrend but we prefer short positions this week.

EURUSD (Euro vs US Dollar)
Slightly bearish was the last week for EURUSD which opened at 1.0514 and closed at 1.0492. The Fed’s 0.75% interest rate hike boosted the dollar after expectations of a 0.50% increase, but a few hours before, the European Central Bank’s emergency meeting to address high bond yields and the eurozone debt crisis was also important. The new tools to be developed by the ECB relieved the euro somewhat and thus the fall in the pair was mitigated. In the rest of the macroeconomic data, retail sales in the United States and industrial production in the Eurozone were below market expectations, showing that economies are suffering from high inflation, the energy crisis, and poor psychology. In the scenario of further strengthening of the dollar, the most significant support is in the price range of 1.0350, which is a low price of about 5.5 years. But if the euro’s upward reaction continues, upward splits above 1.0640 and even further above 1.0780 may mean a reversal of the trend. We may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was bearish for GBPUSD, which opened at 1.2315 and closed at 1.2213. The U.S. dollar strengthened after the Fed raised interest rates but this strength was not fully reflected in the pair because the sterling had a reason for strengthening too. The Bank of England announced a new rate hike last Thursday and so the rate now stands at 1.25%. The rest of the macroeconomic results in the UK were mixed and thus had little effect on the country’s currency. Inflation in the United Kingdom is announced this week, which may determine the next moves by the Bank of England, but the fact is that the United States has more room for tight monetary policy and aggressive interest rate rises because they are less affected by the current financial crisis. As the pair approaches 1.20, a strong downtrend is developed. The GBPUSD could rebound further in the event of an upward breakout above 1.24 and we’re keen to try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 134.32 and closing at 134.93. The frantic upward rally for the pair continues with its price already hovering at very many years ‘ highs. The dollar continues to strengthen based on tight monetary policy and the recent Fed rate hike, as long as the Japanese currency is heavily hit by continued ultra-loose monetary policy by the Bank of Japan and interest rates at a negative rate (-0.1%). The third factor that determines the trend of the pair, which is the bond yields, had an increase this week, but it moderated towards the end and so the USDJPY closed below 135. Other economic results in Japan, such as industrial production, have moved into sharply negative territory, and, combined with relatively low inflation, leave room for quantitative easing. The trend that has formed is undoubtedly strongly bullish but at such high levels, any indication in the opposite direction can cause sharp corrections so we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 141.25 and closed at 141.61. The euro had a mild upward reaction after the emergency meeting of the European Central Bank, and in combination with the continued loose monetary policy in Japan, we had the result of the pair rise that ended in its 5th upward week. It is noteworthy, however, that the largest percentage of the rise took place on Friday after the meeting of the Central Bank of Japan and if this is digested quickly by the markets, we may see corrective moves towards the 140 area in the first phase. Going with the main trend, we may try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8531 and closed at 0.8585. The pair moved further away from the milestone price of 0.85 after the euro was able to perform better than the sterling. Sterling strengthened towards the end of the week after the Bank of England raised interest rates again, but the euro also performed relatively well after the ECB’s emergency session. Any continuation of the upward reaction above 0.87 will increase the likelihood of an upward trend but any approach of 0.85 is more conducive to the opposite scenario. We may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Sharply bullish was the last week for USDCAD, which opened at 1.2775 and closed at 1.3026. The pair is again above 1.30 after the start of April, with the U.S. currency visibly strengthening after the Fed raised interest rates and by the markets’ perception that new increases are expected. In contrast, Canada’s currency was pressured due to the big drop in oil prices. The announcement of Canada’s wholesale sales in May, below market expectations, intensified the negative climate but this week, announcements on retail sales and inflation, will have a more decisive role. Inflation is expected to have risen to 7.5% and this could trigger actions by the Bank of Canada. Below 1.2960, we may see further corrective moves but as long as the parity is held above 1.30, the upside scenario outweighs. By trusting more in the first case, we may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a sharply downward course last week after the opening price was at 0.9876 and the closing price at 0.9697. The strengthening of the US dollar was a given but the Swiss National Bank’s unexpected decision to raise interest rates by 0.50%, from -0.75% to -0.25% last Thursday, greatly strengthened the Swiss franc and led the pair to a heavy drop. The SNB intends, based on the statements of bankers, to make new increases in interest rates to address the high inflation in the country. Below 0.95, the reversal of the uptrend that had started at the beginning of April will be largely achieved but any new strengthening of the dollar may outweigh developments in Switzerland and drive the pair towards 1:1 again. We may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Last week was bearish for AUDUSD, which opened at 0.7034 and closed at 0.6935. While the US dollar strengthened after the Fed’s rate hike, the Australian dollar was unable to react. There was a deterioration in economic results in Australia, notably in the unemployment rate which was announced in May at 3.9%. China’s results were also not to the extent that they would suggest a big recovery in the economy after the recent quarantine and so we saw prices for AUDUSD below 0.70. The announcement of the minutes of the Bank of Australia on Tuesday will reveal more about the intentions of the bank concerning monetary policy and interest rates and of course as long as the price is below 0.70, the downward scenario is favored. Especially below 0.6830, it is possible to see an acceleration of the fall. Above 0.7070, there are hopes of a further upward reaction and we may follow the bullish scenario by opening buy positions this week.

Bitcoin

Last week, Bitcoin closed at $20,553 with heavy losses exceeding 22%. Bitcoin and most cryptocurrencies are carrying the recent shock of Luna and Terra and are very vulnerable to market swings. They have also developed a strong correlation with high-risk investment options and with shares from the technology industry. Thus, the recent increase in interest rates by the Fed, caused a new blow to the already burdened situation and over the weekend we saw not only prices below $20,000 but also close to $17,500, something that had not been done since the end of 2020. On Sunday there was an upward reaction above $20,000 but the trend that has formed is sharply bearish and investors are looking for the next support. The tsunami of negative news continued, with the company Celsius (a platform that gives a return on DeFi investments) freezing withdrawals. Many companies such as Coinbase and crypto.com, have already announced job cuts while there are big fears about the viability of hedge fund Three Arrows Capital which is on the verge of bankruptcy. Below $17,500, the way is open for $13,000 and $10,000 while at least an upward reaction above $25,000 is needed to calm the concerns somewhat. We prefer short positions for one more week.

IMPORTANT DISCLAIMER

The information of this report is of a general nature only. It is not a personal financial advice. It does not take into account your objectives, financial situation and personal needs.

a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.