A very volatile week comes to an end with a lot of news and developments and many price actions in the world of currency pairs that are rare and have not appeared for many years or even decades. Without any doubt, the major event of the week was the US inflation announcement at 9.1% in June which is significantly higher than the 8.6% in May and surprised even the markets’ estimates of 8.8%. This inflationary rate gives extra room to the Fed to tighten the monetary policy even more and to be more aggressive regarding the interest rate hikes in the following months. Christopher Waller, a member of the Federal Reserve Board of Governors mentioned though that the most likely scenario is a 0.75% raise, trying to calm down some rumors that predict 1%.
As Europe is pretty vulnerable to a possible recession due to the energy crisis and the Ukrainian war, the ECM seems very cautious in acting similarly to the Fed. No interest rate hikes have taken place so far, a possible one may take place in the next session but there is no safe estimation after that. Some say that in September the ECB will be pushed to raise interest rates again to fight the high inflation and some others say that the threat of a recession and the difficult winter will stop the ECB from acting aggressively. US retail sales announced earlier today 1% higher compared to the previous month, giving one more evidence of the strength and the solidity of the US economy. Another critical set of announcements came from China today as per the Chinese GDP, fixed asset management, industrial production, and retail sales. The results were mixed (some rates above, some rates below estimations) and so there was no serious turbulence in the markets.
The result is a very strong dollar due to the divergence between the Fed and the other central banks and due to the investors’ preference for safe-haven assets in a time of concerns, fears, and risk-off mood. All the other major currencies are weak this week. Strong pressures and corrective trends for the major stock indices while gold and oil continue their bearish trends. Finally, the bond yields dropped this week. The US 10-year bond yield is below 3% again, currently moving at 2.93%.
EURUSD (current price at 1.0049) dropped below 1:1 yesterday for the first time since November 2002. It was a very significant price movement that shows and validates the divergence between the Fed and the ECB as well as the weakness of the European economy which has a high probability to fall into recession. The rumors that the Russian Nord Stream 1 will stop permanently the provision of natural gas to Europe has brought Europe into despair because if it comes true, many European countries will face severe issues. The industrial production in the Eurozone for May had a positive sign but these are minor developments in front of the big picture of central banks and the energy crisis. Although the 1:1 parity seems like a milestone price and EURUSD has recovered above it, the general sense amongst the markets’ analysts is that the downtrend may carry on.
GBPUSD (current price at 1.1834) is bearish this week, as the pair is unable to resist the dollar’s strength. As the UK is still deep into the government crisis and the replacement of Boris Johnson is awaiting, many issues are suspended regarding the new economic policy of the new prime minister and the reaction on a series of open issues such as Brexit. On Wednesday, the UK had a series of positive economic news as per the GDP, industrial & manufacturing production, and the trade balance but the sterling was not able to perform a bullish reaction. If the downtrend of the GBPUSD continues, we may see prices even close to 1.14 which was the pair’s price at the beginning of the COVID-19 pandemic, in March 2020.
USDJPY (current price at 138.72) has another bullish week (the 7th in a row) as a series of factors help the uptrend of the pair. First of all, the strength of the dollar dominates in the currency markets and causes multi-year and in some cases multi-decade record prices. Secondly, the Bank of Japan insists on an ultra-loose monetary policy and negative interest rates without any visible intention for a game-changer action. Moreover, industrial production in Japan fell by 4.7% in May (on yearly basis), showing that the Japanese economy is not in a good shape. After breaking out of the strong resistance of 137, the USDJPY is on its road to 140. It could reach it so far but the lowering bond yields are a retracement factor.
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