THE ECB HAS SPOKEN, NOW IT’S TIME FOR THE FED
The central event that dominated international markets last week was the actions of the European Central Bank, as announced on Thursday. The European Central Bank raised interest rates by 0.50% for the first time in 11 years and introduced a new financial tool to combat the debt crisis in Eurozone countries. This tool is called the Transmission Protection Instrument (TPI) and is a secondary market intervention mechanism to support the bonds of countries facing financing problems. Of course, there will be strict implementation criteria such as fiscal discipline and reform mood. However, the increase in interest rates above the 0.25% that most people estimated indicates a willingness of the bank to deal with the high inflationary pressures in the Eurozone with determination. The climate improved further after the reopening of the Nord Stream 1 pipeline, even though the supply is not yet complete. These actions and developments helped the euro recover, but not to the extent that many market analysts expected.
On the other side of the Atlantic, we had no major developments, events, or announcements. PMI indices in the US had a mixed sign and a significant development is a decline in bond yields with the US 10-year closing the week at 2.75%. All eyes are now concentrated on the Fed meeting next Wednesday where a new 0.75% increase in interest rates is likely, without excluding the scenario of a 1% increase.
Market sentiment has improved and this has been reflected in the rise of most stock indexes and the weakening of the US dollar that always gathers the preferences of investors seeking safer investment haven. The recovery of gold after several weeks of decline is considered important, while oil showed stabilizing trends. Finally, a mild upward reaction of Bitcoin and most cryptocurrencies continues, but without the corresponding enthusiasm among the investors.
The central event of this week, as we said above, is the decision on interest rates by the Fed. In the United States, second-quarter GDP is also announced, while in Germany, inflation and unemployment rate are singled out, and in the Eurozone, inflation and GDP.
The US SP500 index closed last week with upward trends, at 3,962 points and gains that approached 2.50%. Investment sentiment was improving throughout the week, except for Friday when PMI, Composite, and Services indices, were announced well below 50 meaning a deterioration in the climate is expected more generally. The biggest rise for the SP500 was last Tuesday, about 2.8% and this was the best daily performance for the index since early June. The reason was the announcement of many companies, with strong results for the 2nd quarter of 2022 and in some of them, even above expectations. Utility companies and companies from the health space had the best results. Of course, the weak dollar also had its role in the weekly index performance, as well as the big drop in bond yields. The Fed meeting on Wednesday and the decision on interest rates, however, may strengthen the dollar again and bring back downward trends in the index, especially if we see prices below 3,900 points so we may try short positions this week.
The German DAX40 index moved upward in the week that left, closing at 13,163 points, with gains of 2.60%. All the rise took place last Tuesday, with the investment climate improving but the rest of the days were stabilizing and with slightly downward trends. On Thursday, there was a slight recovery due to the ECB’s announcements but it seems that it was transient since, on Friday, the downward trends and pressures returned. The reopening of the gas pipeline, even to a partial extent, was a positive development since there was a belief to the contrary. Germany’s PMI results, however, were disappointing, with all indicators below 50, foreshadowing a deterioration in the economy or even a recession. The winter will be quite difficult, not only for Germany but also for many European countries and so it is not ruled out that we will see the index turn towards 13,000 points again so short positions is our selection for the current week.
The British FTSE100 index moved upward last week, closing at 7,196 points, gaining just over 1%. The index was in line with most of the world’s major indices but performed significantly worse. The positives include the fact that the FTSE100 was removed from 7,000 points, a level that is considered particularly critical. High inflation, which stood at 9.4% in June, is likely to force the Bank of England to act even more aggressively, with tight monetary policy and new interest rate hikes, and this will hurt growth and equity markets. The PMI indicators announced at particularly good prices could not change the climate that from Tuesday onwards, was not positive. If this situation continues, we may see the index squeezed, especially approaching 7,000 points so we may try short positions this week.
Gold was bullish last week, closing at $1,743 and gaining close to 2.20%. It was gold’s first upward reaction after five weeks of heavy declines and overall losses of 9%. Two strong factors helped gold recover: the weakening dollar and de-escalation in bond yields. The Fed’s meeting with the expected rate hike is this week’s pivotal event. Analysts and investors will try to decode Jerome Powell’s likely statements on the bank’s next moves after a rate hike on Wednesday is taken for granted. If the dollar strengthens again, we could see gold revert to its downward channel. Of course, there is also the scenario of fears and concerns about the course of the global economy, which can create a new wave of gold buyers. Over $1,785 this scenario earns more points and we’re keen to try long positions this week.
Last week was slightly bullish for oil with next month’s futures closing at $95.09, with gains of 0.50%. Monday and Tuesday were particularly bullish days but the pressures prevailed afterward. Fears of a global recession hurting oil demand are beginning to flare. It is characteristic that in the USA the consumption of gasoline was announced, about 8% reduced compared to the same period last year while increased by 3.5 million barrels were announced inventories last week. In the geopolitical landscape, Russia has restarted gas supply to Europe, while exports from Libya that had been cut off from the country’s ports due to the recent political crisis have also started. There has been intense speculation in recent hours about an amendment to European Union sanctions on Russia that will allow oil to be shipped to third countries, intending to reduce risks to global energy security, as Reuters reported. Prices are already under pressure at the opening of the week and many analysts estimate that $90 is a feasible scenario. We may try short positions this week.
EURUSD (Euro vs US Dollar)
Bullish was last week for EURUSD which opened at 1.0082 and closed at 1.0215. The US currency weakened after a mild improvement in investment sentiment internationally, but the euro also strengthened after the European Central Bank raised interest rates and introduced a new financial tool to combat the eurozone debt crisis. The rise of the euro, however, had neither the required strength nor the required continuity after the pair fell slightly on Friday. Inflation was announced in the eurozone at 8.6%, and perhaps that helped the ECB’s decision and may push the central bank to a new interest rate hike in September. However, the PMI indices in both Germany and the Eurozone were announced below the critical value of 50, which shows that the psychology of the markets in Europe is negative and that the probability of recession is high. All eyes of investors and markets are on the Fed’s announcement on Wednesday, and if markets think the bank will continue to aggressively raise interest rates, then the dollar may strengthen further. This would bring the pair back to its downward trajectory, which has in no way been altered by the euro’s upward reaction last week that is why we may try sell positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Bullish was last week for GBPUSD, which opened at 1.1866 and closed at 1.2005. The U.S. dollar fell on improved investment sentiment and some suspicions that the likelihood of a recession in the U.S. economy may not be as small as initially estimated. For the United Kingdom, however, the announcements were many and important in the past week. Inflation in June was announced at an unreal 9.4%, perhaps making the need for new rate rises from the Bank of England all the more immediate and irrepressible. The unemployment rate remained unchanged at 3.8% while the announcements for retail sales were mixed. The announcements of the PMI indices on Friday gave a breath of optimism to the sterling, with the results far exceeding the estimates of the markets. The week that has just started has no major announcements for the UK and so investors will focus on the dollar and especially the Fed’s announcements on Wednesday. Given that the UK’s problems remain intense and lasting, it is not ruled out that a new strengthening of the dollar could push the exchange rate well below 1.20 again so we may try sell positions this week.
USDJPY (US Dollar – Japanese Yen)
USDJPY moved down last week, opening at 138.51 and closing at 136.07. It was the first downward week for the pair after seven upward weeks and a total rise above 1000 pips. Japan kept interest rates at -0.1% at the Bank of Japan meeting last Tuesday and will likely maintain a loose monetary policy aimed at full recovery of the economy as low inflation in the country allows it. However, the pair showed strong downward trends due to the weakening of the US currency but mainly due to the large drop in bond yields. It is characteristic that the US 10-year bond performed a drop in yield from 3.08% early on Thursday, to 2.75% at Friday’s close. So, it proves once again the strong correlation of the USDJPY with the yields of US bonds. We also note that for several weeks the phenomenon of inversion of yields between the 2-year and 10-year US bond has continued to appear. We will learn more about Japan’s monetary policy this week, and the unemployment rate is announced at the end of the week. Logically, a correction week for the pair is not capable of reversing the long-term trend, and so in the event of a re-strengthening of the dollar, the upward trends can return so we may try buy positions this week.
EURJPY (Euro – Japanese Yen)
Last week, EURJPY was bearish as it opened at 139.63 and closed at 138.99. The euro appeared to strengthen following recent actions by the European Central Bank while the Japanese currency continued to be weak after the Bank of Japan meeting left interest rates unchanged and continued loose monetary policy. However, what weighed heavily on the pair and led to the downward trend of the week, was the large de-escalation of bond yields. The German 10-year bond took a big fall and from 1.37% on Thursday, closed on Friday near 1.04%. Significant was the loss of 140 which is considered a psychological threshold for the pair and if there is a downward break out of 137 then the reversal of the trend should be taken for granted. However, if bond yields stabilize and start to climb, then an upward split of 140 will return the parity to its familiar upward trend of recent weeks. We may try buy positions this week.
EURGBP (Euro – Great Britain Pound)
Last week was bullish for EURGBP which opened at 0.8490 and closed at 0.8506. On Thursday the pair even approached 0.86 but the initial enthusiasm for the euro was quickly lost and so it returned to its familiar balance point, around 0.85. The most recent role in the movements and fluctuations of the EURGBP is played by the decisions of the central banks and the perceptions of the markets about their future movements. Technically speaking, an upward break out above 0.86, increases the chances of the upward scenario while below 0.84 the downward trends prevail. We prefer sell positions this week.
USDCAD (US Dollar – Canadian Dollar)
Last week was bearish for USDCAD, which opened at 1.3016 and closed at 1.2914. Canada’s economy had a series of major economic announcements, including inflation, which was reported at 6.2% in June, industrial production which plunged -by 1.1% in the same month, while retail sales were reported at a positive sign, which increased by 2.2% in May. Another factor that significantly affects the Canadian dollar is the price of oil, which, however, has remained practically unchanged over the past week. The fall in the pair should therefore be attributed to the weakening of the US currency, resulting in an easy loss of 1.30. Given the criticality of the Fed’s decision next Wednesday on interest rates in the United States, if the US currency strengthens again, then the pair will return to the well-known uptrend of the last period and will return above 1.30 so we may try buy positions this week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week after the opening was at 0.9756 and the closing at 0.9611. Switzerland’s economy last week had no major announcements, with the only exception of the trade balance, which was announced in June at 3.8 billion Swiss francs, slightly below market expectations. The US dollar, with its problems, was the main reason for the downward picture performed by the pair. It makes perfect sense, therefore, that if the dollar finds its way back, the pair will return to its upward course. The critical price level in this movement is the area of 0.9885 while in any continuation of the downtrend the sellers of the exchange aim to support 0.95. We prefer buy positions this week.
AUDUSD (Australian Dollar – US Dollar)
Strongly bullish was last week for AUDUSD, which opened at 0.6782 and closed at 0.6923. Things seem confusing in Australia as the head of the country’s Central Bank Philip Lowe announced that actions to combat inflation will continue unabated but on the other hand, Australian Prime Minister Anthony Albanese said and warned the bank and its executives that the actions they are developing are already too many and that the risk of a recession lurks. We remind you that the country’s central banker has said that in the coming months there could be a total increase in interest rates of 2.5% and this is natural to hurt growth. PMI indices were reported in Australia below market expectations while the people’s Bank of China at its recent meeting, left interest rates unchanged at 3.7%. If the pair continues its upward reaction above 0.70, then there is a greater chance for a further rise. Critical support is 0.6830 because if the pair falls below this value, we return to the long-term downtrend. We may try buy positions this week.
Last week, Bitcoin closed at $22,596 with gains close to 8.60%. From mid-June onwards, there is a stabilization of prices and a mild upward reaction, but without achieving the recovery that will fill the cryptocurrency investor community with optimism. The resistance near $24,500 seems insurmountable at the moment since the approach to these levels that took place last Wednesday was accompanied by a wave of sales. Bitcoin is therefore still very vulnerable and any negative news or deterioration of the climate is followed by a fall in prices. This is what happened when it was announced that Elon Musk sold approximately 75% of the Bitcoins he owns. The prevailing perception that the big rise in 2021 was mainly a product of huge liquidity in the market, and that tighter monetary policy and higher interest rates from central banks will hurt cryptocurrencies, has raised concerns among investors. As the price gets closer to $20,000 again, the climate will worsen so we may try short positions this week.
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.