London 27/07/2022

The scenario of a global economic recession is becoming stronger, especially in the Eurozone where we observe a combination of events starting from Gazprom’s announcement to reduce the gas supply causing many problems and uncertainty to the lower consumer confidence in Germany, which was slightly lower than the consensus of -28.9. On Monday, the business climate in Germany was also announced below market expectations. The aforementioned events and many more worsen the investing sentiment and create a risk-off environment, and of course, low-risk assets such as the US dollar are considered more favorable among investors. Today, all eyes are on the Fed interest rates decision and FOMC press conference, and the probability of interest rates rising comes to 75% for 0.75% and 25% for a 1% rise. A more hawkish monetary policy by the Fed or some hints for a new interest rate increase in the upcoming months will indicate a message from Fed chair Jerome Powell that the US is dedicated to fighting and crushing inflation.
In the EU, except for the recent announcement of the Russian gas giant and the consumer confidence in Germany, as described above, there is also an agreement among EU members to reduce gas use for the next winter, aiming to cut gas use by 15% in the upcoming six months, which indicates from the one hand a dedication and a common direction by EU members but on the other hand a signal that this action may impact GDP growth.
Moreover, in the last months, the US bond yields continue to be in an inverting mode, and the 2-year bond yield continues to be above the 10-year one indicating a recessionary estimation and risk-off mood by the investor community in the short-term.
The stock indices are in a wait-and-see mode ahead of the Fed, except for the British FTSE100 which performs big gains. Gold has consolidative trends while the oil is in a mild uptrend this week.
EURUSD (current price at 1.0153) is bearish this week. The energy crisis in the Eurozone and the possibility that the EU will move to a recessionary territory caused pressure on the EUR. On the other hand, waiting for the Fed’s announcement on interest rates and the possibility that it may have a hawkish monetary approach to fight inflation creates an environment that strengthens the US dollar. After bottoming in the 1.01 zone in the first half of the week, the EURUSD currency pair had a short-term reversion to the level of 1.0147, however, a clear estimation will only be created after Fed’s announcement and no assumptions could be done yet.

GBPUSD (current price at 1.2079) is bullish this week. The 9.4% inflation in the UK is high and even more than the EU’s recent inflation announcement, thus the market anticipates that BoE will increase the interest rates to fight the inflationary pressures. UK’s politics and Brexit may create pressures on the currency pair, but for now, the FOMC press conference is the critical event that will give direction, even in the short term. The current price is above the SMA50 and the SMA200, which are at the level of 1.2239 and 1.3013 respectively. Any possible strengthening of the US dollar after the FOMC may push the GBPUSD below 1.20 again.

USDJPY (current price at 136.60) is bullish this week after last week’s bearish movement. BoJ continues the ultra-loose monetary policy and negative interest rates and on the other side Fed follows a hawkish monetary policy, thus an upside above 137 may be possible. Also, the bond yields are slightly higher this week. Japan’s monetary policy has a positive impact on its exports and thus on corporate earnings, however, it may not be helpful in the long term. The divergence between the US and Japanese monetary policy may lead to a higher price for the currency pair. A solid break out above the resistance of 137 may bring back the scenario of 140.

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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