THE DE-ESCALATION OF INFLATION IN THE US HAS IMPROVED MARKET SENTIMENT
The most important macroeconomic announcement of the week that passed, had to do with inflation in the United States in July. The previous month had inflation of 9.1% and for July the markets expected 8.7%, however, the figure announced was 8.5% which changed a lot of data in the perception of the markets. The main thinking is that by de-escalating inflation, the Federal Reserve now has the room to stop such aggressive policy raising interest rates. This will give a breath of liquidity to the markets and that is why the main stock indices held a mini rally last week. The U.S. dollar suffered losses after a 0.50% rate hike became the main scenario at the Fed’s September meeting. We remind that a few weeks ago the scenario of an increase of 0.75% prevailed. Things are not so rosy, however, because the US economy has completed two consecutive quarters with negative GDP, which is technically a recession.
On the European continent, although the macroeconomic figures announced are positive, as we will see below, fears of a lasting energy crisis next winter dominate Europe. These fears have not yet been reflected in the European markets, which continued to strengthen in the past week, nor in the euro, which rose mainly due to the weakness of the dollar.
Most commodities, such as gold and oil, strengthened last week due to improved sentiment and a weak dollar, while we also saw a slight strengthening in bond yields with the U.S. 10-year reaching 2.85%. The announcement of inflation in the US also positively affected the cryptocurrency market, which had a significant rise.
Although we are in the heart of the summer and there is reduced investment interest, the important announcements continue. Dominated by the announcement of GDP on Wednesday and inflation in the Eurozone on Thursday, the Fed meeting on Wednesday but without expecting any special actions, retail sales in the United States and unemployment rate, inflation, and retail sales in the United Kingdom. In Asia, the announcements of retail sales in China and inflation, industrial production, and GDP in Japan are considered important.
The US SP500 index closed with strong upward trends last week, at 4,280 points and gains that approached 3.40%. Until Wednesday, the index had been stabilizing, but since the announcement of inflation, it has risen sharply. Markets ‘ perceptions shifted and most analysts thought the Fed would ease its tough monetary policy and aggressive interest rate hikes as inflation appeared to be taming. On Friday, this belief was further strengthened after the positive results recorded by the Michigan Consumer Confidence Index. As a counterweight to the positive climate, the tense relationship between the US and China has been operating lately, with President Biden freezing the abolition of tariffs imposed by the Trump administration. The index was not intimidated by the small increase in bond yields and climbed to a high price of about three months. This does not mean, of course, that the problems of the economy were solved. We remind that the US economy is typically in recession and that a difficult winter is ahead. Tensions with China are also likely to cause several problems and increase geopolitical risk. Any correction of the SP500 below 4,200 points may bring the negative climate back into the ranks of investors, so we prefer short positions this week.
The German DAX40 index moved upward in the week that passed by, closing at 13,872 points, with gains of 1.90%. DAX40 was favored like most major indexes by the overall positive sentiment that prevailed in equity markets last week. Inflation in Germany remained unchanged at 8.5% and thus was a factor that did not particularly affect the course of German markets. The difficult winter that follows, given the energy crisis, with very high prices and a possible shortage of energy is the most difficult problem that plagues Germany and many European countries. Plans are already being drawn up to tackle the problem to save energy in households, businesses, and public services. The German index has performed four consecutive weeks of net growth, reaching values we haven’t seen since last May, but the harsh reality hasn’t changed, and possible corrections lurk so we may try short positions this week.
The British FTSE100 index moved upward last week, closing at 7,253 points, gaining more than 1.50%. It is obvious that the British index did not have the same performance as the American or other European stock indices, and this is due to the big problems facing the economy in the UK. The energy crisis that creates very high prices and possible shortages next winter is a difficult puzzle for the economy. Plans are even being made for a lesson three days a week in British schools to save energy. In addition, the country is suffering from a major drought that creates unprecedented images of rationed water supply. Economic sentiment improved on Friday following the announcement of positive macroeconomic results for the UK (GDP, industrial production, manufacturing, etc.) but the bleak picture coming in the coming months, as has been described by many central bankers, with high inflation and recession, is capable of triggering corrections in equity markets. We may try short positions this week.
Gold was bullish last week, closing at $1,818 and gaining more than 1.50%. Gold completed four net consecutive weeks of rising, benefiting mainly from the fall in the U.S. dollar. Many analysts believe that the peak of inflation in the United States is already a thing of the past and that it will gradually begin to de-escalate, as was shown in the latest announcement on Wednesday, where it stood at 8.5% in July, from 9.1% in June. This development is something that will not favor gold because due to its nature it is an option for investors as a hedge against high inflationary pressures. The positive for the gold price is certainly the increase in geopolitical risk due to the tension that has been caused between the United States and China lately, but the negative factor is the latest increase in bond yields. Above $1,825 prices could continue upward but in the event of a correction below $1,800 and with a possible strengthening of the dollar, it is not ruled out that the upward rally of the last month will end so short positions is our selection for the current week.
Last week was upward for oil with next month’s futures closing at $91.86, with gains approaching 3.90%. This increase in prices was made in two phases. The first on Wednesday, after the announcement of inflation in the United States, signaled to markets that a milder monetary policy could reignite oil demand. The second increase came the day after Shell announced in Mexico that three undersea oil units were halting production. It is noted that these three units had a total production of over 400,000 barrels per day. On Friday, however, there was a correction in prices after the company announced that this situation is transient and that the production units will soon return to operation. The economic climate also worsened on Friday because fears of a recession and an energy crisis gradually returned. If this climate continues to prevail this week, we may see a new turn in prices downwards and if there is a downward split of $90.50 then we may see prices even close to $87, soon enough. We may try short positions this week.
EURUSD (Euro vs US Dollar)
Bullish was last week for EURUSD which opened at 1.0174 and closed at 1.0258. The announcement of inflation in the US had a catalytic significance for the course of the exchange rate since the weakness of the US dollar was evident, because of which we saw prices close to 1.0370 for the first time after about 1.5 months. On Friday, industrial production in the eurozone was announced for June, with an increase of 2.4% on an annual level, but this did not help the euro and, combined with the positive result of the Michigan Consumer Sentiment Index in the United States, which was announced in particularly positive territory, the exchange rate began to show downward trends again. Fears and worries prevail because the great energy crisis on the European continent can create significant problems for households and businesses next winter. Significant is the resistance in the price range 1.0360 – 1.0370 which if the exchange rate can overcome, it may be able to move higher. Otherwise, if the dollar strengthens again, the exchange rate will probably return to its long-term downtrend, and we prefer sell positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Upward was last week for GBPUSD, which opened at 1.2067 and closed at 1.2133. There was a big upward movement last Wednesday after the announcement of inflation in the United States that weakened the dollar, but two downward days followed, resulting in the weekly rise being anemic. It is important to emphasize that on Friday we had a series of announcements about the United Kingdom, and almost all of them were on a positive note. More specifically, the GDP of the second quarter of 2022 strengthened by 2.9% on an annual level, while industrial production, manufacturing, and the trade balance were also above the prices that the markets estimated. A characteristic example of the weakness of the sterling is that after these announcements, we saw downward trends for the exchange rate even with a slight strengthening of the dollar. This week continues to be important in terms of announcements for the UK as we will find out last month’s inflation, retail sales, and the unemployment rate. If there is no clear break of 1.23, there can be no easy talk of reversing the long-term downtrend and any movement towards 1.20 reinforces the downward scenario. We may try sell positions this week.
USDJPY (US Dollar – Japanese Yen)
USDJPY moved lower last week, opening at 135.01 and closing at 133.49. The weakness of the US dollar after the announcement of inflation in the United States was the catalytic factor for the downward movement we saw. This factor was able to outweigh the continued weakness of the Japanese currency due to loose monetary policy and negative interest rates in Japan, as well as the slight rise in bond yields. The producer price index in Japan fell in July to 8.6% from the previous month’s 9.4%, and therefore the Bank of Japan has enough breath to continue the current monetary policy. Next week, however, is very important for the Japanese economy as inflation, GDP, and industrial production are announced. Above 135.60 there are serious hopes for a recovery of the upward trend while as the exchange rate approaches 130, the downward scenario gains points. We prefer buy positions this week.
EURJPY (Euro – Japanese Yen)
Slightly bearish was last week for EURJPY which opened at 137.35 and closed at 136.94. Currently, both the euro and the yen are weak, each one for different reasons. The euro is suffering from the problems caused by the energy crisis on the European continent and a possible recession that may appear in the next few months in the Eurozone. The Japanese currency, on the other hand, is weak as the Bank of Japan continues its loose monetary policy after low inflation in the country allows it. Given these facts, the yen has recently appeared to be stronger than the euro because the problems of the European economy seem to be more important in force. The next supports for EURJPY, are at 133.40 and 132.65 and these are the target of our sell positions this week.
EURGBP (Euro – Great Britain Pound)
Last week was bullish for EURGBP which opened at 0.8426 and closed at 0.8451. In the last two weeks, the exchange rate seems to be recovering from lows near 0.8340 because it is obvious that the British sterling is under a lot of pressure. During the week we saw prices that even approached 0.85 but the barrage of positive announcements for the UK on Friday somehow mitigated the rise. The week, which has just begun, is important both for the Eurozone with announcements of inflation and GDP and for the United Kingdom with announcements of the unemployment rate, inflation, and retail sales. As we get closer to winter, Europe’s problems will grow and become more obvious and so we may see a downward turn for the exchange rate again, so we prefer sell positions this week.
USDCAD (US Dollar – Canadian Dollar)
Last week was strongly bearish for USDCAD, which opened at 1.2928 and closed at 1.2773. The Canadian economy had no major announcement in the past week and so the tone was set by the US dollar and oil prices. The US dollar weakened sharply after the announcement of inflation in the United States because now the Fed can relax its aggressive policy of raising interest rates. Also last week we saw an increase in oil prices that always affects Canada’s currency since oil is the country’s most important export product. In a recovery in the US currency, we may see the exchange rate heading upwards again, and this scenario is strengthened in the event of an upward break above 1.2820 so we may try buy positions this week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had a sharply downward course last week after the opening price was at 0.9613 and the closing price at 0.9412. The main factor in this large downward movement was the weakening of the US dollar after the announcement of inflation in the United States. The rate was below 0.95, at a low price of about four months, even below the price found when Switzerland had announced a surprise rate hike. Unemployment in Switzerland remained unchanged at 2.2%, which indicates that the country’s economy is not seriously affected by the international crisis. The dominant factor continues to be the US dollar which if it continues to strengthen, we may see the exchange rate exceed 0.95 again and continue with upward trends so buy positions is our selection for the current week.
AUDUSD (Australian Dollar – US Dollar)
Strongly bullish was last week for AUDUSD, which opened at 0.6902 and closed at 0.7122. Important is the help that the exchange rate got from the weakness of the US dollar after the news of inflation in the US and the belief that the US central bank will relax its aggressive policy of raising interest rates. So AUDUSD was able to exceed the milestone price of 0.70 and develop an upward momentum that we have not seen in several months. Australia had no major announcements, but its economy was favored by higher commodity prices and China’s positive macroeconomic results. China announced an impressive trade balance of more than $ 100 billion in July, while exports also increased significantly. Inflation was also announced at 2.7%, up from June’s 2.5%. We recall that Australia-China trade relations make Australia’s currency heavily dependent on China’s economy. The next target for buyers is the price range of 0.7285 but in case parity is found below 0.70 then the downward channel is strengthened. We may try sell positions this week.
Last week, Bitcoin was bullish and closed at $24,320 with gains that approached 4.90%. Since the beginning of July, there has been a mini upward trend for Bitcoin, which intensified in the past week, especially on Wednesday after the announcement of inflation in the United States. A strong correlation has developed between Bitcoin and many cryptocurrencies, with the rest of the markets with the technology equity markets. It is also characteristic of the euphoria that dominates the ranks of cryptocurrency investors, the large increase in the share prices of mining companies in recent weeks, with some of them doubling their price. The positive climate seems to continue at the beginning of this week and the next resistances for Bitcoin are at $25,400 and $28,800 so we prefer long positions this week.
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