London 25/08/2022

The US dollar, after seven consecutive days of rising, suffered losses yesterday due to the negative announcements of PMI indicators in the United States. More specifically, the manufacturing index was announced at 51.3 against expectations for 52, the services index at 44.1 against expectations for 49.2, and the composite index at 45 against expectations for 47.5. These figures show a sharp deterioration in the economic climate in the United States and were thus interpreted by markets that things were worse than they seem. The corresponding indicators in Europe and the United Kingdom were not positive, but more or less the poor economic situation of these economies is well known in the markets, so the American numbers came as a surprise.
Based on the generally negative sentiment, most equity indexes in the main economies have marked corrective trends this week. Gold shows slight signs of recovery while oil has more gains after leaks about OPEC’s intentions to cut production in case the embargo on Iran is lifted. Finally, bond yields continue their upward course with the US 10-year having exceeded the threshold of 3%.
The announcement of durable goods orders in the US is expected to be interesting in the coming hours as markets will get a better sense of the course of the US economy. The news culminates tomorrow and the day after tomorrow with the announcement of the US GDP, the speech of Fed chief Jerome Powell and the launch of the Jackson Hole Symposium.
EURUSD (current price at 0.9949) is bearish this week although the US dollar lost some of its strength yesterday. The exchange rate had fallen below 0.99, which was the lowest price since December 2002, and recovered slightly with the weakening of the US dollar yesterday. This recovery, however, does not seem to have a continuation since today the EURUSD has again downward trends. The situation on the European continent is not good at all with the threatened energy crisis being a major concern in many countries and the possibility of recession is being strengthened. The results of the PMI indicators in the eurozone and Germany were mixed, but this did not help the euro. The next day’s announcements on German GDP and business sentiment follow, but it seems that the downtrend in the exchange rate is strong and below 0.99 could accelerate.

GBPUSD (current price at 1.1797) is slightly bearish this week due to a temporary recovery that we saw yesterday after the announcements in the USA. PMI indices in the UK had a mixed sign with services reported above market expectations but the composite index and manufacturing were found well below what markets estimated. The economic situation and climate in the UK are not good with inflation already rising to double figures and the likelihood of a recession in the coming months to be high. There are even estimates and analyses that predict much higher inflation and recession for several quarters. GBPUSD is moving to around 2.5-year lows and below 1.17 could have an even more accelerated decline.

USDJPY (current price at 136.42) is slightly bearish this week as it could not recover from yesterday’s dollar weakness. The dollar seems to be recovering today, but the slight decline in bond yields does not allow the exchange rate to gain a positive sign for the week. The yen also seems to be strengthening to some extent due to the announcement of the Japanese government that the controls at the country’s borders to limit the pandemic will be partially lifted in the first days of September. Relatively low inflation in Japan and macroeconomic numbers that have not yet reached the desired result are pushing the Bank of Japan to continue its loose monetary policy and negative interest rates. This situation gives more chances in the upward scenario, especially if there is a breakout of the resistance at 137.

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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