Financial markets are on standby mode so far for this week as all eyes are on the announcement of the United States labor market and unemployment rate on Friday. The outcome of this announcement will show the course of the U.S. economy and therefore markets will have a safer assessment of the Fed’s next moves. Today, however, we had the very important announcement of inflation in the Eurozone which was found in August at 9.1%, slightly higher than the 8.9% in July. This would logically strengthen the euro, which has already had a slight upward slope since the beginning of the week but on the contrary, it is dropping. Perhaps the markets anticipate that the upcoming energy and economic crisis in the eurozone, which could lead to a deep recession, will not allow the European Central Bank to take the necessary actions to combat high inflation.
The U.S. dollar has strengthened slightly this week even though the United States has no major announcements so far, but markets are assessing that the central bank will continue with aggressive interest rate hikes and tight monetary policy. Stock indices in the US and Europe are moving slightly corrective, with the exception of Germany where there is a mild rise. Most commodities such as gold and oil are also moving correctively while bond yields are moving upwards with the U.S. 10-year having jumped to 3.13%.
EURUSD (current price at 0.9994) is slightly bullish this week but today after the inflation announcement in the Eurozone, it is moving lower. Inflation in Germany was announced as slightly higher than the estimations, at 7.9% but the perception of the markets does not seem to change. The next winter will be extremely difficult for many European Union economies, mainly due to energy shortages that can afflict households and businesses and lead to a very big recession. This situation does not leave much room for the European Central Bank to act aggressively, and so the dilemma of high inflation or recession has not yet a clear winner. The remaining exchange rate below 1: 1 worries about any continuation of the upward reaction and so it is not ruled out that EURUSD will turn to 0.99 again, especially if the announcement of new job positions in the United States on Friday strengthens the dollar.
GBPUSD (current price at 1.1612) is bearish for the 3rd week in a row. The current week contains no major economic announcements for the UK but the country’s economy has a negative outlook. Inflation is already in double figures and the Bank of England estimates a prolonged recession that will last several quarters. On the contrary, the US dollar appears to have better prospects because the positive macroeconomic results announced in the United States indicate relative economic robustness that will likely allow the country’s central bank to further raise interest rates and tighten monetary policy without fear of a major recession. The next big and important support for the pair is just above 1.14. This is a price area where GBPUSD was found in March 2020 with the outbreak of the pandemic.
USDJPY (current price at 138.68) is bullish this week as the strong dollar leads the pair to higher levels. A helper in this upward movement is the raising of bond yields that almost always have a high degree of correlation with the exchange rate. The Japanese yen, on the other hand, does not seem able to react because all indications imply that the Bank of Japan will continue its loose monetary policy. Japan has relatively low inflation and is still away from the macroeconomic targets set. Unemployment was announced unchanged at 2.6% for July while industrial production fell for the same month by 1.8%, year-on-year. The obvious target for any continuation of the upward trend in the exchange rate is the price area of 140.
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