The financial markets are still absorbing the aftershocks from the US inflation announcement on Tuesday. As the announced inflation was higher than expected, markets anticipate that the Fed will be more aggressive during the next months, with higher interest rate hikes and tighter monetary policy to tame the inflationary rates. The result of this anticipation is the strengthening of the US dollar and the big correction of the stock indices in both the USA and Europe. Markets strongly believe that we’re entering an era of low liquidity and big uncertainty that will cause a risk-off mood. A risk-off mood usually forwards capital to safer investment solutions rather than risky assets.
Of course, the USA keeps on having better macro results than Europe. US retail sales rose by 0.3% in August (monthly) while industrial production dropped by -0.2%. In Europe, things look much worse: inflation was announced at 9.1% without any declining trends, industrial production dropped by 2.3%, and the trade balance was -34 bn euros in July (vs -25 bn euros in July). Moreover, earlier today Christine Lagarde (ECB head) in her speech sounded hawkish enough by saying that “interest rate hikes should send a signal that we’ll meet the price goal”. Earlier today, Olli Rehn (European Commissioner for Economic and Monetary Affairs and the Euro) mentioned that further rate hikes are on the plan.
Most of the major commodities are bearish this week, following the dollar’s strength. Interesting enough is the continuing uptrend of the bond yields with the US 10-year approaching 3.50%.
EURUSD (current price at 0.9958) remains below parity, after the bug strengthening of the dollar due to the higher US inflation that was announced on Tuesday. An interest rate hike of 0.75% by the Fed next week is now the dominating scenario, without excluding even a 1% hike. Europe is trying to find a way to deal with the upcoming winter energy crisis. Ursula von der Leyen suggested a few measures on Tuesday but the problem extends beyond these solutions. As the ECB does not have the appropriate macroeconomic environment to apply a tight monetary policy with the same comfort as the Fed has, the divergence between the ECB and Fed interest rates may open more. Under these circumstances, the EURUSD may try the major support at 0.9860, soon enough.
GBPUSD (current price at 1.1380) has managed to breakout the major support of 1.1410 which was the lowest price since March of 2020. The current price is the lowest price since the mid-80s and it’s not only the strength of the dollar that contributes to that. The UK had a series of important announcements this week. Lower-than-expected inflation gave the perception to the markets that the Bank of England may stop being aggressive on interest rate hikes. The retail sales in August decreased by 5.4% (yearly) and the estimations for the course of the UK economy are black: high inflation and recession. A solid remaining under 1.14 may drive the GBPUSD to 1.12 or even 1.10.
USDJPY (current price at 143.16), most likely will be bullish for the 5th week in a row. The comeback of the US dollar and the higher bond yields have helped the pair to recover after a few days of decline. Without any important news for the Japanese economy this week, the markets are trying to guess the future behavior of the Bank of Japan. There are some analysts, based on officials’ statements, who believe that the ultra-loose monetary policy will change soon as the exchange rate has climbed to very high levels. Until we have some developments on that, the USDJPY can reach the price zone of 145.
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