London 23/09/2022

Financial markets had another turbulent week as the economic news, the events, the geopolitical developments, and the future estimations create a very volatile environment. The Fed increased the US interest rates by 0.75% on Wednesday, as expected and Jerome Powell at the following press conference gave a hawkish tone on the bank’s future behavior.  The expectation is that the Fed will move on more aggressively, probably with two more big interest rate hikes by the end of the current year. According to Powell, the high inflationary rates remain the major target and thus the problem should be fought even if it causes damage to the growth and other macroeconomic factors. Markets reacted immediately: the US dollar strengthened significantly and the high-risk and commodity-linked currencies performed important losses. Many analysts predict a very deep correction in the stock market, due to less liquidity, higher interest rates, and high prices. This week verifies such a situation because most of the major indices are in deep red.
Other central banks also applied interest rate hikes: the Bank of England by 0.50% and the Swiss National Bank by 0.75%. These were the expectation and markets reacted accordingly: the Swiss franc had a transient strengthening but the sterling collapsed because the interest rate divergence between the Fed and the Bank of England deepens. Another important event that took place yesterday, was the intervention from the Japanese government to support the weak yen. It was a big surprise for the markets, as such interventions are not usual and it caused huge volatility in all the yen’s currency pairs. Most of the commodities also perform losses, following the dollar’s strength and the bond yields are moving higher and higher with the US 10-year bond yield touching 3.70%.
The US PMIs. just announced, had a better than expected result, causing an extra strengthening of the dollar and more losses for the stock indices as the Fed has much room to act aggressively.
EURUSD (current price at 0.9746) is sharply bearish this week, mostly after the Fed’s decision regarding the interest rates. The pair keeps on performing new multi-decade low prices. We just need to remember that the same day, one year before, the EURUSD was above 1.17. The great strength of the dollar and the economic problems in Europe (current and upcoming) have created a strong downtrend, combined with high volatility. As the US has decent macroeconomic results, the European ones disappoint: PMIs in Eurozone and Germany were all below market expectations and the Eurozone’s consumer confidence dropped to -28.8 (vs -25.8 expected). Unless there is a positive surprise from the Ukrainian war or a big change in ECB’s interest rates & monetary policy, the downtrend may carry on.
GBPUSD (current price at 1.1029) is in one of the most bearish weeks of the last years, having lost about 400 pips. The 0.50% interest rate hike that the Bank of England applied yesterday was considered by the markets as a soft action, regarding the size of the inflation problem. Jonathan Haskel (member of the Bank of England’s Monetary Policy Committee) said that the Bank of England is in a difficult position as the government’s expansionary fiscal policy conflicts with the bank’s actions to lower inflation. Most of the estimations and projections of the UK economy converge that a recession combined with very high inflation is inevitable. Earlier today, the PMIs did not meet the markets’ expectations and the sequence of the bad news for the UK economy is getting bigger. The price zone of 1.10 is psychological support for the pair’s downtrend and there’s nothing else that can be told from a technical point of view.
USDJPY (current price at 142.96) is neutral but it had one of the most volatile weeks during the last period. After the Fed’s interest rates decision, the dollar strengthened and the pair formatted an uptrend. This uptrend became stronger after the Bank of Japan’s decision to keep the interest rates unchanged at -0.1% and to maintain the ultra-loose monetary policy. A few hours later though, the Japanese government decided to intervene to support the weak yen, by selling dollars and buying yen. It was an unexpected and surprising event that caused an instant drop in the USDJPY. The pair recovered pretty soon but statements that further action can be taken any day, anywhere, including on holiday make USDJPY very unstable and unpredictable.  The pair is at a critical crossroad and no estimations are safe.

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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