London 28/09/2022

The US dollar continues rising for one more week and it is moving higher and higher as the USD Index is currently above 114 which is its highest price since June of 2002. On a monthly basis, the dollar’s rise is one of the biggest in recent years. Since the major target for the Fed is the taming of high inflation, there is an aggressive policy of hiking interest rates along with monetary policy tightening. The USA has more room to apply such aggressive behavior because the macroeconomic outlook allows it. Yesterday, the durable goods orders were announced better than the markets expected and the same thing happened with the new home sales.
In Europe, Christine Lagarde reiterated that high inflation remains the number one problem for the ECB and more interest rate hikes will take place shortly. The point is that there’s already a divergence in the interest rates between Fed and ECB that makes the dollar more attractive. Another major reason that strengthens the greenback is the negative investing sentiment amongst the markets that pushes flow to safer options rather than risky currencies.
Important is the news from the UK as well. After the mini-budget that the government announced last week, today the Bank of England announced that it will carry out temporary purchases of long-dated UK government bonds. The volatility of the sterling is extremely high, driven by these events.
Most of the stock indices keep on dropping this week as well. There are losses for gold as well but a commodity that manages to perform mild profits so far. Finally, today the US 10-year bond yield touched the value of 4% for the first time in the last 10.5 years.
EURUSD (current price at 0.9589) is bearish this week, following the huge drop of the previous week but it starts showing some signs of recovery. The energy problem becomes deeper and deeper after the sabotage (as it seems) of the Nord Stream 1 pipeline. In such a risk-off mood environment, investors prefer the dollar instead of the euro. Eurozone countries keep on having negative economic results: the consumer confidence in both Germany and France was announced much below markets’ estimations and the speeches of Christine Lagarde this week do not seem able to change the sentiment. The price of 0.95 is the next major support for EURUSD which may apply some bullish reactions periodically, based on its oversold conditions but it takes two things before it starts reversing the trend: either good news from the Ukrainian war or a more loose stance from the Fed.

GBPUSD (current price at 1.0635) performed earlier this week at its all-time lower price at 1.0337. The previous lowest price took place back in 1985 and it was more than 200 pips higher than the current low. The mini-budget that was announced last week, which is a fiscal event that will cut the basic rate of income tax, gave a strong downtrend push to the sterling. The GBPUSD was already weak due to the divergence between the Fed and the Bank of England and due to the negative outlook of the UK economy, regarding the growth and the high inflation. Today another news was released that kept the volatility incredibly high. The Bank of England announced that it will start buying long-dated UK government bonds to stabilize the prices as the bond yields climbed to very high rates. No safe estimation can be expressed in such extreme conditions. The trend remains bearish but the volatility is ultra-high.

USDJPY (current price at 144.27) is mildly bullish this week, helped by the strength of the dollar but mainly by the rising bond yields. The Japanese government intervention last week did not change the trend of the USDJPY which is ready to meet the resistance of 145 and the multi-decade high price at 145.90. Haruhiko Kuroda, head of the Bank of Japan mentioned this week that the Japanese Ministry of Finance’s intervention in the foreign exchange market was the right thing to do. Furthermore, after the Bank of Japan’s monetary policy minutes were released, we learned that the bank plans an unscheduled bond buying operation. This fact makes the yen even weaker. The trend remains bullish.

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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