Another volatile week comes to an end with many developments in the financial markets. During the last three days, we saw a mild correction to the US dollar’s strength that has dominated the other currencies for many months. There is no fundamental reason for this correction because the major stock indices in the United States remain bearish. Most likely, the correction of the bond yields is the major reason for the dollar’s drop. On Wednesday, the US 10-year bond yield had climbed above 4% but now it is moving around 3.70%.
As the inflation in September was announced earlier today in the Eurozone at 10% (vs expectations of 9.7% and vs 9.15 in August) the central banks are aligned that the most critical issue that needs to be resolved is the high inflationary rates. Both Jerome Powell (Fed) and Christine Lagarde (ECB) reiterated that the aggressive interest rate hike will carry on during the upcoming banks’ meetings. The US macroeconomic results, which are far better than the European ones, allow the Fed to be more aggressive so there’s an interest rate divergence between the two economies.
Most of the commodities like gold and oil recovered this week based on the dollar’s strength and the European stock markets kept their trip to the deep red.
EURUSD (current price at 0.9748) has recovered from the weekly low price of 0.9535 which was also the lowest price of the last 20.5 years. Tensions between most of the European countries and Russia continue and things are getting worse after the suspected sabotage of the Nord Stream 1 pipeline. President Putin annexes four south-eastern Ukrainian regions and as he said, Russia will defend these territories ‘with all the means’, following the referendums. Inflation remains at very high levels and some good or neutral results that were released in the Eurozone & Germany, which come from the 2nd quarter of 2022 do not reflect the current situation. However, the euro and most of the high-risk currencies perform a recovery that is based mostly on technical rather than fundamental reasons. All these currencies are under oversold conditions lately, having broken multi-decade record prices. Above 0.9865 the EURUSD has a good chance to reach parity again but any bearish turn below 0.9635 could mean a new multi-decade low price.
GBPUSD (current price at 1.1064) performs an impressive recovery from its all-time lowest price that took place on Monday, at 1.0337. The sterling has been struck by several factors lately. The bad shape of the UK economy, the risk-off mood, the mini-budget announced by the government (tax rate cut & new fiscal stimulus package), and the Bank of England’s intervention in the markets through a bond-buying program. However, the sterling reacted to a 700-800 pips recovery from the all-time low price as many investors evaluated the extremely low prices as an opportunity. The UK GDP for the second quarter of 2022, rose unexpectedly by 0.2% while the markets had a consensus for a negative figure but the sterling is getting weaker during the last hours and this fact confirms that the dollar will take over the pair’s behavior. The highest price of the current week at 1.1235 is the next resistance for the GBPUSD while below 1.10 the bears may return.
USDJPY (current price at 144.57) is slightly bullish this week with significantly lower volatility, compared to the previous weeks. The dollar and the bond yields had a rise and a fall this week, keeping the pair in a quiet mode. It also seems that the resistance of 145 is a hard price zone for the USDJPY to surpass easily. Earlier today, Japan announced positive macroeconomic results in August, regarding the unemployment rate, retail sales, and industrial production but the yen could not benefit. On Tuesday, the Bank of Japan monetary policy meeting minutes were released and the ultra-loose monetary policy and the negative interest rates will carry on, even if the BoJ agrees with the latest government monetary interventions. Above 145, we may see an uptrend acceleration.
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