London 26/10/2022
The US dollar in the current week has had one of the most bearish weeks during the last months, so far. It’s a combination of the downtrend continuation of last Friday with the disappointing data that the US economy released. Last Friday, the WSJ article, followed by some Fed officials’ statements, created the sense that the Fed after the next interest rate hike on Nov, 2 (most likely a 0.75% hike) will stop its aggressive hikes. In case this chance comes true, the interest rates during 2023 will not be as high as the market estimated. Regarding the economic news in the USA, the PMIs were well below 50 and below markets’ estimations, and the housing price index was announced at -0.7% in August and this is an indication of inflation de-escalation.
In Europe, all eyes are turned to the interest rates decision tomorrow by the European Central Bank. The market consensus is that the ECB will raise the interest rates by 0.75% as the inflationary pressures are still very strong. This expected development, along with the 2022 Q3 GDP announcement in the United States (also tomorrow) are the major announcements of the week. The interest rates decisions from the Bank of Canada (later today) and the Bank of Japan (on Friday) as well as the inflation announcement in Germany on Friday are also important.
Stock indices are bullish this week and so are the major commodities such as gold and oil. Finally, the bond yields continue to drop and the US 10-year bond yield has approached the area of 4%.
EURUSD (current price at 1.0005) is bullish this week, following the mini-uptrend that has developed since last Friday and the weakness of the dollar. If finally, the Fed will stop being so aggressive with continuous 0.75% interest rate hikes and at the same time, the ECB will raise the interest rates tomorrow, the divergence of the rates between the two central banks will be reduced. This divergence was the main reason that the EURUSD dropped to a multi-decade low price. Europe still cannot agree to a possible cap on energy prices and the big drop in the TTF should be addressed more in the unexpectedly high temperatures in Europe and not for some fundamental reasons. Above 1.02 the uptrend may stabilize even more.
GBPUSD (current price at 1.1547) is very bullish this week and it has managed to surpass the milestone price of 1.15. The new government of Rishi Sunak gave an end to the uncertainty and to the political crisis that hurt the UK in the last period. Of course, one major factor is the current weakness of the dollar but the GBPUSD outperforms the other major USD currency pairs. Regarding the macros in the UK, the only important release was the PMI indicators on Monday which were all below markets’ expectations. All eyes are on the US GDP announcement tomorrow and the Fed’s interest rates decision next week but in case the dollar’s weakness carries on, the pair may exceed the next resistance at 1.1730, opening the road to 1.20.
USDJPY (current price at 147.24) is bearish this week although it has managed to limit its losses since last Friday when a huge fall led it to the price area of 145.50. The latest intervention by the Bank of Japan in the currency market has helped the yen to recover partially, even though all the clues converge that the Bank of Japan will continue the ultra-loose monetary policy. Needless to say that the recent weakness of the dollar and the bond yields decrease were the main reasons that the USDJPY has lost 500 pips in the last 5 days. Below 145, a strong downtrend will start to appear.
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