London 11/11/2022
The major event of the current week was supposed to be the US inflation announcement in October. This conjecture came true as the result of the announcement changed drastically the mood of the financial markets. The inflation was announced at 7.7%, importantly lower than the 8.2% of the previous month and significantly lower than the 8.0% that the markets forecasted. Markets reacted immediately with a strong uptrend on the major stock indices, important profit in the majority of commodities like gold, and a strong sell-off of the US dollar. Markets anticipated that the de-escalating inflation will drive the Fed to calmer interest rate hikes in the following decisions. The probability for a 0.50% hike (vs 0.75% that was decided in the last 5 FOMC sessions) is now more than 80% while the most likely scenarios for February and March are for 0.25% hikes. This scenario slows down the concerns about a super tight monetary policy and that is why the markets react in a positive mood.
Given the severity of the news in the USA and the fact that the US economy affects other economies, we saw some other interesting developments this week. China’s National Health Commission announced the decision to reduce the required quarantine periods and this was another positive news for the markets. In Kherson, the withdrawal of the Russian armies was completed and the war in Ukraine is entering a new phase.
As a complete review of the week that comes to an end, we would underline the strong profits in the stock & commodity markets, the US dollar sell-off along with the bullish trend of the other currencies such as the Euro, the Sterling, and the Aussie and the big drop of the bond yields. The US 10-year bond yield opened the week at 4.15% and it is currently at 3.81%.
EURUSD (current price at 1.0307) is in one of the strongest upward rallies in the last months. Needless to say that the primary reason for that is the weakness of the dollar, as we mentioned above. Euro is one of the major winners of the week not only due to the weak dollar but due to the quarterly publication from the European Commission with projections regarding the GDP in the Eurozone. According to these projections, the GDP will grow to 3.2% in 2022, slow down to 0.3% in 2023 and accelerate to 1.5% in 2024. Positive projections were also announced about the inflation and the unemployment rate and this forecast is distanced far from the bad recession scenario that many analysts were predicting. Above 1.0370, the pair can make it up to 1.05 without any important resistances in between.
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GBPUSD (current price at 1.1787) is strongly bullish this week, having performed about 500 pips, compared with the weekly open price. Indeed the US dollar sell-off helps a lot to the pair’s recovery but the Sterling also has reasons to be bullish. The head of the Bank of England Andrew Bailey said today that more increases to interest rates are likely in the coming months. A hawkish stance from the BoE along with a slowdown in the Fed’s monetary policy will extra help the pair to its bullish course. Also today, more macroeconomic results were released in the UK: GDP, Manufacturing & Industrial production were all above markets’ consensus so there are hopes that the upcoming recession may be easier. If the same conditions remain, the pair can approach the price zone of 1.20.
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USDJPY (current price at 139.36) ends the week with the most bearish performance of the last 2.5 years. The mood of the markets has changed dramatically after the US inflation announcement and the big drop in the bond yields pushes the pair even lower. It’s impressive how the pair opened the week from above 147 and now it is well below 140 which is a milestone price. All these, without any hint so far that the Bank of Japan will change its ultra-loose monetary policy and negative interest rates. There’s no obvious support for the pair until the price area of 130.
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