Inflation in the United States, based on last Thursday’s announcement, seems to have entered a phase of de-escalation. In September it was announced at 8.2% while for October markets expected 8% inflation. The 7.7% that was announced was a mini surprise that greatly changed the psychology of the markets and their perception of the next moves of the Fed. We should note here that the interest rate policy of central banks in recent times has been the most important factor affecting international financial markets. If inflation continues to decline in the United States, there is a high probability that the U.S. central bank will make smaller rate hikes in the near future than originally estimated. Already the probability of an increase of just 0.50% in December has exceeded 80%, while it is estimated that at the beginning of 2023, the increase will be only 0.25% each time. We need to remind also that there have been four increases in interest rates of 0.75% each.
The result of the announcement was a strong uptrend in equity markets and most commodities markets. In contrast, the US dollar suffered heavy losses while strong gains were recorded by currencies such as the euro and sterling. Big was the de-escalation in bond yields, with the U.S. 10-year closing the week well below 4%, at 3.81%. The news of inflation was so significant that it overshadowed all other economic announcements and events in the rest of the world. Other economies such as the Eurozone and the United Kingdom had important announcements, as we will see below, but they did not greatly affect the reactions of the markets.
In addition to purely economic developments, we also had developments in the geopolitical/ geostrategic landscape. The midterm elections in the United States, and the withdrawal of Russian troops from Kherson, were the most important of them. While investment sentiment turned positive for most markets, the cryptocurrency market did not follow and the main cause was developments in the big FTX exchange, as we will see below.
In the week that has just begun, the important announcements are in the Eurozone economy. The announcements on GDP and inflation stand out, while the speeches of the head of the ECB Christine Lagarde will be of particular importance this week. In the United States, the announcement of the retail sale is the most important announcement of the week. In the UK, announcements of inflation, unemployment, and retail sales stand out, and in the rest of the world, retail sales in China and inflation in Canada. In addition to the purely economic announcements, the markets have their eyes on the G20 and the upcoming meeting of Joe Biden with Chinese leader Xi Jinping, in a relatively heavy climate, but without excluding an open channel of communication between the two superpowers, in order to see their issues mainly in Southeast Asia.
The US SP500 index closed with strong upward trends last week, at 3,999 points and gains of more than 6%. The index managed to reach 4,000 points for the first time in about two months and the main cause is the creation of a positive climate after the inflation announced in the US. Inflation for the first time seems to be falling at a higher rate than market estimates, and this makes markets believe that the Fed will have a softer stance on its next interest rate decisions. The week had started upward but on Wednesday we saw a significant correction that was mainly due to external factors from equity markets: the issue with FTX and possible dominoes, or the disruption it can cause, hit the markets as a whole. In addition to financial announcements and speeches by bankers about the Fed’s next moves, important will be the outcome of the Biden – Xi talks, on the sidelines of the G20 meeting. In case of consolidation above 4,000 points, the next target based on the optimistic scenario is the area of 4,175 points, which is the highest point that the index had reached in mid-September before the big correction began. Below 3,920 points the gloom will gradually begin to return. We may try long positions this week.
The German DAX40 index moved up sharply last week, closing at 14,327 points, with gains like 6%. Europe and Germany were buoyed by positive sentiment in the markets from Thursday onwards, due to reduced inflation in the US. The expectations and hopes of the markets are that eventually there will not be such a tight monetary policy and that the recession will eventually be limited in duration and intensity. On last week’s economic news, inflation in Germany continues to climb: 11.6% in October (harmonized index of consumer prices) but the unexpected recovery in industrial production in September had eased the heavy climate since the beginning of the week. If the index consolidates to levels above 14,350 points, it may even be optimistic about 15,000 in due course but below 14,000 points we will experience negative sentiment again. We may try long positions this week.
The British FTSE100 index remained unchanged last week, closing at 7,342 points, having a marginal change compared to the previous week. The index on Thursday followed the path of most of the world’s main indexes, rising significantly but on Friday it performed losses, retreating from highs of 7,435 points and being unable to hold the levels of 7,400 points. The strengthening of sterling, which continued on Friday, did not help the index to continue rising as statements from the Bank of England spoke of a continued aggressive policy of raising interest rates in the near future. GDP in the United Kingdom, along with industrial production, manufacturing, and trade balance, had generally positive results, giving breaths of optimism about the course of the British economy. If the FTSE100 manages to exceed 7,500 points then a significant uptrend will have developed. Obviously, the issues in the UK have not yet been resolved so the index is still vulnerable to corrections, especially if it approaches 7,000 points but we prefer long positions this week as well.
Gold was strongly bullish last week, with a close at $1,774 and gains exceeding 5%. The weak dollar was instrumental in this big upward move for gold. Inflation, which seems to be de-escalating in the US, gave rise to the stock and commodity markets, with gold being among the most gainers after having one of the biggest weekly rises in several months. Caution is needed, however, because the inflationary risks have not been eliminated, nor the possibility of a recession in the global economy that if it happens will hit commodities such as gold. Markets believe that the Fed’s cycle of big interest rate increases is over and that the next decisions (starting in December) will have smaller increases than the 0.75% we’ve seen four times in a row. The eyes of many investors have also turned to the Biden-Xi meeting, within the G20. $1,825 is the next target for those who expect the rise to continue as it is the highest price we have seen since June. A shift below $1,735 may reverse the positive sentiment. We may try short positions this week.
Last week’s oil futures closed at $88.84, with losses exceeding 4%. The weekly losses would have been clearly greater but the upward reaction of Thursday and especially Friday, from week lows at $84.70 made the prices recover. The factors that have been dropping prices lately are fears of an impending recession and lockdowns in China. These are two factors that, if confirmed in duration and intensity, are expected to hit oil demand. OPEC’s decision to cut production since early November has not raised prices as much as it could because of concerns about declining demand. It is obvious, however, that if the price is well above $90, an upward channel will begin to develop that will further strengthen above $93.75. If recession concerns prevail, prices may take a downward turn to $85. We prefer long positions this week.
EURUSD (Euro vs US Dollar)
Strongly bullish was last week for EURUSD which opened at 0.9903 and closed at 1.0352. It was certainly one of the biggest weekly rises in recent years. The most decisive factor was the announcement of inflation in the US which caused a large weakening of the dollar. Perhaps the markets had anticipated such a development because the exchange rate had been strengthening since the beginning of the week. Reduced inflation brings to the fore the scenario of changing the aggressive stance of the Fed, about the next rate hikes. In contrast, in the Eurozone, according to Lagarde’s statements, new interest rate increases are expected as inflation persists in double digits. Retail sales in the Eurozone were in negative territory, but much better than market estimates. Also, the forecasts/projections made during the week for the course of the European economy indicate a slight recession in 2023 but a return to growth in 2024. The announcement of inflation and GDP in the Eurozone this week will give us more information on the state of the European economy. If the dollar continues to weaken, the exchange rate may exceed 1.05 and head toward the resistance of 1.0780. In the opposite case, a downward turn to 1.01 is not excluded. We may try buy positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Strongly bullish was the last week for GBPUSD, as it opened at 1.1306 and closed at 1.1828. Of course, the weakening of the U.S. dollar had a dominant role in this strong upward reaction. However, sterling also had a strong image, mainly based on two reasons. The first reason has to do with statements by central bankers about new imminent interest rate hikes by the Bank of England. The inflation announced for the UK this week will be key in this regard. Secondly, the UK showed a strong macroeconomic picture, based on the results published last week. All this, combined with the political stability observed in recent weeks after some previous government setbacks, gave the British currency a strong upward boost. If this picture continues, the exchange rate will fight to overcome the milestone price at 1.20, while if the rise is stronger, the next resistance may be threatened near 1.23. We prefer buy positions this week.
USDJPY (US Dollar – Japanese Yen)
The previous week was sharply bearish for the USDJPY, opening at 147.13 and closing at 138.71. The most important factors in this huge downward move were the super weakness of the US dollar after the announcement of inflation in the United States and the big de-escalation of bond yields, with the US 10-year bond yield falling well below 4%. These factors outweighed the weakness of the yen, which continues to be under pressure as all conditions and reports indicate that the Bank of Japan will continue its loose monetary policy and negative interest rates. There are rumors that the Japanese government will intervene in the foreign exchange market as it has already done twice lately, but it is uncertain whether this makes any sense anymore, since the fall in the exchange rate is already very large. A continued weakening of the dollar could lead the USDJPY to several lower levels since there is no apparent support in the surrounding area. But it will certainly take an upward reaction above 140 to reverse the climate. We prefer buy positions this week.
EURJPY (Euro – Japanese Yen)
Last week was bearish for EURJPY which opened at 145.66 and closed at 143.65. The Japanese currency was one of the big winners of the inflation announcement in the United States because the inflation effect caused a big drop in bond yields, primarily American but also European such as the German ones. In Europe, new interest rate increases are expected, while in Japan the situation of loose monetary policy continues. But if the same picture in the U.S. and inflation continues and bond yields de-escalate further, we may see the exchange rate shift to the 140-price range. We may try buy positions this week.
EURGBP (Euro – Great Britain Pound)
Practically unchanged was the last week for EURGBP which opened and closed around 0.8740-0.8750. Stabilizing trends prevailed throughout the week, with alternating upward and downward movements. The fact is that both currencies (euro and sterling) came out stronger after the announcement of inflation in the United States which greatly weakened the dollar and strengthened higher-risk currencies such as the European and British. The positive macroeconomic results for the United Kingdom, combined with statements by Bank of England executives about new interest rate increases, give a greater share of probability in the downward scenario for the exchange rate. The price range of 0.8570-0.8580 is the next support (a low price of about two months) and thus the obvious target of sellers so we may try sell positions this week.
USDCAD (US Dollar – Canadian Dollar)
Last week was strongly bearish for USDCAD, which opened at 1.3524 and closed at 1.3250. It was one of the most bearish weeks in recent months for the exchange rate, mainly due to the large drop in the US dollar following the announcement of inflation in the US. From Thursday onwards, rising oil prices also helped strengthen the Canadian dollar and thus further pressure on the USDCAD. Canada’s economy had no economic announcements last week, but Bank of Canada chief Tiff Macklem’s interview on CNBC gave the country’s dollar an extra boost. Tiff Macklem said new interest rate hikes were expected, even though six more have already taken place this year. The pair has come very close to the 1.30 zone which is considered particularly critical and it is not excluded that it will approach it if the same conditions continue. Should the U.S. currency recover, we may see upward reactions. We may try buy positions this week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had a very strong downward course last week since the opening price was at 0.9978 and the closing price was at 0.9412. It was certainly one of the sharpest downward changes in recent years, on a weekly level. Unlike most exchange rates that contain the US dollar and that reacted after the announcement of inflation in the US, the USDCHDF has had obvious downward trends since the beginning of the week. The reason for this was the speech of the head of the Swiss bank Thomas Jordan who said that monetary policy decisions do not depend only on the course of inflation. Inflation in Switzerland has begun to shrink, so most analysts thought there was no need for new rate hikes. This picture changed after the statements of Thomas Jordan. It also looks like the labor market is stabilizing in the country, with inflation announced to steady at 2.1% in October. Given the importance of support at 0.9370 where it is and the lowest price for the last seven months or so, the downtrend could continue even to 0.90. It takes a strong recovery of the dollar and a reset of the rate above 0.95 to change this picture. We prefer buy positions this week.
AUDUSD (Australian Dollar – US Dollar)
Bullish was the last week for AUDUSD, which opened at 0.6416 and closed at 0.6703. It is not just the weakening of the US dollar that has led to this explosive rise in the exchange rate. The large increase in commodity prices, especially metals, has helped significantly strengthen the Australian dollar, which is closely linked to these markets. Positive news has also come from China and its economy. The economies of China and Australia are closely dependent on each other. In China, the lockdowns are significantly reduced and the country is returning to its normal activity. A significant development was the large de-escalation of inflation in China, which fell to 2.1% in October from 2.8% the previous month. A continuation of the same picture and the current week could theoretically lead AUDUSD to higher prices, perhaps to 0.70. The pair was there in the middle of last summer. We may try buy positions this week.
Last week, Bitcoin closed at $16,310 with losses exceeding 22%. Cryptocurrency markets are being hit hard by the FTX issue. FTX was the largest exchange in the world, by volume of transactions and in addition to the official bankruptcy application in the US Bankruptcy Code, it is under review for several issues. More specifically, there are statements about a transfer of several billion dollars from the exchange to the company Alameda Research, owned by FTX owner Sam-Bankman Fried. Also in the last hours, there are rumors about new losses of funds by hackers, several hundred million dollars. The attempt to rescue FTX through Binance failed almost in the beginning, while a possible attempt from Justin Sun from Tron is also unlikely because it is doubtful whether there is a financial capacity for this. In general, in the field of cryptocurrencies, there are not many companies or schemes with a large financial potential for such a venture. So, cryptocurrency investors are plunged into negative sentiment, with many institutional investors who were positioned, returning to traditional markets. The downward scenario could continue if there is no serious change in the climate so we prefer short positions this week.
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