London 25/11/2022

Low volatility is the main feature of the current week for most of the currency pairs and other relative financial markets. Thanksgiving day in the USA is a good reason for that and also the lack of important macroeconomic announcements does not give extra fuel to move the markets. Without any doubt, the main event of the week was the Fed minutes release on Wednesday. The meeting minutes through official data from the Fed concluded that we should wait for smaller interest rate increases in the next decision sessions. According to the CME FedWatch tool, the most likely scenario for December’s decision is a 0.50% interest rate hike instead of the four consecutive hikes of 0.75% that we have seen until now. This piece of information encouraged the markets to develop a bullish trend as there is a stronger anticipation that this less hawkish stance of the Fed may cause avoidance of the bad recession scenario or at least the recession could be soft.
Europe has also had a profitable stock indices week, as a part of general optimism, although the relationship between the EU and Russia is getting worse. Ursula von der Leyen (president of the Commission) announced immediate plans for a new sanctions package on Russia. Also in China, the situation with the COVID cases does not seem to come to an end soon as the country announces high numbers of cases and the lockdowns most likely will carry on.
As a result of all the above, this week we noticed a weakening of the US dollar with a corresponding strengthening of higher-risk currencies such as the euro and the sterling.
EURUSD (current price at 1.0371) is bullish this week, mostly based on the US dollar’s weakness. The PMIs indicators for Eurozone, Germany, and France were above market expectations, and the GDP, the business climate, and the consumer confidence in Germany had also good results. Since the high inflation insists in Europe and according to many ECB official statements, including Lagarde, there’s a good chance for large interest rate hikes in the next decision sessions of the European Central Bank. If this conjecture comes true, the interest rate divergence between the Fed and the ECB will be reduced and the reasonable reaction of the EURUSD is to develop an uptrend. Technically speaking, above 1.0480 this uptrend may start shaping up.
GBPUSD (current price at 1.2061) is bullish this week, following a bullish trend of the previous weeks. The pair has managed to surpass the milestone price of 1.20 due to the weakness of the dollar and the relative strength of the sterling. It’s only the improved macro outlook of the UK economy, based on the latest announcements (on Wednesday the PMIs had a good result). It is also the statements by some Bank of England members like Dave Ramsden who talked about a further monetary tightening, depending on the economy. On the same page, Catherine Mann said that the Bank of England has communicated effectively that rates need to rise. If the pair is able to exceed 1.23 next week, the developed uptrend may be considered as strong.
USDJPY (current price at 139.34) is bearish this week as it could not follow the bullish reaction of the previous one. Although inflation keeps on rising in Japan (Tokyo Consumer Price Index was announced at 3.8% which is a multi-decade high price), the Bank of Japan does not seem to change the loose monetary policy nor to quit the negative interest rates. It means that the USDJPY cannot take advantage of the recent dollar’s weakness to develop a strong downtrend. Even the lower bond yields cannot help in this direction (the US 10-year bond yield has dropped to 3.74%). Below 137.60 the downtrend has a better chance while above 142.25 it is the uptrend that may prevail. No further solid estimations can be applied under the aforementioned circumstances.

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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