The last economic week of the year is coming to an end with significantly reduced volatility, which is quite normal since the lack of investor interest due to the festive climate and the lack of regular economic news are factors that do not support large market movements. The U.S. dollar continues its downward spiral, which has been going on for about three months when markets realized how the Fed intends to ease its aggressive policy of raising interest rates. At the same time, the euro has an upward trend as the European Central Bank is forced to make aggressive moves because inflation in the Eurozone persists in double figures.
There is a general climate of concern about the course of the economy in 2023 and the high probability of a global recession. At the heart is the ongoing war in Ukraine and the energy crisis and of course high inflation. The coronavirus pandemic has recently returned to the spotlight due to the lack of information about the situation in China. There are analyzes and journalistic reports that speak of thousands of deaths every day.
As for equity markets, stabilizing trends prevail this week, with slight corrections in US markets, small gains in European and larger gains in the UK. Gold has been on the rise this week, but the other major commodity, oil, is losing. Finally, bond yields continue their upward direction with the U.S. 10-year currently at 3.85%.
The financial news will return next week which is also the first week of the new year and there we will see how the markets will welcome 2023.
EURUSD (current price at 1.0663) is mildly bullish this week, following mostly the weakness of the dollar. Markets expect the Fed’s interest rate policy to be different in the new year compared to 2022, where we saw repeated increases of 0.75%. Already the last increase in December was 0.50% and most analyzes converge that by the summer there will have been a peak. Things are much murkier in Europe because inflation is at higher levels and because the next moves by the European Central Bank are far from clear. The fact is, however, that higher inflation in the Eurozone favors new increases in interest rates, perhaps to a greater extent than in the United States, and this is what the markets value through strengthening and raising the exchange rate. Technically speaking, the resistance at 1.0740, which is the highest price for EURUSD in the last 6.5 months or so, is the most critical price zone in a possible continuation of the rise.
GBPUSD (current price at 1.2031) is bearish this week, unable to take advantage of the dollar’s weakness. The aftermath of the Bank of England’s latest 0.50% rate rise accompanied by the revelation that two of the bank’s nine members voted against this increase still affects the sterling and consequently the exchange rate. The problems in the UK economy remain, inflation persists in double figures and the likelihood of a recession is high, especially after the announcement of the British GDP for the third quarter of 2022, which was slightly in negative territory. A possible solid loss of 1.20 may further worsen the climate and lead to a greater fall for the GBPUSD. Hopes of recovery begin to appear above 1.2150 and of course above the significant resistance of 1.2450.
USDJPY (current price at 131.87) turned bearish this week although it had a strong uptrend at the beginning of the week. The reason is the Bank of Japan which surprisingly announced several unscheduled bond-purchasing actions, buying 2-year notes at 0.04%, and 5-year debt at 0.24%. The combination of additional fixed-rate and fixed-amount purchases announced on Friday has boosted this month’s buying to about $128 billion, a monthly record, according to data compiled by Bloomberg. It was a very big support for the Japanese currency and if the pair drops below 130, a strong downtrend will have formed which could push the exchange rate to much lower levels.
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.