17/07/2023

General Comment

The financial markets had a significant rise last week, mainly due to the announcement of inflation in the United States. More specifically, on Wednesday the inflation for June was announced at 3% against 3.1% predicted by the markets. The previous month’s inflation had again decelerated impressively from 4.9% to 4%. So overall within two months, we had a reduction in inflation from 4.9% to 3%, i.e., of the order of 1.9%. This news shot up the markets worldwide and especially the stock markets. The stock indices in the United States were found at high prices for several months while the European markets also aligned with impressive profits as we will see in detail below. On Thursday another indicator of inflation in the United States was announced, the producer price index at 2.4% Against the 2.6% expected by the markets and 2.8% last month. Thus, the markets’ belief in a rapid de-escalation of inflation was confirmed.

The rapid decline in inflation strengthened the markets against the sentiment of the last weeks and the statements of central bankers in the US that new interest rate hikes are imminent within the next period. The statements continued last week from key Fed officials such as Christopher Waller and Mary Daly. But it seems that the positive atmosphere was not affected, and the rally continued without interruption.

In Europe, things are quite different. Inflation continues to be at particularly high levels, with Germany as a prime example where the inflation was announced last week at 6.8% (harmonized index of consumer prices). Based on the ECB monetary policy meeting accounts, the European Central Bank intends to continue aggressively to address the problem of high inflation.

All the above developments have resulted in the great drop of the US dollar and the corresponding strengthening of other currencies such as the euro and sterling, as their central banks are expected to continue aggressively with interest rate increases. The commodity market also strengthened with commodities such as gold and oil making significant gains. As for the bond market, there was a significant drop with the American 10-year bond yield closing the week well below 4%, at 3.83%. However, the cryptocurrency market could not benefit from the generally positive sentiment, and the week ended without significant changes.

 Based on the positive climate that formed, we enter the new week, which started with the announcements about China a few hours ago. The Chinese economy grew by 6.3% in the 2nd quarter of the current year, higher than the 4.5% growth in the 1st quarter, but lower than the market consensus of 7.3%. Retail sales in the United States and the announcement of inflation in the Eurozone dominate, while the announcements for the United Kingdom (inflation and retail sales) are also considered important.

SP500

With strong bullish trends, the US SP500 index closed last week, at 4,505 points and profits of 2.40%. The announcement of the US inflation (3% in June vs 3.1% expected and 4% in the previous month) was the most catalytic factor of this uptrend. The week started with bullish trends although there were statements from Fed officials that the interest rate hikes will carry on. The inflation announcement on Wednesday came on top and boosted the uptrend even more. There were two more pieces of news though that helped the trend: the producer price index on Thursday which was also announced below expectations and the Michigan consumer sentiment index on Friday which was announced at 72.6, well above the markets’ estimations of 65.5. With all the above, the SP500 climbed to its highest price since April 2022 and it faces the new resistance at 4,637 points. The most important US economic data of the current week are the retail sales and initial jobless claims but it makes sense to see some corrective trends after such a sharp rise. We may try sell positions this week.

DAX30

The German DAX40 index was heavily bullish last week, closing at 16,105 points, with profits a bit more than 3.20%. Although there were bullish trends from the beginning of the week, the real boost came from the US inflation announcement on Wednesday which seems to help the uptrend of all major indices worldwide. Economic data from Eurozone & Germany point to new interest rate hikes from ECB and this would bring corrective pressures to the European stock indices. German inflation was announced at 6.8%, more than double the US inflation which means that the issue is still hot and requires more actions of high interest rates and tight monetary policy. The conclusion is that the positive news from the US economy reflects globally and affects positively Europe, even if there’s no fundamental reason in Europe itself. We will know more regarding the European economy after the announcements of the consumer price index in the Eurozone and producer price index in Germany but we prefer short positions this week, especially if the DAX40 drops below 16,000 points.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,435 points, dropping about 2.45%. The FTSE100 had a strong bullish reaction as it is in a downtrend during the last months, mostly helped by the positive news regarding the US inflation. Inflation in the UK remains at extremely high levels and according to the market’s expectations, it is going to be announced this week above 8%. As a result of this, the Bank of England is expected to continue the aggressive actions of hiking interest rates and tightening the monetary policy. On Monday, the head of the BoE Andrew Bailey said that inflation is unacceptably high, far from their 2% target, but he also underlined that he expects a high deceleration within the current year. In any case, he sounded hawkish but the FTSE100 was based more on the US news rather than the local developments. The downtrend has not changed so far so we’re keen to try short positions this week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $1,959.5 and profits close to 1.50%. The prevailing factor of this movement was the weakening of the US dollar after the announcement of inflation in the USA from 4% in May to 3% in June. The low inflation changes the perception of the markets regarding the Fed’s next actions although all the statements from top officials are aligned that two more interest rate hikes should be expected. The probability of a 0.25% hike at the end of the July session is very high but markets are optimistic that we’re very close to the end of the interest rate hikes cycle. Technically speaking, the next support to a possible downtrend in gold prices is at $1,900 and we’re keen to go after it with short positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $75.25, with profits exceeding 2.15%. It was the third bullish week in a row as a result of the markets’ perception regarding the oil demand. Markets believe that the reasonable result of the dropping inflation (mostly in the USA) will be the ending of the interest rate hikes cycle. Lower interest rates would hurt the global growth less and so the demand will be higher. OPEC has revised the projections of oil demand in 2024 by 2%. There are some other reasons as well that have to do with the supply. In Libya, there was a shutdown of several oil fields due to political conflicts that could result potentially in 250K barrels per day. Already, some oilfields partially resumed after ex-official who was kidnapped was released. These developments are temporary and if the production returns to its normal levels we may see a price correction after a bullish movement of 9.30% in total, during the last three weeks so we may try short positions this week.

EURUSD (Euro vs US Dollar)
Last week was impressively bullish for EURUSD as it opened at 1.0959 and closed at 1.1225. The exchange rate rocketed from Wednesday on the announcement of inflation in the United States which fell to 3% for June and is now quite close to the Fed’s target of 2%. These developments have overshadowed the impending new rate hikes from the Fed. The probability of a 0.25% hike at the end of the month from the Fed now stands at 93% but that doesn’t seem to be deterring markets. By contrast in Europe, inflation is more than double that of the United States in countries such as Germany. Based on this situation and statements from the European Central Bank, new interest rate hikes should be taken for granted. That’s not all though, the avoidance of a global recession has boosted investing sentiment and is sending a lot of investors to higher-risk currencies like the euro. The important announcements of the current week are Eurozone inflation and US retail sales and in the continuation of the upward trend, there is the important resistance at 1.1495. But it is possible to see corrective trends due to the sharp rise and so we will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2827 and closed at 1.3092. The combination of the weakening of the US dollar due to the rapid deceleration of inflation and the strengthening of sterling due to the insisting inflation in the UK resulted in the breakdown of two important resistances for the pair: the first resistance was the multi-month high at 1.2850 and the second resistance when the psychological limit of 1.30. Low inflation in the US weakens the dollar even if there are clear statements from the Fed that the increase in interest rates is not going to stop. Inflation in the United Kingdom remains at particularly high levels and is expected to be announced later in the week with markets estimating a slight deceleration to 8.2% but still very high. However, the high interest rates have already started to show their effects on the UK economy with the unemployment rate rising last month to 4%, from 3.8%. GBPUSD is at its highest price since April 2022 and the economic announcements in the US and the UK could send it back below 1.30, as a corrective move to the very big rise and so we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved heavily downward last week, opening at 142.10 and closing at 138.79. Last week there were no significant economic announcements or statements regarding the Japanese economy, so this significant drop is attributed to the weakening of the US dollar and the fall in bond yields. A catalytic role in these factors was the large drop in inflation in the United States which removes the possibility of tough measures from the Fed even if there are certain statements from many executives that the increase in interest rates will continue for at least two more times. Japan’s Inflation announcement next Friday has some role in currency formation but the drop for USDJPY in the last two weeks touched 600 pips therefore we expect a bullish reaction, and this is what we will support by picking buy positions this week.

EURJPY (Euro – Japanese Yen)
Consolidative was last week for EURJPY which opened and closed around 155.80 without significant change. The week for the exchange rate is divided into two: in the first half there were bearish trends while in the second half, there was a recovery, so the weekly result was practically neutral. The euro and yen strengthened recently, each for their own reasons. The euro boosters based on new interest rate increases expected from the European Central Bank given that the problem of inflation in the Eurozone persists. Japan’s currency on the other hand is strengthening because many voices are arguing that the very loose monetary policy that Japan has been adjusting to for many years cannot continue forever. We may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8534 and closed at 0.8570. During this period, currencies such as the euro and sterling are strengthened because the risk appetite has increased and currencies that are far from investment security are in second place. In addition, the central banks of the two economies, the Bank of England, and the European Central Bank are expected to raise interest rates in the next period on the basis of persistently high inflation. But technically speaking, it seems that the price range of 0.85 is low for the pair and every time it is approached, there are bullish reactions. This happened last week as well, but it does not change the fact that sterling has more chances of strengthening than the euro because the inflation problem in the United Kingdom is more severe. So, we will choose sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, which opened at 1.3266 and closed at 1.3214. It is a fact that the drop for USDCAD was quite less compared to other currencies containing the US dollar. The dollar of Canada had important reasons to strengthen as the Bank of Canada raised interest rates last Wednesday by 0.25%, from 4.75% to 5%. In the press conference that followed, the head of the Bank, Tiff Macklem, said that he expects inflation to be around 3% within the year, and then the de-escalation towards the 2% target will take place slowly. All this, in relation to the weakness of the US dollar, should result in the exchange rate sinking even towards the 1.30 area. However, just below 1.31, there were visible bullish reactions that appeared on Friday and after, because of which they moderated the weekly decline for USDCAD. The US dollar found support in this price range and the Michigan consumer confidence index result helped this situation but considering the Canadian dollar has room for further growth we may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a strong downward course last week as the opening price was at 0.8972 and the closing price was at 0.8620. The decline for the pair was big after the important support at 0.8757 was broken and the price found itself at the levels of January 2015. In January 2015 an important event happened for the Swiss franc. The Swiss National Bank had promised to defend the strengthening of Switzerland’s currency against the euro. They did not allow the Swiss Franc to drop below 1.20. The SNB declared on January 12th, 2015, that it would keep its promise. However, three days later, the SNB announced the end of the EURCHF peg. It had the result in an extreme strengthening of the CHF against all currencies including the USD and the USDCHF dropped by 25%, up to 0.8236. After so many years we found the currency pair in this price area again. It makes sense therefore to have bullish reactions and so we will select buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6679 and closed at 0.6873. The US dollar may have fallen quite a bit due to the very low inflation announced in the US, but the Australian dollar also strengthened significantly. The head of the Bank of Australia Philip Lowe said that he is “deadly serious about getting inflation back to target” and he stressed that the increase in interest rates brings results. These statements were interpreted as hawkish behavior of the RBA and the country’s currency strengthened. An obstacle to a further rise however is China and the results that they announce lately. China’s inflation was announced last Monday at 0% which may mean slowing growth. Also below expectations were Chinese exports, exports, and trade balance. A bullish reaction of the dollar can bring local passes for the exchange rate and therefore we will choose buy positions this week.

Bitcoin

Last week, Bitcoin was slightly bullish and closed at $30,253 with profits close to 0.30%. The cryptocurrencies had a mild uptrend, unable to follow the positive sentiment of the traditional markets. An exception to this was Ripple (XRP) which performed impressively after Ripple Labs’ big win against the U.S. Securities and Exchange Commission (SEC). The federal court in the Southern District of New York ruled in favor of the company, striking down the SEC’s claim that the XRP cryptocurrency is a security. A few hours ago, there was another positive news for the crypto world as the SEC has accepted asset manager BlackRock’s application for a spot Bitcoin exchange-traded fund (ETF). It was a positive step for the first spot ETF of Bitcoin. Nevertheless, Bitcoin cannot escape from the price zone of $30K which means that if the fresh news fades out, we may see corrections in Bitcoin’s price and therefore we may try short positions this week, especially below the support of the $30K.

IMPORTANT DISCLAIMER

The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.

a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.