Important calendar events
The dollar continued gaining strength last week, with the dollar index jumping to a 20-year record of 104, before closing at 103.75 on Friday. The US dollar has been rising these past few weeks, surpassing its pandemic high of 2020, supported by hawkish Fed monetary policy. US yields also climbed last week, with the US 10-year treasury note closing above 3.1% on Friday.
Over the past few weeks, Fed rhetoric has been one of the primary drivers of USD price, as the Fed had signaled a faster pace of policy tightening in the US. The outcome of the highly-anticipated Fed meeting on Wednesday disappointed expectations, however, leading to the dollar’s decline. At the end of last week, however, the dollar rallied, as markets had time to assess the Fed policy news, but also as a strong risk-off sentiment prevailed.
The US Federal Reserve raised its benchmark interest rate by 50 base points to 1%, last week. This is the first time that the Fed has performed such a steep rate hike since 2000. A rate hike of 50 bp, however, had been fully priced in by markets and some market participants were even anticipating a 75 bp rate hike. Markets have been pricing in a total of over 225 base points of additional interest rate hikes this year, with the main Fed rate expected to rise to 2.75%.
More importantly, the ensuing Fed statement was less hawkish than anticipated, with Fed Chair Jerome Powell stating firmly that the Fed is not considering a 75 bs rate hike for the next policy meetings. The Fed’s statement thwarted market expectations, driving the dollar down.
In addition, the Fed announced on Wednesday that it would move towards a policy of gradual quantitative tightening. The Fed’s balance sheet has risen to approximately 9 trillion USD during the pandemic and many of the US Central Bank to address have decided to start trimming its balance sheet.
Continued Russian hostilities against Ukraine have increased risk-aversion sentiment these past two months, providing support for the safe-haven dollar. The situation between Russia and Ukraine continues to escalate, as Russian President Vladimir Putin makes threats about using nuclear weapons, while he cuts off the gas supply to Poland and Bulgaria.
Several financial and employment indicators are scheduled to be released for the US on Friday, including Monthly CPI and Core CPI, Monthly PPI and Core PPI, Unemployment Claims, Preliminary UoM Consumer Sentiment, and Preliminary UoM Inflation Expectations. The CPI and PPI data in particular are key inflation indicators and may have affected dollar price, as inflation rates are expected to influence the Fed's monetary policy in the coming months.
In addition, several FOMC Members are due to deliver a speech this week, which may cause some volatility for the dollar, in the wake of the latest Fed meeting.
The Euro has been under pressure by the rising dollar these past few weeks, with the EUR/USD rate trading near the 1.050 level, below a five-year low. On Wednesday however, the currency pair was catapulted to 1.063, following the Fed’s statement that saw the dollar plummet to a one-week low. The Euro paired at the end of the week, with the EUR/USD pair closing at 1.054 on Friday. If the currency pair falls even further, it may find support near the 2016 low around the 1.036 level. The outlook for the pair is still bearish as markets will have time to absorb the Fed’s announcement in the following days, but if the currency pair goes up, it may encounter resistance at 1.118.
Increased risk-aversion sentiment and hawkish Fed policy have boosted the dollar at the expense of other currencies, with the Euro suffering heavy losses these past few weeks.
The 10-year German Bund yield has risen to 1% last week, for the first time in eight years, as expectations that the ECB will need to increase rates continue to grow. Ecofin and Eurogroup meetings were also held last week, at which the direction of the Eurozone economy was discussed.
Eurozone CPI flash inflation estimates have risen by 7.5% on an annual basis, highlighting the problem of rising energy and commodity prices in the EU. Core CPI estimates rose to 3.5%, further increasing the likelihood of an ECB rate hike in July. Markets are pricing in 3 ECB rate hikes this year, of at least 25 base points each.
The ECB however, has so far been hesitant to raise its interest rates, as the Eurozone economy is still struggling to recover from the effects of the pandemic. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates. With the US Federal Reserve raising its benchmark interest rate by 50 base points last week, the difference in monetary policy between the EU and the US becomes more pronounced, driving the Euro down.
Many of the Central Bank’s members have repeatedly expressed concern about the high inflation levels in the EU and are in favor of taking immediate steps towards monetary policy normalization. ECB President Christine Lagarde is in favor of a more dovish stance, however, and has stated that Eurozone inflation is expected to rise in the following months, while economic growth is expected to stall. Even Lagarde however, has shown recent signs of wavering though, as rising inflationary pressures are forcing the ECB to act to drive inflation down.
German Buba President Joachim Nagel, who is one of the more hawkish ECB members, recently stated that he does not agree with avoiding monetary tightening in the EU. The divergence of opinions within the ECB is expected to cause some volatility in the currency leading to the next ECB policy meeting.
ECB President Christine Lagarde and German Buba President Nagel are due to deliver speeches on Wednesday, May 11th. Their speeches will be followed closely by traders and may influence the Euro.
The sterling has been under pressure for the past few weeks, falling against the dollar. The GBP/USD rate was catapulted to 1.264 on Wednesday though, following the Fed monetary policy meeting. On Thursday, the pound plummeted to new lows, following the BOE’s interest rate announcement, with the GBP/USD pair closing near 1.234 on Friday. If the GBP/USD rate goes up, it may encounter resistance at the 1.331 level and further up near the 1.341 level, while if it declines, support may be found at 1.241 and further down near the two-year low at 1.206.
The sterling has been losing ground against the dollar due to the divergence in monetary policy between the Fed and the BOE. Although the BOE started the year with a strong hawkish policy, it has recently backed down and moderated its stance, weighted down by the still fragile British economy. In contrast, the increasingly hawkish Fed policy is boosting the dollar against the pound.
The Official BOE interest rate was announced on Thursday, just a day after the Fed announced that it would raise its benchmark interest rate by 50 base points. In a widely expected move, the Bank of England raised its benchmark interest rate on Thursday by 25 base points, although three of its members voted for a more aggressive rate hike of 50 bp. The BOE had already performed three consecutive rate hikes in its previous meetings, bringing its rate to a 13-year high of 1%. The sterling plummeted after the announcement of the BOE’s baseline interest rate, as the rate hike had been fully priced in and some market participants were anticipating an even steeper rate hike. Markets have already priced in approximately six BOE rate hikes this year, but it remains to be seen whether these expectations will be fulfilled.
On Thursday, the BOE statement stressed once more the dangers of recession, as the economic contraction is battling with inflation rates that are predicted to surge to 40-year highs of 10% in the coming months. The cost of living in the UK has been increasing, driven primarily by the high cost of energy imports, putting pressure on UK households. Rising commodity prices and import costs in the UK are driving inflation rates higher, with headline inflation reaching 7% and climbing.
BOE Governor Andrew Bailey has recently stated that the BOE is walking a tight line between inflation and economic recession and warned of the risks of tightening monetary policy too fast. Recent economic data show that the British economy is sluggish and economic recovery is still a long way off.
In last week’s BOE and Fed meetings, we are starting to see a divergence between Fed and BOE policies, with the Fed moving towards a more aggressive economic tightening by raising its interest rate by 50 bp, versus the 25 bp of BOE’s interest raise. The difference between the Fed’s and the BOE’s stance over the past few weeks has been driving the sterling down and propping up the dollar, with most market participants becoming more modest in their expectations of a BOE rate hike.
Even though the Fed thwarted market expectations of a higher rate hike last Wednesday, investors still see the Fed adopting a more decisive approach towards tackling rising inflation rates than the more hesitant BOE. Interestingly enough, both Central Banks have now brought their interest rates to the same level of 1%, but the BOE is perceived to be slowing down, while the Fed is moving with a more aggressive pace.
Several economic data are scheduled to be released on Thursday, May 12th for the sterling. These include Annual Preliminary GDP, Construction Output, Monthly GDP, Goods Trade Balance, Index of Services, Industrial Production, Manufacturing Production, and Preliminary Business Investment. These are indicators of economic health and activity and may have some impact on the sterling
In addition, several MPC Members are due to deliver speeches this week. Their speeches may cause some volatility for the sterling as they may provide insight into the BOE’s future monetary policy direction.
The USD/JPY continued climbing last week, closing above 130.5 on Friday, in the wake of the Fed policy meeting. The Yen had plummeted to a 20-year low following the BOJ’s latest monetary policy meeting, with the USD/JPY trading above 131, its highest price in 20 years. If USD/JPY continues to rise, it may find resistance at the 2002 high of 135.3. If the USD/JPY declines, support might be found near the 121.3 level and further down near the 118 level.
The primary driver of the Yen over the past few months has been the BOJ’s fiscal policy which has been pushed down by the persistently dovish stance of the BOJ. Bank of Japan officials acknowledge the impact on the Japanese economy from increased import costs due to the weak yen but persist in following an ultra-easy monetary policy to support the struggling economy. While other countries are moving towards quantitative tightening to return to pre-pandemic fiscal policies, Japan continues to pour money into the economy.
In its latest monetary policy meeting, the Bank of Japan continued its ultra-accommodating policy and massive stimulus program. The BOJ also maintained its negative interest rate of -0.10%, in contrast to other Central Banks, which are moving towards a policy normalization after the pandemic and are raising their benchmark interest rates. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down.
The BOJ Governor Haruhiko Kuroda has vowed to continue the bank’s ultra-easy monetary policy, stating that the weakening Yen is not part of the BOJ’s considerations. The BOJ also stated that it would continue to buy an unlimited amount of Japanese treasury bonds, defending their current low yield. Japan’s 10-year government bond yield is currently close to 0.25%, more than an order of magnitude lower than the respective US 10-year bond, which is offered with a yield close to 2.8%. The large divergence in bond yields makes the low-yielding Yen less appealing to investors than the dollar, pushing its price further down.
The safe-haven dollar is boosted by continuing Russian hostilities against Ukraine. The Yen is also considered a safe-haven currency but has been underperforming, despite an increased risk-aversion sentiment, and many investors have been doubting its safe-haven status.
Several financial data are scheduled to be released on Thursday, May 12th for Japan. These include BOJ Summary of Opinions, Bank Lending, Current Account, 30-y Bond Auction, and Economy Watchers Sentiment. These may cause some volatility for the currency, especially the BOJ reports, which may provide insight into the BOJ's future policy.
Gold price ended last week at a low level, falling near $1,884 per ounce on Friday, just above the $1,877 per ounce support. If the price of gold decreases, further support may be found at $1,782 per ounce, while resistance may be found at around 1,920 per ounce and higher up at $2,000 per ounce.
The price of gold has been driven by conflicting market forces over the past weeks and balances between increased risk aversion and rising yields. Gold is supported by increased risk-aversion sentiment arising from the war in Ukraine. Gold price is undermined by increasingly hawkish Fed policy though, which boosts the dollar and real yields.
The rising dollar and US yields have put pressure on the price of gold over the past couple of weeks. Last Wednesday, the dollar declined following the Fed policy meeting, even though the US Central Bank raised its benchmark interest rate by 50 base points, its highest rate hike in 22 years. Markets had fully priced in the 50 base point rate hike and were anticipating a steeper rate hike, either in the current meeting, or one of the next monetary policy meetings. Fed Chair Jerome Powell dashed investors’ expectations by announcing that a 75 bp rate hike was not under consideration in the Fed’s plans.
Markets had time to absorb the Fed policy announcement by the end of last week, driving the dollar and US yields back up. US yields have been boosted by a tightening in the Fed’s monetary policy, with the US 10-year treasury note rising above 3.1% again on Friday. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.
Gold’s safe-haven status supports its price, as the ongoing crisis between Russia and Ukraine drives investors away from riskier assets as global economic growth is stalled. Continued Russian hostilities against Ukraine have increased risk-aversion sentiment, providing support for gold. Even though risk aversion drives investors towards safe-haven assets, the dollar has been surpassing other assets in popularity, decreasing the appeal of gold.
Concerns about the state of the economy in China, after the fresh rise of Covid cases and the lockdown in Shanghai, also boost the price of gold.
Oil prices resumed their ascend last week, with WTI trading above $110 per barrel on Friday. If the WTI price drops, support can be found at the $94.5 per barrel level and further down at the $90 per barrel level, while resistance can be found near $118.3 per barrel.
Oil prices are especially volatile, as competing factors affect oil supply and demand. The crisis between Russia and Ukraine has been intensifying concerns of disruptions in oil distribution, supporting oil prices. The US has already banned all oil and gas imports from Russia, with as many as 3 million barrels per day of Russian crude oil potentially removed from the market as a result of sanctions and of boycotting Russian oil.
The EU has been so far hesitant to enforce an embargo on Russian oil, as many of its member states, and especially Germany, depend heavily on Russian oil imports. Last week, however, a new package of Russian sanctions was outlined by the EU. The new sanctions are reported to include a severe ban on Russian oil crude imports. Even though the ban, if enforced, will likely throw the Eurozone into an energy crisis, the ban will not take effect for some time. The EU is hesitant to cut off Russian oil imports abruptly, as most EU member states are in favor of gradually weaning off Russian oil imports. Expectations of an EU ban propped up oil prices last week, although the enforcement of the new EU sanctions is not certain yet, as some EU member states, such as Hungary, oppose the ban.
Stalling global economic growth and lockdowns in China dampen demand. Covid restrictions in China have raised fears of a large decrease in global oil demands. China is the largest importer of crude oil and the strict Covid lockdowns had been reducing global oil demand. The large economic hub in Shanghai has been in a zero-Covid lockdown for weeks now. China’s capital city of Beijing is not under zero-Covid lockdown yet, but has strict Covid restrictions in place, limiting oil demand.
Last week, OPEC+ decided to raise its production output by a modest 432,000 barrels per day for next month. OPEC members responded to the plans of an EU ban on Russian oil by raising their production targets. OPEC’s announcement halted the rally of oil prices, alleviating global oil demand a little.
The first of the bi-annual OPEC meetings is scheduled to be held on May 11th in Vienna. The members of the organization will discuss a range of subjects, focusing on oil prices, and will decide on their output goal. The event is expected to attract traders' attention and high volatility in the price of oil is expected following the conclusion of the meeting and the release of the formal OPEC statement.
A strong risk-off sentiment prevailed at the end of last week, as markets had time to assess the Fed policy statements. Stock markets crashed, with the Dow plummeting by more than 1,000 points, led by tech stocks. Most major cryptocurrencies also plummeted, as crypto markets have been following the overall trends of stock markets and especially of tech stocks.
Last Wednesday, the Fed raised its benchmark interest rate by 50 base points, its highest rate hike in 22 years. The shift of major central banks towards a more hawkish fiscal policy has been putting pressure on cryptocurrencies over the past few months. Most major Central Banks are turning towards a tighter policy and a return to pre-pandemic interest rates, driving cryptocurrency prices down.
Bitcoin fell sharply at the end of last week and continued to decline over the weekend, falling below its $36,000 level support. If Bitcoin price declines further, support may be found near $30000, while resistance may be found at $40,000 and further up near $48,200.
Ethereum also crashed last week, falling near $2,500 during the weekend. If the ETH price declines further, it may find support at $ $2,440, while resistance may be encountered near $3,174.
Continued Russian hostilities against Ukraine have increased risk-aversion sentiment, putting pressure on crypto markets. The situation between Russia and Ukraine continues to escalate, as Russian President Vladimir Putin makes threats about using nuclear weapons, while he cuts off the gas supply to Poland and Bulgaria.
BTC/USD 1h Chart
ETH/USD 1h Chart
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