Important calendar events
The dollar soared last week, with the dollar index closing near 105.6 on Friday, its highest value since March. US Treasury yields also continued gaining strength on increased future rate hike expectations, with the US 10-year bond yielding above 4.5% for the first time since 2007.
FOMC members unanimously voted on Wednesday to keep interest rates unchanged at a target range of 5.25% to 5.50%. The Fed decided to pause rate hikes but that does not necessarily mean it has reached its rate ceiling.
The Fed policy statement following the meeting left the door open for further rate hikes. Market odds of another rate hike within the year are increasing, although it is clear that the Fed’s future policy direction will be data-driven.
Market participants focused especially on FOMC Economic Projections on Wednesday. US policymakers upgraded the US GDP outlook to 2.1% from 1.0% for 2023. Inflation was forecast to decrease further, with core PCE for 2023 expected to drop to 3.7% from previous estimates of 3.9%. The US economy is showing signs of picking up, giving the Fed more leeway to raise interest rates. At the same time, inflationary pressures are proving quite stubborn and may force the Fed to continue its hawkish policy.
Particularly illuminating was the Fed’s so-called dot plot, which illustrates the anticipated trajectory of borrowing costs as envisioned by Fed officials. The interest rate projection for 2023 stayed unchanged at 5.6%, pointing at another rate hike within the year.
US inflationary pressures are not easing just yet, despite the Fed’s high-interest rates. PPI rose by 0.7% in August, exceeding expectations of a 0.4% rise. Core PPI, which excludes food and energy, decelerated a little, rising by 0.2% in August compared to a 0.4% growth in July. Rising fuel costs are primarily to blame for the stubbornly high inflation rates in the US.
Consumer inflation is also accelerating, with CPI rising by 0.3% in August from 0.2% in July against expectations of a 0.2% print. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Core inflation, which excludes food and energy, also rose by 0.3% in August from 0.2% in July. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.
Preliminary GDP for the second quarter of 2023 showed that the US economy expanded by only 2.1% against expectations of 2.4% growth. The preliminary GDP price index for the 2nd quarter of the year also came in below expectations at 2.0% versus 2.2% anticipated.
This week will be packed with news for the dollar. GDP and GDP Price Index data on the 28th are some of the week’s most important fundamentals as they provide information on the economic outlook of the US. The core PCE Price Index on the 29th is also expected to affect the dollar. This is the Fed’s preferred inflation gauge and is expected to attract the attention of market participants.
The EUR/USD pair exhibited high volatility last week as markets reacted to the Fed’s interest rate decision. The currency pair settled down towards the end of the week though, as markets had time to digest the news, closing near the 1.064 level on Friday. If the EUR/USD pair declines, it may find support at 1.061, while resistance may be encountered near 1.076.
Inflation in the Euro area is cooling, albeit at slow rates, according to Final CPI data released last week. Headline inflation in the Eurozone dropped slightly to 5.2% year-on-year in August from 5.3% in July. Flash CPI estimates had shown that annual CPI had remained unchanged from July at 5.3%. Core CPI, which excludes food and energy, dropped to 5.3% from 5.5% in July.
The ECB raised interest rates by 25 bp at its monetary policy meeting last week, bringing its main refinancing rate to 4.50%. The ECB had the difficult task of assessing the risk to the fragile Eurozone economy against high inflation rates. In the end, persistently high inflation induced the central bank to raise interest rates again on Thursday.
The ECB hinted that it had reached its interest rate ceiling, putting pressure on the Euro. ECB President Christine Lagarde signaled an end to rate hikes at the press conference after the conclusion of the meeting but warned that interest rates will remain at sufficiently restrictive levels for as long as necessary.
Final GDP data for the Euro area were disappointing, showing that the Eurozone economy expanded by only 0.1% in the second quarter of the year against expectations of 0.3% growth. The Eurozone economy barely expanded in the second quarter after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening.
EU Flash CPI data on the 29th may affect the Euro as traders will be watching the direction of the Euro area inflation. ECB President Christine Lagarde is also due to deliver speeches next week on the 25th and the 29th. Market participants will follow her speeches closely for hints into the ECB’s future policy which may cause volatility in the Euro.
The Sterling plummeted last week after the BOE decided to keep interest rates unchanged. GBP/USD dipped, testing the 1.223 level support on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.255, while support may be found near 1.223 and further down at 1.200.
In a surprise move on Thursday, MPC members voted to keep interest rates steady. The BOE maintained its official rate at 5.25% against expectations of a 25-bp rate hike that would bring the interest rate to 5.50%.
The voting was marginally in favor of pausing rate hikes, with 5 votes in favor of a pause against four voting for a 25-bp rate hike. More importantly, the BOE signaled on Thursday that it had reached its peak interest rate. BOE Governor Andrew Bailey stated on Thursday that the central bank would be watching closely to see if further rate hikes are needed. Bailey also emphasized that the BOE will be holding interest rates in restrictive territory long enough to see inflation down to the bank’s 2% target. Bailey’s comments implied that the BOE has likely reached its rate ceiling after a long run of rate hikes.
Inflationary pressures in the UK are finally receding and likely tipped the balance in favor of a pause in rate hikes. British Inflation cooled more than expected on Wednesday, demonstrating the effectiveness of the BOE’s consistently hawkish policy. Headline inflation dropped to 6.7% year-on-year in August from 6.8% in July against expectations of 7.0%. Core CPI, which excludes food and energy, dropped significantly, indicating that rising fuel costs are largely to blame for sticky inflation in the UK. Core CPI dropped to 6.2% on an annual basis in August from 6.9% in July against 6.8% expected.
British economic growth forecasts are not optimistic with BOE predicting a weaker economic outlook. A combination of a struggling economy and high inflation is making the BOE’s task more difficult. Further tightening is needed to bring inflation down at the risk of tipping the British economy into recession.
Britain’s economy contracted by 0.5% month-on-month in July after expanding by 0.5% in June. The prognosis was more optimistic, with markets forecasting a 0.2% decline in GDP. The state of the British economy is fragile, as prolonged tightening has taken its toll on the labor market and other vital economic sectors. The British economy weakened more than expected in July, likely influencing the BOE’s decision to pause rate hikes.
On the data front, important fundamentals are due on the 29th of this week for the UK, including the Current Account and Final GDP.
USD/JPY edged lower last week, dropping to the 148.3 level on Friday. If the USD/JPY pair declines, it may find support near 145.8. If the pair climbs, it may find resistance at 149.
Expectations of a hawkish pivot at the BOJ’s policy meeting last week were dashed on Friday. The BOJ maintained its short-term interest rate target steady at -0.10% and showed no signs of relaxing its ultra-easy policy.
BOJ Governor Kazuo Ueda had hinted in the past few weeks that a policy shift may finally be on the horizon. Ueda, however, refrained from signaling any changes in policy after last week’s meeting. The BOJ maintained its dovish bias, putting more pressure on the Yen as other major central banks have been moving in a hawkish direction for over a year.
Even though the Fed kept interest rates steady last week, the US central bank delivered a hawkish message hinting at more rate hikes within the year. The Yen becomes even more vulnerable as other major central banks continue raising interest rates.
The Yen has been weakening, pushed down by the BOJ’s ultra-accommodating monetary policy. The Yen’s weakness has been the subject of concern for Japanese authorities as it undermines the country’s importing potential and causes financial distress in households.
Japanese authorities have been repeatedly warning speculators against excessive short-selling of the Yen. The Yen’s continued weakness is raising market awareness of another intervention by the Japanese currency to support the ailing currency. Many market analysts view the USD/JPY 150 level as the line in the sand for another intervention. Japan’s top currency diplomat Masato Kanda warned again on Wednesday that authorities won’t rule out any options to address excessive currency moves.
On the data front, Balance of trade data released on Wednesday for Japan were disappointing. The value of imported goods in August exceeded the value of exported goods by 0.56T versus 0.44T expected.
National Core CPI dropped to 3.1% in July from 3.3% in June. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. BOJ Core CPI dropped slightly to 3.0% in July from 3.1% in June.
Final GDP data for the second quarter of the year showed that the Japanese economy expanded by 1.2%, disappointing expectations of 1.4% growth. The final GDP Price Index showed a 3.5% annual expansion, versus 3.4% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
Inflation data are scheduled to be released this week for Japan and may cause some volatility for the Yen. More importantly, the minutes of last week’s meeting are scheduled to be released on the 27th and may provide insight into the BOJ’s policy direction.
Gold prices ranged from $1,945 per ounce to $1,910 per ounce last week, finally settling near $1,925 per ounce on Friday. If gold prices increase, resistance may be encountered near $1,950 per ounce, while if gold prices decline, support may be found near $1,900 per ounce. Gold prices exhibited high volatility last week as the Fed’s interest rate decision caused turbulence in markets.
Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar soared last week, with the dollar index closing near 105.6 on Friday, its highest value since March. US Treasury yields also continued gaining strength on increased future rate hike expectations, with the US 10-year bond yielding above 4.5% for the first time since 2007.
Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. FOMC members unanimously voted on Wednesday to keep interest rates unchanged at a target range of 5.25% to 5.50%.
The Fed decided to pause rate hikes but that does not necessarily mean it has reached its rate ceiling. The Fed policy statement following the meeting left the door open for further rate hikes. Market odds of another rate hike within the year are increasing, although it is clear that the Fed’s future policy direction will be data-driven.
Inflationary pressures in the US are not easing just yet, despite the Fed’s high-interest rates. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.
Oil prices were volatile last week, with WTI price touching a yearly high of $93.0 per barrel but paring some gains towards the end of the week and settling near $90.7 per barrel on Friday. If WTI price declines, it may encounter support near $85.0 per barrel, while resistance may be found near $93.0 per barrel.
Fears of tight oil supply buoyed oil prices last week. Russia announced a new ban on oil exports on Thursday, increasing supply concerns. Russia will temporarily restrict diesel and gasoline exports to stabilize domestic fuel prices.
Reports that the Saudi Energy Minister will announce further production cuts are also boosting oil prices. OPEC has been limiting oil production to keep oil prices up. Saudi Arabia and Russia are extending production cuts that have already been in place for some months now, through the end of the year. Saudi Arabia has been reducing its output by one million barrels a day since early summer and Russia followed shortly after with a reduction of 300,000 barrels a day.
The oil demand outlook has declined as the Fed delivered a hawkish message on Wednesday, hinting at further tightening. FOMC members unanimously voted on Wednesday to keep interest rates unchanged at a target range of 5.25% to 5.50%. The Fed decided to pause rate hikes but that does not necessarily mean it has reached its rate ceiling. The Fed policy statement following the meeting left the door open for further rate hikes. Market odds of another rate hike within the year are increasing, although it is clear that the Fed’s future policy direction will be data-driven. Even if the Fed has reached its interest rate ceiling, rates are likely to stay high for longer to bring inflation down.
Signs of diminishing oil reserves provided support for oil prices on Wednesday. The Energy Information Administration reported on Wednesday that US crude oil inventories dropped by 2.1M barrels for the week ending on September 15th. Wednesday’s print exceeded expectations of a 1.3 M barrel drop, indicating that oil reserves are dwindling faster than anticipated.
Deterioration in China’s economic outlook is keeping oil prices down, however. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and a weaker Chinese oil demand outlook has put pressure on oil prices. China’s economy showed signs of improving this week, though, boosting oil prices.
Crypto markets exhibited high volatility last week. Major cryptocurrencies surged early in the week as a surprisingly bullish move prevailed. Cryptos failed to maintain their bullish momentum though, and relinquished gains by the end of the week as bears managed to wrestle control back from bulls.
The Fed’s hawkish message drove cryptocurrency prices down last week. Expectations of further tightening lowered risk sentiment putting pressure on risk assets.
The Fed kept interest rates stable last week, but delivered a hawkish message, raising odds of future rate hikes. The Fed’s projections showed that interest rates may rise even further this year and are likely to stay in restrictive territory for a longer period, hindering economic growth. Increases in central banks’ interest rates sour risk sentiment, driving risk assets down.
Bitcoin rose above the key $27,000 level early in the week but pared gains mid-week, dropping below $26,500 over the weekend. If BTC price declines, support can be found near $26,200, while resistance may be encountered near $28,100.
Ethereum price touched $1,670 early in the week but also plummeted towards the end of the week, touching the $1,590 level over the weekend. If Ethereum's price declines, it may encounter support near $1,550, while if it increases, resistance may be encountered near $1,670.
BTC/USD 1h Chart
ETH/USD 1h Chart
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