Important calendar events
The dollar gained strength last week, with the dollar index closing at the 100.5 level on Friday, spurred by hawkish Fed rhetoric and a comparatively dovish ECB statement towards the end of the week. The ECB statement last Thursday was less hawkish than expected, driving the Euro down and propping up the dollar. Yields also rose across the US treasury curve last week, with the US 10-year treasury note closing at a two-year high of 2.83% on Friday.
Inflation remains one of the biggest problems for the US economy, with CPI data last week showing that headline inflation in the US rose to 8.5%, its highest rate since 1981. Producer Price data jumped by 11.2% from last year’s data, marking the biggest increase on record in over a decade. Soaring inflation rates in the US have increased expectations of a high rise in the Fed’s benchmark interest rate, buoying the dollar.
Over the past couple of weeks, Fed rhetoric has been one of the primary drivers of USD price, as the Fed signals a faster pace of policy tightening in the US. Markets are beginning to price in a steep rate hike of 50 base points at the Fed’s next policy meeting in May. Markets have been pricing in a total of over 225 base points of additional interest rate hikes this year, boosting the dollar.
This week, Fed rhetoric continued raising expectations of a steep rate hike, with FOMC member Evans commenting on Monday that an interest rate rise of 50 base points in May seems highly likely. On Tuesday, FOMC Member Brainard delivered a speech about the economy at an online event hosted by the Wall Street Journal. Brainard emphasized in her speech the importance of bringing down inflation in the US through rate hikes and balance sheet trimming. Brainard was formerly considered one of the more dovish FOMC members and her recent hawkish tones carry extra weight, further boosting the dollar. On Thursday, FOMC Member Loretta Mester stated that a 50 base point rate hike is on the table for the next Fed meeting, expressing confidence that the US economy can handle a more aggressive tightening coupled with balance sheet reduction.
Minutes of the latest Fed meeting indicate that several Fed officials were in favor of a rate hike of 50 base points, increasing the chances of a 50 bp increase in the Fed’s benchmark interest rate in May. FOMC minutes also signaled that the US Central Bank would reduce its bond holdings by as much as $95 billion per month.
Reports of escalating violence against Ukraine and increased sanctions on Russia have also turned investors’ interest towards safe-haven assets. Last week, hopes for a resolution of the crisis between Russia and Ukraine were diminished, as Russian President Vladimir Putin announced that diplomatic talks with Ukraine are at a dead end. The Biden administration announced new sanctions last week, targeting Russia’s largest financial institutions to increase economic pressure on Russia.
Several important financial, inflation, and economic indicators are scheduled to be released this week for the dollar, including Philly Fed Manufacturing Index, Unemployment Claims, Flash Manufacturing PMI, and Flash Services PMI.
In addition, several FOMC members and Fed Chair Powell are due to deliver speeches this week, which may cause volatility for the dollar, as market participants scan FOMC members’ statements for insight into the Fed’s policy direction.
The IMF will be holding one of its bi-annual meetings this week, the IMF Spring 2022 meeting, where global economic conditions and policy shifts will be discussed at length. Fed Chair Jerome Powell is due to deliver a speech at the event and investors will focus on his speech for hints into the Fed’s strategy in the coming months.
The Euro ended the week on a very low note, with the EUR/USD closing near a two-year low of 1.081 on Friday. The Euro fell sharply last week, plummeting below the 1.080 level support, following the release of the ECB statement. The outlook for the pair is bearish, and the EUR/USD is currently testing the 1.080 level support. If the currency pair goes up, it may encounter resistance at 1.118, while if it declines, further support may be found near 1.063.
In its monetary policy meeting last week, the ECB announced its main refinancing rate, which remained unchanged as expected. Investors’ expectations of a shift to a more hawkish policy were dashed after the Bank’s meeting, as the ECB showed no signs of considering a rate hike shortly. Following the conclusion of the meeting, the ECB issued a statement, which was less hawkish than expected, putting pressure on the Euro. ECB President Christine Lagarde stated that Eurozone inflation is expected to rise in the following months, while economic growth is expected to stall. Many investors had anticipated a more hawkish statement, as the last ECB meeting pointed to a more aggressive policy to tackle soaring inflation rates.
The minutes of the previous ECB meeting indicated that many of the Central Bank’s members had expressed concern about the high inflation levels in the EU and were in favor of taking immediate steps towards monetary policy normalization. The ECB however, is 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.
The ECB has been pursuing a more cautious fiscal policy than other major Central Banks and does not plan to raise its benchmark interest rate before the end of its bond-buying program in the third quarter of 2022. As the Fed and the BOE have already raised their benchmark interest rates, the Euro remains at a disadvantage from the difference in interest rates.
A new round of EU sanctions on Russia also weighed down the Euro. The new EU sanctions will target the energy sector for the first time, with a ban on coal imports from Russia worth €4bn a year. In addition, Russia’s demands for payments of energy imports in Roubles have increased concerns of an impending energy crisis in Europe, putting pressure on the Euro. Germany has already entered the initial phases of implementing an emergency gas law, preparing for rationing gas resources among its population.
Last week, the results for the first round of the Presidential Elections in France showed Emmanuel Macron to be in the lead, although his adversary for the second round, Marine Le Pen, was not far behind in votes. Macron’s even marginal win, boosted the Euro, providing a promise of political stability for one of the Eurozone’s leading economies.
This week, several important indicators are scheduled to be released for the Eurozone, including Monthly German PPI, Italian Trade Balance, Monthly Industrial Production, Eurozone Trade Balance, French Flash Services and Manufacturing PMI, German Flash Services, and Manufacturing PMI, and Eurozone Flash Services and Manufacturing PMI. The PMI data are indicators of economic health, while the PPI data are indicators of consumer inflation and may impact the ECB’s monetary policy. In addition, ECB President Christine Lagarde is due to deliver a speech on April 22nd, which may cause volatility in the currency, as investors will scan Lagarde’s speech for hints into the ECB’s future policy direction.
The GBP/USD rate dropped last week, as the dollar gained strength against the sterling, closing near 1.306 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, further support may be found near the 1.267 level.
Several important economic data were released last week for the UK, including Annual CPI and Core CPI, Annual HPI, Monthly PPI Input, and Output. These are key indicators of inflation and showed that inflation rates in the UK were higher than expected, with headline inflation reaching 7%. UK inflation has hit a 30-year high and is expected to rise further in the coming months, with a peak rate close to 9% in Q4. Soaring inflation rates in the UK increase market expectations that the BOE will raise its benchmark interest again in the second quarter of 2022, after already lifting the Bank Rate from 0.1% to 0.75% in the past few 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 and may induce the BOE to adopt a tighter monetary policy to tame inflation. A more hawkish fiscal policy and consecutive rate hikes though, may stifle the country’s economy and are forcing the BOE to perform a balancing act between bringing inflation under control and allowing for economic growth.
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, there are signs that its stance may soften in the coming months, weighed down by a fragile economy. In contrast, the increasingly hawkish Fed rhetoric is boosting the dollar against the pound.
BOE Governor Andrew Bailey has stressed the importance of delivering a clear message to the public regarding the BOE’s future policy. He has stated that the joint effects of COVID and the war in Ukraine on the global economy would take some time to manifest fully and, in the meantime, the BOE would need to remain cautious. Bailey has also warned that the energy crisis in the UK was going to be ‘historic’, displaying a relatively dovish stance these past couple of weeks, especially compared to the more hawkish Fed rhetoric.
Several financial data are scheduled to be released this week for the sterling, including Monthly Retail Sales, Flash Manufacturing PMI, and Flash Services PMI. In addition, BOE Governor Andrew Bailey is due to deliver speeches on April 21st and 22nd, which may have a considerable impact on the currency, as they may provide insight into the BOE’s future policy.
The USD/JPY gained strength last week, closing above the 126.4 level on Friday. The currency pair broke through the resistance level of the 2015 high at 125.8 last week, as the dollar gained strength. If the USD/JPY declines, support might be found near the 121.3 level and further down near the 118 level.
The safe-haven dollar was boosted last week 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.
In addition, economic data released last week for Japan were mostly lower than expected and showed that the economy in Japan is sluggish, putting pressure on the Yen.
The primary driver of the Yen over the past few months has been the BOJ’s fiscal policy. Last week, the Yen has been pushed further down by the persistently dovish stance of the BOJ. Bank of Japan Governor Haruhiko Kuroda delivered a speech last Wednesday at the Trust Companies Association of Japan's annual meeting, in Tokyo. Kuroda acknowledged the impact on the Japanese economy of increased import costs and stressed the BOJ’s commitment to an ultra-easy monetary policy to support the struggling economy.
Kuroda, in an earlier speech last Monday, re-affirmed the BOJ’s commitment to a monetary easing policy and stated that Japan’s economy is recovering from the impact of the pandemic, but stressed that the war in Ukraine has introduced a high level of uncertainty over the country’s economy.
The Bank of Japan has maintained its negative interest rate from -0.10%, while other Central Banks 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.
Last week Kuroda commented on the weakening Yen, expressing concern that recent yen moves have been somewhat rapid. Kuroda however, reiterated the benefits of a weaker Yen especially to Japan’s exports, although he acknowledged the added burden of the weak currency on households.
Japan’s core CPI may climb around 2% in April, similar to other countries that are expected to see a peak in inflation rates around the same time, largely due to the effect of the increase in oil prices. Japan is a net energy importer and the current energy crisis is damaging the country’s terms of trade and overall economic health. The rising cost of oil is causing goods prices to rise in Japan, with oil imports accounting for 80% of the country’s oil consumption.
Several economic and inflation indicators are scheduled to be released this week for Japan and may affect the Yen, although these are not expected to cause significant volatility, as the Yen has been mostly affected by BOJ policy decisions and geopolitical factors in the past couple of months.
Gold price edged higher last week, closing near $1,973 per ounce on Friday. If the price of gold decreases, support may be found near $1,893 per ounce and further down at 1,877 per ounce, while resistance may be found at around $2,000 per ounce.
The price of gold has been driven by conflicting market forces over the past weeks. On one hand, gold is supported by intensifying tensions between Russia and Ukraine, as well as by new western sanctions on Russia. On the other hand, the gold price is undermined by increasingly hawkish Fed policy, which boosts the dollar and real yields.
Gold’s safe-haven status supports its price, as reports of violent Russian attacks against Ukraine and new sanctions on Russia drive investors away from riskier assets. Hopes for a resolution of the crisis between Russia and Ukraine were diminished last week, as Russian President Vladimir Putin announced that diplomatic talks with Ukraine are at a dead end. The conflict in Ukraine has triggered a risk-aversion sentiment, propelling the price of gold to $2,050 per ounce last month.
Sanctions against Russia and increasing energy costs have been driving commodity prices up. The US and the EU have further increased economic sanctions on Russia, with the EU targeting the energy sector for the first time, banning coal imports with an estimated total worth of €4bn a year. Rising energy prices contribute to rising inflation, which is hitting record highs in the US, the EU, the UK, and many other countries. Global inflationary pressures support gold price since it is often used as an inflation hedge.
Concerns about the state of the economy in China, after the fresh rise of Covid cases and the lockdown in Shanghai, have also been boosting the price of gold.
The gold price has been weighed down by the rising dollar and strong US yields. The dollar gained strength last week, with the dollar index closing at the 100.5 level on Friday, spurred by hawkish Fed rhetoric and a comparatively dovish ECB statement towards the end of the week.
Yields also rose across the US treasury curve last week, with the US 10-year treasury note closing at a two-year high of 2.83% 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.
Oil prices climbed back up last week, with WTI price rising above $106 per barrel and testing the 106.4 per barrel resistance 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.
Increasing geopolitical tensions and easing lockdown rules in China have spurred oil demand. Large releases from strategic stockpiles have failed to curtail rising oil prices, raising fears of an impending energy crisis. The U.S. Energy Information Administration reported that US crude oil inventories had risen by 9.4 million barrels last week, but failed to curtail the rise in oil prices.
Reports of easing lockdown restrictions in Shanghai have raised expectations of recovering demand from China. China is the largest importer of crude oil and the strict Covid lockdowns had been reducing global oil demand. As the large economic hub in China re-opens though, oil demand has been pushed back up.
In addition, the crisis between Russia and Ukraine has been intensifying concerns of disruptions in oil distribution, supporting oil prices. Last week, hopes for a resolution of the crisis between Russia and Ukraine were diminished, as Russian President Vladimir Putin announced that diplomatic talks with Ukraine are at a dead end.
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. A new round of sanctions on Russia was also agreed upon by EU member states last week, targeting the energy sector for the first time, with a ban on coal imports from Russia worth €4bn a year.
The EU is still hesitant to enforce an embargo on Russian oil, as many of its member states, especially Germany, depend heavily on Russian oil imports. The EU has held a high-level dialogue with OPEC in Vienna, to discuss the possibility of oil sanctions on Russia. OPEC has warned the EU though that it would be impossible to replace the 7 billion barrels per day of Russian oil exports, suspending the EU’s plans for bans on Russian oil. Most EU member states are in favor of gradually weaning off Russian oil imports.
Recent reports show that OPEC raised its output by only 57,000 barrels per day in March, as some of its African member countries have decreased their output and most of the production increase came from the Arab Gulf countries.
The International Energy Agency has announced plans to release 120 million barrels from its emergency oil reserves, half of which will be released from U.S. stockpiles. The announcement has eased oil supply concerns, temporarily, but has failed to curtail the rise of oil prices, as oil demand grows.
Most major cryptocurrencies declined last week, as US stocks and especially tech stocks fell. Crypto markets have been following the overall trends of stock markets, which have been pushed down by rising dollar and US bond yields.
Bitcoin price fell below the $40,000 key level at the end of last week, trading just below the $40,000 level during the weekend. If Bitcoin price declines, it may find support at $37,500 and $36,000, while resistance may be found near $48,200 and further up at the psychological level of $50,000. Over the weekend, the Luna Foundation Guard (LFG), acquired $173 million in Bitcoin, and on Wednesday, added over $100 million to its reserves.
Ethereum's price has been boosted as the release of a long-awaited software upgrade is drawing near. Ethereum price also fell last week though, falling below the $3,075 level support, and continued trading close to the $3,000 level during the weekend. In case its price continues to decline, it may find further support near $2,820, while resistance may be encountered near $3,550.
The shift of major central banks towards a more hawkish fiscal policy has been putting pressure on cryptocurrencies. Most major Central Banks are turning towards a tighter policy and a return to pre-pandemic interest rates, driving cryptocurrency prices down. Increasingly hawkish Fed rhetoric is pointing to a steep rate hike at the Fed’s next policy meeting in May, putting pressure on cryptocurrencies.
Last week, record-high inflation data in the US increased the odds of a 50 base points increase in the Fed’s benchmark interest rate in May. On the other hand, investors are starting to use cryptocurrencies as a hedge against inflation, which could provide a boost to crypto markets, as inflation is expected to peak in the following months.
Reports of renewed Russian attacks against Ukraine have dashed hopes for a diplomatic resolution to the conflict any time soon, putting pressure on risk assets. Hopes for a resolution of the crisis between Russia and Ukraine were diminished last week, as Russian President Vladimir Putin announced that diplomatic talks with Ukraine are at a dead end.
New western sanctions on Russia are also reducing demand for risk assets, with both the US and the EU announcing a new round of sanctions, targeting financial institutions, commodities and individuals.
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