Important calendar events
Last week, continued Russian hostilities against Ukraine and increased sanctions on Russia increased risk-aversion sentiment, providing support for the safe-haven dollar, with the dollar index closing above the 101 level on Friday and increasing to 101.8 on Monday.
Yields also rose across the US treasury curve last week, with the US 10-year treasury note touching 3% for the first time since 2019.
Inflation remains one of the biggest problems for the US economy, with headline inflation rising 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.
Last week, Fed rhetoric continued raising expectations of a steep rate hike, with FOMC member Evans commenting that he sees benchmark interest rates rising as high as 2.25%-2.5% by the end of the year. This implies that the US Central Bank would perform three more rate hikes of an average of 50 base points this year. Fed member James Bullard, who is a known advocate of a tighter monetary policy, in his speech on Monday, didn’t rule out even a 75 base point rate hike and stressed US inflation is ‘far too high’. He stated that he would even support a 3.5% interest rate rise by the end of the year, although he doesn’t expect that such a dramatic increase would be needed.
More importantly, US Federal Reserve Chair Jerome Powell seems to be in favor of an aggressive rate hike. Powell stated last week that a 50 base point increase in the Fed’s benchmark interest rate is on the table for the Fed’s next policy meeting in May.
Several important economic indicators are scheduled to be released on Tuesday for the dollar, including Core Durable Goods Orders, Durable Goods Orders, CB Consumer Confidence, and New Home Sales.
For the rest of the week, important economic data are scheduled to be released on the 28th, which include: Quarterly Advance GDP, Advance GDP Price Index, and US Unemployment claims.
On the 29th, several key indicators are scheduled to be released, especially the Core PCE Price Index, which is the Federal Reserve's primary inflation measure and may influence the shape of the Fed’s monetary policy.
The Euro continued trading low against the dollar last week, with the EUR/USD testing the 1.080 level support at the end of the week and closing near 1.079 on Friday. On Monday, the currency pair fell even lower, reaching 1.071, as the dollar gained strength against the Euro. The outlook for the pair is bearish, but if the currency pair goes up, it may encounter resistance at 1.118, while if it declines, support may be found near 1.063.
Emmanuel Macron’s triumphant victory in the French elections on Sunday provided political stability in one of the Eurozone’s leading economies. His victory had already been priced in by markets though and did not have a significant impact on the Euro.
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.
Soaring inflation rates in the EU increase the chances of an eventual shift towards a more hawkish policy. 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.
Many of the Central Bank’s members have repeatedly expressed concern about the high inflation levels in the EU and have been 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 signs of wavering though, as rising inflationary pressures are forcing the ECB to act to drive inflation down. Last week, Lagarde stated that there is a strong chance of an ECB rate hike within the year but warned other ECB members against making statements before policy meetings.
Several important indicators are scheduled to be released for the Eurozone this week, including French Consumer Spending, French and Spanish Flash GDP, Italian and German Preliminary GDP, Annual CPI Flash Estimate, and Core CPI Flash Estimate. These data provide a measure of economic activity for some of the Eurozone’s leading economies. The CPI data, in particular, are key inflation indicators and may impact the ECB’s monetary policy.
The sterling plummeted at the end of last week, with the GBP/USD rate falling sharply below the 1.300 support level, before closing at a two-year low near 1.283 on Friday. On Monday, the currency pair fell even further to 1.270, as the dollar gained strength against the pound. 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.
The pound has been declining, weighed down by the heavy political climate in the UK and a sluggish British economy. British PM Boris Johnson is still dealing with the aftermath of the ‘party gate’ scandal and the resulting political uncertainty is affecting the currency. Last week, members of the British parliament voted on whether Boris Johnson should be referred to parliament’s privileges committee for an inquiry into breaches of lockdown rules. Although the voting was in the British PM’s favor, Johnson continues to receive heavy criticism over his breaches of lockdown regulations at the start of the pandemic.
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.
Last week, BOE Governor Andrew Bailey 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. His comments were supported by economic data released last week, which showed that the British economy is sluggish and economic recovery is still a long way off. Retail sales and Flash Services PMI data last week were lower than anticipated increasing the chances that the BOE will adopt a more conservative policy to balance rising inflation against slow economic growth.
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%. 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 USD/JPY has been gaining strength these past few weeks, pushing past the resistance level of 2015 high at 125.8. The USD/JPY pair closed near 128.5 on Friday, as the dollar gained strength against the weakening Yen. 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 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.
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 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.
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.
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.
Annual BOJ Core CPI and Unemployment Rate data are scheduled to be released on Tuesday for the Yen and may cause some volatility in the price of the currency, ahead of the next BOJ meeting.
The next BOJ policy meeting is on Thursday, April 28th. The BOJ will announce its main interest rate and will release an outlook report on Thursday, detailing the factors that shape its monetary policy. Although the BOJ is widely expected to keep its interest rate unchanged and continue its ultra-accommodating policy, the event is likely to generate some volatility for the currency. The BOJ will also release a press conference after the conclusion of the meeting, which will be followed closely by market participants for hints into the bank’s future policy. A more hawkish statement will provide the Yen with a much-needed boost, while a communication along the same dovish lines the BOJ has been following, might see the price of the Yen falling even lower.
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 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 price declined last week, weighed down by the rising dollar and strong US yields. The dollar has gained strength these past few weeks, with the dollar index rising above the 101 level, spurred by hawkish Fed rhetoric. Increasing odds of a sharp rate hike of at least 50 base points at the Fed’s next monetary policy meeting in May has been boosting the market appeal of the dollar against other safe-haven assets.
Last week, the rise in US real yields pushed the gold price down to a monthly low. Real yields have been boosted by a tightening in the Fed’s monetary policy, with the 10-year real treasury yield hitting positive territory. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.
Gold price continued to decrease on Monday, testing the $1,893 per ounce support. Further support may be encountered at 1,877 per ounce, while resistance may be found at around $2,000 per ounce.
Gold’s safe-haven status supports its price, as the ongoing crisis between Russia and Ukraine drives investors away from riskier assets. 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.
WTI price has dropped below the $100 per barrel key level, pressured by the rising dollar. 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 have dropped due to expected reductions in demand, spurred by Covid lockdowns in China, as well as by reduced global economic growth.
Covid restrictions in China raise 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 and there are fears that China’s capital city of Beijing will soon follow with strict Covid restrictions.
The IMF meetings last week have pointed to a marked reduction in global growth, signaling a fall in the oil demand and the IMF has cut its global growth forecast.
The crisis between Russia and Ukraine however, 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 of Russian oil.
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. OPEC has warned the EU 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.
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.
Crypto markets gained some support on Monday though, as the bulls fought to regain some of their lost ground. Cryptocurrency prices are expected to remain volatile this week, as continued risk-aversion sentiment may drive their prices down, despite bullish tendencies on Monday.
Bitcoin price moved close to the $40,000 key level on Monday, testing the $40,000 resistance level. 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. Last week the Luna Foundation Guard (LFG), acquired a total of $273 million in Bitcoin, boosting the crypto currency’s price.
Ethereum price has also been boosted in the past few weeks, as the release of a long-awaited software upgrade is drawing near. On Monday, Ethereum's price rose close to the $3,000 key level. 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.
Record-high inflation data in the US have 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.
Continued Russian attacks against Ukraine and failing diplomatic talks between the two countries are promoting a risk-aversion sentiment, putting pressure on risk assets. 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.
BTC/USD 1h Chart
ETH/USD 1h Chart
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