Important calendar events
The dollar withdrew last week, with the dollar index falling below the 105 level, after lower-than-expected US inflation data. US Bond yields remained high, with the US 10-year treasury note yielding above 2.8% at the end of the week.
Last week, US CPI and PPI data showed that inflation in the US is dropping at a faster rate than anticipated. Inflation seems to have cooled down in July, aided by the aggressive efforts of the Federal Reserve. CPI in July did not increase for the first time this year, after going up by 1.3% in June. US inflation remains at a multi-decade high of 9.1%, but its ascend seems to have been arrested for the time being. PPI declined in July, reaching -0.5% compared to 1.1% in June, as fuel costs have been decreasing since late June.
Recession fears were alleviated last week, as lower-than-expected inflation rates sparked hopes of economic recovery. The safe-haven dollar retreated, especially since cooling inflation removes some of the pressure on the Federal Reserve to increase interest rates.
Last week’s inflation data are likely to play a decisive role in the Fed’s rate hike in September. Already markets are moderating their expectations, as the sudden drop in inflation may induce the Fed to hold back from an aggressive monetary tightening. Reports of a shift in Fed policy have dampened expectations of another 75-bps rate hike in September, with odds in favor of a more conservative 50-bps increase in interest rates.
FOMC members however have pointed out that price pressures remain intense, necessitating aggressive tightening. FOMC members’ comments last week were more hawkish than expected, not ruling out the possibility of a 75-bp rate hike in September.
In its latest policy meeting, the US Federal Reserve raised its interest rate by 75-base points in an attempt to rein in inflation. The Fed seems to be gradually moderating its stance, however, as it is tasked with battling soaring inflation without the benefit of a strong economic background. A robust economic outlook is required to enable the Fed to tighten its monetary policy further. Economic data however indicate that the US economy is still fragile and may not be able to withstand aggressive tightening.
Several economic indicators this week may provide more insight into the US economic outlook and are likely to affect the dollar. Market participants this week will focus on the FOMC meeting minutes due to be released on the 17th, in an attempt to gauge the Fed’s future policy direction. Fed member speeches this week may also cause volatility in dollar prices.
The Euro spiked last week after the release of the US inflation data. EUR/USD pushed past the 1.027 level resistance, climbing to 1.036 last Wednesday, but gradually retreated later in the week, finally closing near 1.025 on Friday. If the currency pair goes up, it may encounter resistance again at 1.027 and further up at 1.050. If the EUR/USD withdraws, it may find support at 1.010 and further down at the parity level of 1.000.
Last week’s inflation data showed that US inflation is finally slowing down. Eurozone inflation on the other hand continues to rise. Last week German and French CPI data for these leading EU economies showed that inflation rates went up in July by 0.9% and 0.3% respectively. As fuel prices went down in July worldwide, inflation in the EU was expected to cool slightly. The EU however is facing an energy crisis, increasing price pressure.
Rising Eurozone inflation is expected to figure largely in determining the future ECB monetary policy. Soaring inflation in the EU adds more pressure on the ECB to continue increasing interest rates. The ECB seems to be finally pivoting towards a more hawkish direction, aiming to rein in Eurozone inflation.
In its latest policy meeting, the ECB raised its interest rate by 50 base points. This was the ECB’s first rate hike raise since 2011, bringing its benchmark interest rate from -0.50% to 0%. The ECB’s interest rate remains low, especially compared to the Fed’s 2.50% interest rate.
Currently, market participants are setting their sights on the September ECB policy meeting, with odds in favor of another 50-bp rate hike. After inflation in the US showed signs of cooling, markets are pricing in a 50-bp Fed hike as the most likely outcome. The policies of the Fed and the ECB seem to be converging, at last, favoring the Euro. Struggling Eurozone economies, rampant inflation, and a looming energy crisis in the EU create a toxic combination though, pushing the Euro down.
Several economic activity indicators are scheduled to be released this week for the Eurozone. Key among those is the EU CPI data scheduled to be released on the 18th, which will provide indications of the inflation rates in the Eurozone. Quarterly GDP data on the 17th may show the EU economic outlook and may also affect the Euro.
The Sterling surged last week boosted by positive UK economic data and increased risk appetite. GBP/USD spiked, rising above the 1.219 resistance level mid-week, but pared some of its gains later in the week, closing around 1.214 on Friday. If the GBP/USD rate goes up, it may encounter resistance near the 1.219 level again, while if it declines, support may be found near 1.192 and further down near 1.175.
The Sterling benefitted from the dollar’s retreat last week but declined again after the dollar began to recover later in the week. US inflation data last week fell below expectations, pushing the dollar down. Global recession fears eased and hopes of economic recovery grew. In this climate, risk appetite was renewed and risk assets, such as the Sterling, gained strength.
Meanwhile, UK GDP data last week showed that the British economy is contracting. The economic outlook in the UK does not seem to be as poor as anticipated, however, as GDP figures were more optimistic than expected. Monthly GDP contracted by 0.6% in July, which was more positive than the projected -1.2%. Quarterly GDP fell by 0.1%, which was still better than the expected 0.2%, providing support for the currency.
Last week’s GDP data confirmed the BOE’s forecast of reduced economic growth. The BOE has warned that recession is expected to hit the UK in the fourth quarter of this year, and is forecasted to last for five quarters, until the end of 2024, with GDP falling to 2.1%.
UK inflation in June hit a 40-year high of 9.4%, forcing the BOE to tighten its monetary policy further. This month UK inflation is expected to rise even more, potentially reaching double figures, as energy prices in the UK remain high, despite a global decline in petrol prices. Britain’s grim economic outlook is preventing a more hawkish fiscal policy and is hampering the BOE’s attempts to bring inflation down.
In its latest monetary policy meeting, the Bank of England decided to raise its interest rate by 50 base points, increasing the total interest rate to 1.75%. The BOE has adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy.
Political instability after British PM Boris Johnson’s resignation is keeping the Sterling down. The Tory Leadership race continues, with Foreign Secretary Liz Truss appearing to be ahead in the polls from fellow candidate Rishi Sunak.
Several UK economic activity indicators are scheduled to be released this week. The jobs sector comes into focus on the 16th, while Consumer Confidence and Retail Sales data are scheduled to be released on the 19th. The most eagerly awaited data this week are the CPI indicators due on the 17th, which are expected to show that UK inflation reached record highs in July, and may climb to double digits.
The Yen gained strength last week, benefitting from the dollar’s decline. The USD/JPY rate experienced a sharp drop after the release of the US inflation data, falling below the 134.2 level support and touching the 131.7 support, before climbing back to 133.5 on Friday. If the USD/JPY declines, support might be found at 131.7 again. If the pair climbs it may find resistance near 139.4 and further up at the 1998 high of 147.7.
Last week, lower-than-expected US inflation data, alleviated global recession fears. Risk appetite grew, putting pressure on safe-haven assets, such as the dollar and the Yen. The dollar lost more ground than the Yen, however, as cooling US inflation decreased the odds of a steep Fed rate hike in September.
The BOJ maintains its ultra-easy monetary policy, keeping its main refinancing rate at -0.10%. Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The difference in interest rates with other major Central Banks puts the Yen at a disadvantage, driving its price down.
Inflation in Japan is also on the rise, exceeding the BOJ’s 2% target. Japan’s poor economic outlook, however, hinders the BOJ from pivoting towards a tighter fiscal policy, with recent economic indicators showing that the Japanese economy is contracting. The combination of a weak currency, low wages, and rising inflation is burdening Japanese households.
The recent drop in fuel prices, however, is providing some support for the Yen. Japan is a net energy importer and the reduction in energy costs is providing some relief to the economy.
Several minor economic indicators are scheduled to be released this week for Japan, but these are not expected to affect the Yen significantly. Preliminary GDP data are due on the 15th and may provide insight into the economic outlook of Japan. CPI data are scheduled to be released on the 19th for Japan, which are key indicators of consumer inflation.
Gold rallied last week, as the dollar tumbled, closing above $1,800 per ounce on Friday. If gold prices decline, support may be found at $1,754 per ounce and further down near $1,675 per ounce, while resistance may be found at around 1,813 per ounce and higher up at $1,870 per ounce.
Gold rebounded last week propped up by the fall of competing assets, such as the dollar and US treasury yields. The dollar withdrew, with the dollar index falling below the 105 level, after lower-than-expected US inflation data. US Bond yields remained high though, with the US 10-year treasury note yielding above 2.8% at the end of the week, putting pressure on gold prices. Real yields compete directly with gold, which is a non-interest-bearing asset, and their decline benefits gold prices.
The pivot of most major Central Banks toward a tighter monetary policy to combat rising inflation rates is putting pressure on the price of gold. Assets yielding interest become a more appealing investment compared to gold as interest rates rise.
Federal reserve rate hike rates eased last week, however, following the release of US inflation data, with odds in favor of a 50-bp rate hike. Gold prices benefitted from prospects of a more moderate rate hike and a weaker dollar. FOMC members' speeches last week remained hawkish though, not ruling out a steep 75-bp hike in September.
Global recession fears abated last week after US recession data showed that inflationary pressures are declining. As hopes of economic recovery were rekindled, risk sentiment was renewed, putting pressure on safe-haven assets. Increased risk sentiment halted the ascent of gold prices, even after the dollar’s retreat.
This week, US economic data may provide indications into the state of the US economy, affecting both dollar and gold prices. FOMC members’ speeches may especially affect gold price, by providing further insight into the Fed’s future policy direction.
Oil prices climbed a little last week, boosted by the declining dollar, but failed to gain traction and retreated towards the end of the week, with WTI closing just above the $90 per barrel level support level on Friday. This week, WTI is expected to continue testing the $90 per barrel support. If the WTI price declines further, it may encounter support at $82 per barrel, while resistance can be found near the $100 per barrel level and higher up at $105 per barrel.
Global recession fears eased last week, following the release of optimistic US inflation data. The oil demand outlook increases with the increased economic outlook, boosting oil prices. Fed rate hike bets also eased last week, as inflationary pressures in the US seem to be decreasing. Less severe economic tightening, expressed by more moderate increases in Central Banks’ interest rates, raises hopes of economic recovery, supporting oil prices. FOMC members towards the end of last week maintained a hawkish stance though, putting pressure on oil prices again.
Reports of an impending deal between the EU, aided by the US, and Iran are also adding pressure to oil prices. The EU has proposed to restore the 2015 Joint Comprehensive Plan of Action, effectively lifting sanctions on Tehran. Negotiations between the EU and Iran seem to be progressing, with the Iranian side asking for concessions from the US over its nuclear program. If the deal goes through, it can add more than a million barrels of oil per day to the global market providing some relief to oil demand.
Uncertainty over China’s oil demand is also causing fluctuations in oil prices. China is the largest importer of crude oil and Covid lockdowns have dampened oil demand. China’s weak economic outlook is raising concerns over the demand outlook for oil, pushing prices down.
Last week, the International Energy Agency raised its 2022 oil demand forecast by 380,000 bdp, while OPEC cut its forecast by 260,000 BPD. Interestingly enough, although the two organizations’ forecasts moved in opposite directions, their overall global oil demand forecast for the year is converging with OPEC predicting 100.03 million BPD and the IEA 99.7 million BPD.
Risk sentiment was renewed last week, benefiting high-risk assets like cryptocurrencies. Stock markets also gained last week, providing support to cryptocurrency prices, as crypto markets have been following stock market trends.
US CPI and PPI data last week showed that inflation in the US is cooling, allaying global recession fears temporarily. Increased risk sentiment prevailed in markets, with cryptocurrencies benefitting from the more positive economic outlook.
An increasing number of major Central Banks are moving towards a tighter fiscal policy, fuelling concerns of a shrinking economic outlook. Fed rate hike odds were moderated last week though, following the release of the US inflation data. Reduced inflationary pressures may induce the Fed to adopt a less stringent monetary policy. Severe rate hikes stifle economic activity, putting pressure on cryptocurrencies. Markets are pricing in a Fed rate hike of at least 50 bp in September, with a 75 bp increase still on the table.
Bitcoin price climbed above the $23,000 resistance level last week, testing the 24,500 level resistance, but failed to climb above the $25,000 psychological level. If Bitcoin price declines, support may be found near 20,700 and further down at the $19,200 level, while further resistance may be found near $31,500.
Ethereum continued its ascend last week, climbing above the $1,800 resistance level and unsuccessfully testing the $2,000 resistance level. If Ethereum's price declines, it may encounter support at the $1000 level, representing its lowest price since January 2021, and further down at the psychological level of $500, while resistance may be encountered again at $2.000.
Ethereum's price has been boosted in the past month in anticipation of the so-called ‘merge’, which has been set to launch on September 19th. The Merge from the Proof-of-Work to the Proof-of-Stake method will be a significant network upgrade that is expected to lead to an increase in demand for Ethereum. Last week, the Ethereum price received a further boost from reports that the Ethereum Foundation is making significant progress towards the merger. The proof-of-stake Beacon chain may now take place ahead of schedule, between September 15 and 16.
BTC/USD 1h Chart
ETH/USD 1h Chart
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