Important calendar events
The dollar rallied at the end of last week, after crashing on Wednesday as the outcome of the long-awaited Fed meeting was announced. The dollar index dropped to 101.1 on Wednesday, but climbed to 102.9 on Friday, as markets had time to digest the Fed’s interest rate decision. US Treasury yields also gained a little strength, with the US 10-year bond rising from 3.40% to 3.52% at the end of the week.
Robust labor data on Friday boosted the dollar. Non-Farm Employment Change rose by a whopping 517K in January, against expectations of a 193K raise. The unemployment rate dropped to 3.4% in January, falling below expectations of a 3.6% print.
Fed interest rate changes have been the main factor driving the US dollar and treasury yields over the past few months. After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy. The Federal Reserve raised interest rates by only 25 basis points in Wednesday’s meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. However, a pivot towards a more dovish policy was expected by markets and had been largely priced in. Nevertheless, the initial market response was negative for the dollar, and the currency plummeted.
Fed Chair Jerome Powell, at his press conference after the conclusion of the meeting defended the central bank’s decision to relax its hawkish policy. Powell caused a stir in markets, expressing himself as satisfied with the ‘disinflation’ process. Powell emphasized that ongoing rate hikes are appropriate since substantial evidence is necessary that inflation is under control.
Many analysts believe that the Fed will continue raising interest rates at a slower pace until the benchmark interest rate reaches at least 5.0%. This means there are likely still a couple of rate hikes up ahead, which may support the dollar.
US inflation seems to be cooling, as US headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. Cooling price pressures have given the US Federal Reserve some leeway towards scaling back its interest rate increases, putting pressure on the dollar.
Advanced quarterly GDP data revealed that the US economy is expanding at a higher rate than anticipated. US GDP for Q4 of 2022 grew by 2.9% against expectations of a 2.6% growth. The US is likely headed for an economic ‘soft landing’ and recession concerns ease.
This week, Fed officials' speeches will attract a lot of market attention. Powell’s speech on the 7th is one of the week's most important events. Traders will follow his speech closely, looking out for hints on the central bank’s future policy.
On the data front, we have US Unemployment claims on the 9th, and on the 10th we have Preliminary UoM Consumer Sentiment and inflation expectations.
The Euro plummeted last week after the ECB monetary policy meeting and EUR/USD continued dropping for the remainder of the week, closing near 1.079 on Friday. If the currency pair goes up, it may encounter resistance near 1.103. If the EUR/USD pair declines, it may find support at 1.076.
The ECB meeting raised interest rates by another 50 bp in its policy meeting on Thursday, bringing its main refinancing rate to 3.0%. The rate hike was in line with market expectations though and had already been priced in. On the other hand, the Fed has started to pivot towards a more dovish policy, voting for a 25-bp rate hike on Wednesday.
After the conclusion of the meeting, ECB President Christine Lagarde gave a press conference with hawkish undertones. Lagarde emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June. The EU central bank also decided that it needed to start dialing back its stimulatory bond-buying programs. Even though the ECB seems prepared to continue raising interest rates to bring inflation down, the initial market response was negative towards the Euro, which plummeted.
EU inflation rates are decreasing, but they are still far from the ECB’s 2% goal and are forcing the central bank to hike rates aggressively. According to CPI data released on Wednesday, eurozone headline inflation dropped sharply in January. Final EU headline inflation dropped to 8.5% year-on-year in January from a 9.2% print in December, indicating that Eurozone inflation is cooling. The continued drop in inflation signals that the ECB’s efforts to tame inflation are bearing fruit.
Reduced fuel costs are one of the main reasons for the sudden drop in inflation. Core CPI, which excludes food and energy, remained steady in January at 5.2% on an annual basis. Price pressures in the Eurozone remain high though, and interest rates need to rise significantly to combat entrenched inflation.
The Sterling plummeted last week after the BOE showed signs of pivoting toward a more dovish direction. The market response to the outcome of the meeting was negative for the Sterling and GBP/USD continued to drop below the 1.208 level support at the end of the week. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while further support may be found near 1.284.
The BOE raised interest rates by another 50-bp hike in Thursday’s meeting, bringing the official bank rate to 4.0%. Seven out of nine MPC members voted in favor of the rate hike, while the other two voted to keep interest rates unchanged. The rate hike fell in line with market expectations and had already been priced in. On the other hand, the Fed proved to be less aggressive in its tightening regime on Wednesday, voting for a 25-bp increase.
The BOE Monetary Policy Report issued after the meeting, however, was more dovish than expected, pulling the Sterling down. MPC members appeared to be optimistic about the UK’s inflation trajectory, pointing to a possible pause in rate hikes. The policy report stated that “if there are more persistent price pressures then only will further tightening be required”.
Inflation data have shown that inflation in the UK is cooling. PPI Input dropped by 0.2% in November from an increase of 0.9% in October, and in December, consumer inflation cooled even further, decreasing by 1.1%. Similarly, PPI output data released for November and December showed that British manufacturers unexpectedly lowered their prices in the past two months, suggesting that inflation may be easing. In addition, UK headline inflation dropped to 10.5% in December from 10.7% in November. With inflation remaining firmly above 10% though, additional measures would be required to bring price pressures down.
The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year. The final GDP print for the third quarter of 2022 was -0.3%, indicating that the economy in the UK is shrinking. The British economy is still struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.
This week, several MPC members are due to deliver speeches, which are likely to cause volatility in the Sterling price, given the possibility of a pause in rate hikes up ahead. Primary among those, are the Monetary Policy Report Hearings on the 9th, during which BOE Governor Bailey and several MPC members testify on inflation and the economic outlook before Parliament's Treasury Committee. GDP data on the 10th are also likely to affect the Sterling, due to the current precarious state of the British economy.
The Yen gained strength against the dollar after the Fed meeting last Wednesday, but the dollar’s rebound at the end of the week reversed the trend. USD/JPY skyrocketed on Friday, ending the week around the 131.2 level. If the USD/JPY pair declines, it may find support near 127.2 and further down at 114.2. If the pair climbs, it may find resistance at 131.6. Currently, the USD/JPY rate is driven primarily by the dollar’s direction, as markets weigh in on the implications of the Fed’s dovish shift.
Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10% as expected. BOJ Governor Haruhiko Kuroda defended the central bank's decision to keep its yield curve control policy unchanged and vowed to conduct unlimited bond buying to maintain the bank’s yield curve control. Kuroda, however, is due to retire in April and his successor may decide to unwind the BOJ’s ultra-easy policy. A pivot in Japan’s monetary policy within 2023, would boost the Yen considerably.
The BOJ caused a stir in markets in its previous meeting in December by changing its yield control target for the 10-year government bond to between plus or minus 0.50%, from a previous 0.25%. The BOJ had set a target range around zero for government bond yields for years, and this adjustment may be the signal of a shift towards a more hawkish policy. Long-term, this move may increase interest rates, cutting off some of its monetary stimuli.
BOJ Core CPI rose to 3.1% year-on-year, exceeding expectations of a 2.9% print. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. National Core CPI for December was at 4.0%, rising above November’s 3.7% print.
The final GDP Price Index for the third quarter of 2022 showed economic contraction by 0.3% annually, and the Japanese economy shrank by 0.2% in the third quarter of 2022, mainly due to the high imported energy costs. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.
Gold prices were boosted after the US Fed scaled back its interest rate hikes last Wednesday but plummeted as the dollar rebounded at the end of the week. Gold tumbled from a nine-month peak of $1,958 per ounce to $1,860 per ounce on Friday, as it was trading in overbought territory. Gold prices had been trading in the overbought territory in the past couple of months, rising close to levels reached only after the crisis in Ukraine started last year. If gold prices continue to increase, resistance may be encountered near $1,950 per ounce, while if gold prices decline, support may be found near $1,825 per ounce.
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 rallied at the end of last week, after crashing on Wednesday as the outcome of the long-awaited Fed meeting was announced. The dollar index dropped to 101.1 on Wednesday, but climbed to 102.9 on Friday, as markets had time to digest the Fed’s interest rate decision. US Treasury yields also gained a little strength, with the US 10-year bond rising from 3.40% to 3.52% at the end of the week.
Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment than gold as interest rates rise. After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy, boosting gold prices. The Federal Reserve raised interest rates by only 25 basis points at Wednesday’s meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%.
Fed Chair Jerome Powell, at his press conference after the conclusion of the meeting, defended the central bank’s decision to relax its hawkish policy. Powell expressed his satisfaction with the ‘disinflation’ process but emphasized that ongoing rate hikes are appropriate since substantial evidence is necessary that inflation is under control.
US inflation seems to be cooling, providing support for gold prices. As the Fed and other central banks start to scale back their aggressive rate hiking, gold prices surge. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices.
Oil prices plummeted last week after the OPEC+ meeting and continued to decline throughout the week, with the WTI price touching the $73 per barrel level. If the WTI price declines, it may encounter support near $72.4 per barrel, while resistance may be found near $82.3 per barrel.
The outcome of the OPEC-JMMC Meetings on Wednesday caused oil prices to tumble. The organization kept output target levels unchanged, maintaining the production cuts agreed to in October, despite declining oil prices. These included cutting back 2 million barrels a day to balance out reduced demand. The committee reaffirmed its determination to maintain its production target until the end of the year as expected, but oil prices slumped after OPEC’s announcement on Wednesday.
In addition, US crude oil inventory data on Wednesday showed a rise of 4.1 million barrels, far exceeding expectations of a drop by 1.0 million barrels, putting pressure on oil prices.
The Fed, the ECB, and the BOE, all tightened their monetary policy last week. The cumulative result of this new wave of economic tightening on oil prices was negative. Even though the Fed pivoted to a more dovish direction and the BOE hinted at a possible pause in rate hikes, oil prices plummeted. Recession concerns still run high and aggressive rate hikes stifle economic activity, limiting the oil demand outlook.
As inflation starts to cool though, central banks are starting to lower the pace of rate hikes, which may raise future oil demand expectations. Moreover, the International Monetary Fund has revised its global economic growth outlook, easing recession concerns. According to the IMF World Economic Outlook, the global economy is expected to grow by 2.9% this year, boosting oil demand expectations.
EU leaders have yet to reach an agreement on the price cap of Russian oil exports. Meanwhile, the Russian oil supply remains strong, suggesting that the sanctions have not made a significant dent in Russian oil sales.
Oil prices are supported by optimism over China’s economic recovery. China’s economy has suffered, and the country’s debt has ballooned over the past few years. The Chinese government has eased some of its strident Covid regulations, abandoning its zero-Covid policy. China has re-opened its borders after almost three years, fuelling hopes of economic recovery. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand.
Last week's Fed monetary policy meeting outcome was perceived as dovish, propelling risk assets upwards. Risk appetite surged after the release of the Fed statement, boosting stock markets and crypto markets in anticipation of lower interest rates by the end of the year.
After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy, boosting cryptocurrency prices. The Federal Reserve raised interest rates by only 25 basis points at Wednesday’s meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Even though inflation rates remain high, cooling price pressures have induced the Fed to scale back its rate hikes, providing support for riskier assets. Fed Chair Jerome Powell stated that the disinflation process has started, renewing risk sentiment.
In addition, the International Monetary Fund revised its global economic growth outlook, easing recession concerns. According to the IMF World Economic Outlook, the global economy is expected to grow by 2.9% this year, raising optimism for economic recovery.
Bitcoin price tested the resistance at $23,900 last week, touching $24,000, but retreated below $23,000 over the weekend. If the BTC price declines, support can be found near $22,390, while further resistance may be encountered near $25,000.
Ethereum price also gained strength last week, rising to $1,700 and trading around $1,630 over the weekend. If Ethereum's price declines, it may encounter support near $1,518, while if it increases, resistance may be encountered near $1,789.
Global cryptocurrency market capitalization has started to recover this year and remains above $1 trillion. Crypto bulls are hoping that the recent cryptocurrency selloff has passed and that market confidence in the industry will be restored. Bears are fighting back, however, pushing cryptocurrency prices down.
BTC/USD 1h Chart
ETH/USD 1h Chart
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