Last week, tensions between Russia and Ukraine continued mounting. The Pentagon warned that Russia may be on the brink of invading Ukraine, with Russia amassing over 100,000 troops within its Ukrainian borders and reports that Russia has moved blood and other medical supplies closer to the border. However, diplomatic talks continue, in the hopes of finding a peaceful resolution. Russian President Vladimir Putin stated last week that Russia does not plan to attack Ukraine, and insisted instead that Russian security concerns need to be taken into account. The Russian President also accused the US of using Ukraine as a tool to contain Russia. On the other hand, Ukrainian Prime Minister Denys Shmygal and his Polish counterpart, Mateusz Morawiecki, announced last week that they were working with Britain to cooperate in the face of "Russian aggression."
The Russian stock market and the Ruble have plummeted since last week as investors turned away from this high-risk market. The US and the EU have threatened Russia with economic and trade sanctions in the case of an attack against Ukraine and this might result in an energy crisis. The EU relies on Russia for most of its natural gas and oil imports, as well as for wheat and other commodities, and a disruption in supply might result in a rise in prices and an increase in inflation rates for the Eurozone.
Last week, statements by FOMC members have led traders to believe that the Fed’s fiscal policy this year will not be as aggressively hawkish as originally anticipated. The dollar, whose price had been pushed up last week in expectation of frequent and sharp rate hikes, plummeted, with the dollar index going as low as 95.14. The Euro benefitted from the weakening dollar and also from rising speculation that the ECB will be forced to tighten its monetary policy within the year in the face of soaring inflation rates in the EU, and the EUR/USD climbed to 1.148. In the UK, the heavy political climate against British PM Boris Johnson has been weighing the pound down. The sterling was propped up by the BOE’s decision to raise its benchmark interest rate though, and GBP/USD climbed up to 1.362.
Gold was supported by rising geopolitical tensions between Russia and Ukraine, and also by declining yields across the US treasury curve, ending the week just above the key $1,800 per ounce level. Oil was catapulted to new heights, with WTI trading above $93.4 per barrel, amidst rising demand and supply constraints. Cryptocurrencies experienced a volatile week, with prices kept low by a prevalent risk-aversion sentiment. Major up levels appeared on Friday though, and Bitcoin price was catapulted above $40,000 for the first time in two weeks.
Important calendar events
The dollar fell heavily last week, after climbing to its highest level in over a year in the wake of the Fed’s monetary policy meeting. The US Central Bank indicated that it would adopt an aggressive fiscal policy to tackle inflation, signaling an increase in its interest rates as early as March. The dollar index had climbed as high as 97.25, but fell to 95.14, as traders digested the Federal Reserve’s statements. This past week, several FOMC members have clarified the Federal Reserve’s intentions, ruling out more than four interest rate rises in 2022 and steep rate hikes. When interviewed, FOMC members seemed to consider an increase of the interest rate by 50 base points excessive. As some investors were anticipating more frequent and sharper rate hikes, the comparatively dovish FOMC statements drove the dollar and US treasury yields down.
The Federal Reserve is planning to tighten its fiscal policy to combat inflation, but in the coming months, it will rely on financial and inflation indicators to determine the extent of the measures that will be required to reduce inflation and gradually tighten its monetary policy to pre-pandemic levels, in a way that will be sustainable by the US economy and employment.
Several inflation and employment indicators for the dollar will be released throughout the week and may cause volatility for the dollar, since economic, inflation, and employment data may influence the Fed’s future monetary policy.
Last week, economic indicators showed soaring inflation rates of around 5.1% in the Eurozone, putting pressure on the ECB to shift to a more hawkish fiscal policy. The much-anticipated ECB policy meeting was concluded last Thursday and the EU Central Bank kept its interest rates unchanged and continued its ultra-accommodating monetary policy, as expected. The ECB Monetary Policy Statement though contained hints that the bank might eventually start moving towards a less dovish policy. Mounting inflationary pressures in the EU seem to be finally catching up with the ECB, which might be forced to tighten its monetary policy within the year. ECB President Christine Lagarde, who is known as a staunch supporter of a dovish monetary policy, did not reaffirm her previous statement that the EU Central Bank would not raise its interest rate within the year. Instead, she expressed concern about the increasing inflation rates in the EU. This hint was sufficient for traders, and the Euro spiked following the ECB’s statement.
The Russia-Ukraine crisis also threatens to further increase inflation in the Eurozone. An escalation of this crisis might force the EU to adopt economic and trade sanctions against Russia. This would have a heavy impact on the Eurozone, which relies on Russia for key commodities, such as wheat, natural gas, and oil and the price of these goods is already increasing. A disruption in importing these commodities would likely result in rising prices, creating an energy crisis and further increasing inflation rates in the EU.
The EUR/USD rate was catapulted to 1.148 last week, testing its resistance at this level. If the currency pair goes up, it may encounter resistance at 1.190, while if it falls, support may be found around 1.275 and further down at 1.112. The Euro gained strength last week after the ECB meeting, while the dollar weakened. The dollar lost ground, as it had spiked upwards due to expectations of an overly-hawkish Fed stance, and dipped when FOMC members signaled that the US Central Bank would raise interest rates at a more moderate pace.
The sterling was supported last week by BOE announcements that it would raise its benchmark interest rate by 25 basis points. This is the first time since 2004 that the BOE has announced back-to-back rate hikes, from 0.1% to 0.25% in its previous meeting in December, to 0.5% last week, indicating the BOE’s commitment to combat soaring inflation rates. The Monetary Policy Committee voted unanimously in favor of raising interest rates, although four of its members voted in favor of an even steeper rate hike by 50 bs. The sterling rose after the BOE’s announcements and BOE Governor Andrew Bailey’s speech following the conclusion of the meeting. The pounds ascend was not dramatic though, as the BOE’s decision was widely expected and had been largely priced in.
Meanwhile, the uncertain political climate in the UK is putting pressure on the pound. British PM Boris Johnson is facing opposition even from within his party and is pressured to resign. Last week, a report into the ‘party gate’ scandal was presented by Civil Servant Sue Grey, threatening Boris Johnson’s political future. The report was heavily redacted, pending the conclusion of the Metropolitan Police investigation into the matter, but contained heavy criticism against the actions of the British PM, finding ‘failures in leadership. Following the release of the damning ‘party gate’ report, Boris Johnson’s position became even more strained, and he has been battered in recent meetings of the House of Commons and the British Parliament. Later last week, four senior members of the British PM’s staff resigned, creating even more turmoil in Downing Street.
GBP/USD rate was up from last week’s levels, benefitting from a stronger pound and a weaker dollar. The exchange rate fell slightly on Friday though, as the dollar gained strength, closing at 1.353. If the GBP/USD rate goes up again, there may be resistance at the 1.375 level, while if it declines, support may be found at 1.333 and further down at 1.317.
The Yen remains at its lowest level in decades, creating problems for households, as imported goods, especially food and energy, are becoming increasingly expensive for Japanese households. Gasoline prices in Japan continue rising, hitting the highest level in 13 years, despite emergency measures to keep the price down.
The BOJ’s dovish monetary policy is creating a gap in interest rates between other major Central Banks, especially the Fed and the BoE who are raising their benchmark interest rates. The disparity in interest rates between the BOJ and other major Central Banks is hurting the currency, increasing the price of imports. The Japanese vice finance minister for international affairs, Masato Kanda, stated last week that the weak Yen has its advantages, such as highly competitive exported goods, but recognizes the downsides of a weak currency, which might point to a change in fiscal policy in the future.
USD/JPY tested its 114.8 support at the end of last week, but ended the week higher, climbing to 115.2. If the pair continues gaining strength, it may find resistance at 115.6 and 116, while if it declines, support might be found at 114.8 and further down at 113.48.
Early last week gold prices went up as treasury yields declined and the dollar dipped, as traders adjusted their expectations of future Federal Reserve rate hikes. On Friday however, the dollar index recovered a little, and US, as well as EU yields, rose. Rising treasury yields put pressure on the price of gold, which becomes less appealing as an asset, as it does not pay dividends or interest.
Last week, the ECB exhibited a faint, but significant shift in its stance, moving slowly to a more hawkish fiscal policy, while the Bank of England raised its benchmark interest rate to 0.5%. As major Central Banks raise their interest rates to combat inflation, treasury yields also rise, putting pressure on the price of gold.
Mounting tensions between Russia and Ukraine also help to keep the price of gold up, as investors turn to safe-haven assets. Russian President Vladimir Putin stated last Tuesday that Russia does not plan to attack Ukraine, and accused the US of using Ukraine as a tool to contain Russia. Diplomatic talks continue though, and if the situation is resolved peacefully, the gold price might drop. An escalation of the Russia-Ukraine crisis might boost the price of gold, as metal is considered a safe-haven asset, and its price rises in times of war. Geopolitical tensions in the region might also serve to drive the price of other commodities up, especially energy-related assets, contributing to rising inflation rates. The price of gold benefits from increased inflation, as it is often used as an inflation hedge.
Gold price closed at $1,807 per ounce on Friday, above the key $1,800 per ounce level. If the price of gold rises again, it may find resistance at $1,829 per ounce and further up at $1,853 per ounce, while if the price of gold decreases further, support may be found at 1,782 per ounce.
WTI price climbed above $93 per barrel last week, amid rising demand and supply constraints. WTI rose to $93.4 per barrel, its highest level since October 2014 and many analysts predict it will reach three-digit figures within the year. WTI is moving in an uptrend and the outlook for the commodity is bullish. In case the uptrend is reversed, support may be found at the $82.4 per barrel level and further down around $78.8 per barrel and $77.8 per barrel.
Mounting geopolitical tensions between Russia and Ukraine as well as in the Middle East have sent the price of oil up since the beginning of the year. An escalation of the Russian-Ukraine conflict might create an energy crisis, especially for the EU, driving the price of oil further up.
On Wednesday, OPEC+ agreed to increase its output by another 400,000 barrels per day, matching last month’s increase in output, amid pressures to increase supply in the face of rising demand. Some of its member countries struggle to meet their output goal though, amidst capacity constraints, raising doubts on whether the organization will be able to deliver the amount promised. OPEC managed to increase its output in December by only 250,000 barrels a day rather than the 400,000 expected and the difficulty in increasing output is driving the price of oil up.
Supply shortages are driving the price of oil up, as cold weather descends on the US, and existing inventories are tight. Oil production in the US is on the rise though, as an EIA report published on Monday showed that production rose over 2% in November, indicating an increase in shale output, although existing inventories are tight.
Bitcoin and Ethereum had a volatile week, with prices climbing at the end of the week and over the weekend, as both BTC and ETH crossed key resistance levels. BTC climbed above the $40,000 key level and $42,000 over the weekend. If its price declines, it may find support at $36,000 and further down at $33,000, while if the price of Bitcoin goes up, it may find resistance at $44,300. Ethereum rose to the $3,000 key level and continued trading just above this level during the weekend, testing its resistance. If its price goes down, it may find support at $2,640 and further support at around $2,150. In case its price goes up, it may find resistance around $3,400.
Since the beginning of the year, cryptos have been under pressure, with Bitcoin losing over 20% of its value, hit by a bout of risk aversion. Can the bulls finally prevail and reverse the downtrend? Mounting geopolitical tensions contribute to keeping cryptocurrency prices down, as risk-appetite decreases and investors turn to safe-haven assets. The hawkish shift in the fiscal policy of most major Central banks also puts pressure on cryptocurrencies.
Regulatory concerns are also keeping the price of cryptos down, as many countries around the world are launching a crackdown on cryptocurrencies. US Congressman Ted Budd submitted an amendment to scrub a bill provision allowing the U.S. Treasury to unilaterally prohibit certain financial transactions without public input. If this bill passes, it would put pressure on cryptocurrencies, especially since many other countries such as Italy, Spain, and the UK, proposed restrictions on mining and advertising.
BTC/USD 1h Chart
ETH/USD 1h Chart
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