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Weekly Market Outlook For January 16th To January 22nd

Home >  Weekly Outlook >  Weekly Market Outlook For January 16th To January 22nd

Written by:
Myrsini Giannouli

16 January 2023
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Forex

Important calendar events

  • January 16, JPY: Annual PPI, Preliminary Machine Tool Orders
  • January 16, EUR: German WPI, French Gov Budget Balance, Eurogroup Meetings, German Buba Monthly Report
  • January 17, EUR: German Final CPI, German ZEW Economic Sentiment, ZEW Economic Sentiment, ECOFIN Meetings
  • January 17, GBP: Claimant Count Change, Average Earnings Index, Unemployment Rate
  • January 17, USD: Empire State Manufacturing Index
  • January 18, JPY: Core Machinery Orders, BOJ Outlook Report, Monetary Policy Statement, BOJ Press Conference, BOJ Policy Rate, Revised Industrial Production
  • January 18, GDP: Annual CPI and Core CPI, PPI Input and Output, RPI, HPI, CB Leading Index
  • January 18, EUR: Italian Trade Balance, Annual Final CPI, and Core CPI
  • January 18, USD: Monthly PPI and Core PPI, Retail Sales and Core Retail Sales, Capacity Utilization Rate, Industrial Production, Business Inventories, NAHB Housing Market Index, Beige Book, TIC Long-Term Purchases
  • January 19, JPY: Trade Balance
  • January 19, GBP: RICS House Price Balance, BOE Credit Conditions Survey
  • January 19, EUR: Current Account, ECB Monetary Policy Meeting Accounts
  • January 19, USD: Philly Fed Manufacturing Index, Unemployment Claims, Building Permits, Housing Starts
  • January 20, JPY: National Core CPI
  • January 20, GBP: GfK Consumer Confidence, Retail Sales
  • January 20, USD: Existing Home Sales

USD

The soft inflation print put pressure on the dollar, as cooling price pressures may give the Fed some leeway towards scaling back its rate hikes. 

The dollar plummeted last week after the release of the highly-anticipated US inflation report on Thursday. The dollar continued to decline towards the end of the week, with the dollar index closing near the 102.1 level on Friday. 

US Treasury yields also fell sharply on Thursday on reduced Fed rate hike expectations, with the US 10-year bond yielding approximately 3.5% by the end of the week%. 

CPI data released on Thursday were this week’s most highly anticipated fundamentals. US inflation seems to be cooling, as US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. Monthly CPI, which excludes food and energy, came at -0.1% in December from 0.1% in November, which was the first negative print of 2022. On the other hand, Core CPI rose to 0.3% from 0.2% the previous month. 

Although the US inflation print on Thursday was in line with expectations, the dollar crashed after the release of the CPI data. The soft inflation print put pressure on the dollar, as cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases. 

US Unemployment Claims released on Thursday were more optimistic than expected but failed to provide support for the dollar after the release of the US inflation report. Similarly, Prelim UoM Consumer Sentiment on Friday exceeded expectations, indicating that the US economy is moving in a positive direction, but the dollar remained unchanged, weighed down by reduced Fed rate hike expectations.

Fed interest rate increases have been the main factor driving the US dollar and treasury yields over the past few months. At the latest monetary policy meeting the Fed raised interest rates by 50 basis points, bringing the benchmark interest rate to a target range of 4.25% to 4.50%. 

Fed rhetoric in the past week has been cautiously hawkish, with FOMC members stressing the need to bring inflation down but hinting that inflation indicators will play a decisive role in determining the pace of future rate hikes. On Tuesday, Federal Reserve Chairman Jerome Powell stressed that the Fed will have to make tough decisions to bring US inflation down. The Fed Chair however, carefully avoided commenting directly on the central bank’s monetary policy outlook, increasing the likelihood of a pivot in the Fed’s policy as US inflation cools. FOMC member James Bullard maintained his hawkish stance even after the release of soft inflation data, stating that interest rates should get above 5%.

US economic outlook and inflation will likely determine the pace of future rate hikes. Many analysts believe that the Fed will ease its rate hikes but 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. Markets however are currently pricing in a more moderate 25-bp rate hike at the Fed’s next monetary policy meeting.

Global recession concerns remain high, boosting the dollar. US GDP data revealed that GDP rose by 3.2% for the third quarter of 2022. The US economy is still expanding, but at a slower pace than anticipated and recession looms.

Several economic activity indicators are scheduled to be released this week for the US. This week's most important fundamentals are the PPI inflation indicators on the 18th. Together with last week’s CPI data, the PPI indicators will provide a more complete picture of the direction of US inflation. As interest in the Fed’s future policy direction mounts, the dollar will also be especially sensitive to FOMC members’ speeches this week.

TRADE USD PAIRS

EUR 

Markets are pricing in at least two more 50-bp ECB rate hikes this year against 25-bp Fed rate hikes, bolstering the Euro.

The Euro was bolstered last week, and the dollar plummeted after the release of soft US inflation data. EUR/USD was catapulted above the 1.078 resistance, reaching 1.083. If the currency pair goes up, it may encounter resistance at 1.118. If the EUR/USD pair declines, it may find support at 1.048. 

Hawkish ECB rhetoric last week has been providing support for the Euro. ECB members Isabel Schnabel and Francois Villeroy stressed the need for additional interest rate hikes in the coming months. In addition, ECB Economic Bulletin released on Thursday showed that the ECB doesn’t expect to hit its 2% inflation target until 2025.

Increased price pressures combined with a weak economic outlook have brought stagflation in the Eurozone, a toxic mix of high inflation and stale economic growth. EU headline inflation dropped to 9.2% year-on-year in December from a 10.1% print in November indicating that Eurozone inflation is cooling. This is the first drastic drop in inflation that signals that the ECB’s efforts to tame inflation are bearing fruit. Price pressures in the Eurozone remain high though, and interest rates need to rise significantly to combat entrenched inflation. 

EU inflation rates are still far from the ECB’s 2% goal and are forcing the central bank to hike rates aggressively. In its latest monetary policy meeting in December, the ECB raised interest rates by 50 bp, bringing its benchmark interest rate to 2.50%. 

The question however is, whether economic conditions in the Eurozone will allow the ECB to continue raising interest rates at a fast pace. The ECB has updated its economic growth forecast by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024, and 1.8% in 2025. These are lower than previous estimates, indicating that Eurozone economic outlook is poor and that the ECB might be forced to raise interest rates in a recessionary backdrop.

Markets are pricing in at least two more 50-bp rate hikes in February and March this year. On the other hand, market odds for the next Fed rate hike are at 25-bp, as a pivot in the Fed’s policy is expected. If this scenario comes true, it will boost the Euro against the dollar. 

Several economic activity indicators are scheduled to be released this week for the Eurozone. Key among those are annual CPI data on the 18th, which will provide information on Eurozone inflation. In addition, ECB President Christine Lagarde is due to deliver a speech at the World Economic Forum in Davos on the 19th and the 20th.

EURUSD 1hr chart

TRADE EUR PAIRS

GBP 

The British economy expanded by 0.1% in November against expectations of a 0.2% contraction.

The Sterling gained strength last week, benefitting from the dollar’s decline. GBP/USD edged higher, climbing to 1.223. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.184. 

UK GDP data released on Friday exceeded expectations, boosting the Sterling. The British economy expanded in November, albeit only by 0.1%. Analysts were predicting a 0.2% contraction though and the unexpected rise improved the British economic outlook. 

The British economy remains constrained, however, and the country is on the brink of recession. 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. 

At the same time, surging inflation has forced the BOE to adopt a more hawkish fiscal policy, bringing its interest rate to 3.50% in December, its highest rate in 14 years. After a year of fiscal tightening, UK headline inflation finally dropped to 10.7% in November, alleviating some of the pressure on the BOE to raise interest rates. In December's latest monetary policy meeting, BOE members voted to hike rates by 50 bps. With inflation remaining above 10%, this was perceived by many analysts as the start of a pivot toward a more dovish fiscal policy, putting pressure on the Sterling. 

The BOE gave uncertain forward guidance at its latest policy meeting in December, leaving the door open for further rate hikes, but signaling that interest rate increases might pause within the first quarter of 2023. The UK’s grim economic outlook may limit policymakers’ ability to increase interest rates sufficiently to rein in inflation.

On the data front, the most important fundamentals this week for the UK are annual CPI data on the 18th, which will provide a measure of the inflation levels in the UK and may cause some volatility in the Sterling price. 

GBPUSD 1hr chart

TRADE GBP PAIRS

JPY

Market expectations of a gradual shift in the BOJ’s policy towards a more dovish direction bolstered the Yen.

The Yen gained strength last week, as the dollar dipped on cooling US inflation. USD/JPY dropped below the 129.5 level support, touching 7-month lows and closing near 127.8 on Friday. If the USD/JPY pair declines, it may find further support near 114.2. If the pair climbs, it may find resistance at 138.2.

Price pressures continue to rise in Japan, as BOJ CPI rose to 2.9%, mainly due to the high cost of imported energy. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households.

The BOJ caused a stir in markets in December by finally yielding to increased price pressures and tilting its monetary policy. In the latest monetary policy meeting, Japanese policymakers maintained the central bank’s refinancing rate at -0.10% but changed its yield control target for its 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 allow interest rates to rise, cutting off some of its monetary stimuli. 

Meanwhile, BOJ Governor Haruhiko Kuroda has been reaffirming the central bank’s commitment to its ultra-easy policy. 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 final GDP Price Index for the third quarter of 2022 showed economic contraction by 0.3% on an annual basis and the Japanese economy shrank by 0.2% in the third quarter of 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

Market expectations of a gradual shift in the BOJ’s policy towards a more dovish direction bolstered the Yen last week. This week, the BOJ monetary policy meeting on the 18th is expected to generate some volatility in Yen price. The BOJ is not expected to change its interest rate yet, but even subtle signs of a pivot in the bank’s policy are likely to affect the Yen. The BOJ may start moving away from its ultra-loose monetary policy by revising Yield Curve Control measures as early as this week. Market participants will be focusing on the Monetary Policy Statement and Press Conference following the meeting for any tweaks in the BOJ’s forward guidance. 

USDJPY 1hr chart

TRADE JPY PAIRS

Gold 

Gold prices soared last week as the dollar plummeted but are approaching overbought territory.

Gold prices climbed to their highest level since April last week, as soft US inflation print put pressure on the dollar. Gold prices climbed above the $1,877 per ounce resistance, touching $1,920 per ounce. If gold prices continue to increase, further resistance may be encountered near $2,000 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 plummeted last week after the release of the highly-anticipated US inflation report on Thursday, with the dollar index closing near the 102.1 level on Friday. 

US Treasury yields also fell sharply last week on reduced Fed rate hike expectations, with the US 10-year bond yielding approximately 3.5% by the end of the week. 

CPI data released on Thursday were this week’s most highly anticipated fundamentals. US inflation seems to be cooling, as US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. Monthly CPI, which excludes food and energy, came at -0.1% in December from 0.1% in November, which was the first negative print of 2022. On the other hand, Core CPI rose to 0.3% from 0.2% the previous month. 

Although the US inflation print on Thursday was in line with expectations, the dollar crashed after the release of the CPI data. The soft inflation print put pressure on the dollar and gold prices soared, as cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases. Gold prices are approaching overbought territory though, as they move closer to levels reached only after the crisis in Ukraine started last year.

Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. Several major Central Banks, such as the Fed, the ECB, and the BOE raised interest rates considerably in the past year. A worldwide wave of fiscal tightening has been driving gold prices down.

Gold prices surge as the Fed and other central banks start to scale back their aggressive rate hiking. Gold has been in a bullish trend for the last couple of months, which is likely to continue if the Fed signals a pause in raising interest rates.

Increased global recession concerns, however, raise the appeal of gold as an investment. In China, prolonged Covid lockdowns have dealt a significant blow to the economy. A diminishing economic outlook may force central banks around the world to pivot to a more dovish fiscal policy. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices.

This week's most important fundamentals are the US PPI inflation indicators on the 18th. Together with last week’s CPI data, the PPI indicators will provide a more complete picture of the direction of US inflation and are likely to affect gold prices. As interest in the Fed’s future policy direction mounts, markets will also be especially sensitive to FOMC members’ speeches this week.

XAUUSD 1hr chart

TRADE GOLD

Oil 

Increased optimism about China’s oil demand outlook is providing support for oil prices.

Oil prices rallied last week on an increased oil demand outlook and WTI price climbed to $80 per barrel. If the WTI price declines, it may encounter support near $70.2 per barrel, while resistance may be found near $81.4 per barrel.

Hopes of global economic recovery boosted oil prices last week. The highly-anticipated US inflation report on Thursday showed that US inflation seems to be cooling, which may give the US Federal Reserve some leeway toward scaling back its interest rate increases. US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. A soft inflation print on Thursday reduced Fed rate hike expectations, boosting oil prices. 

Aggressive rate hikes stifle economic activity fuelling recession fears. Several major Central Banks, such as the US Federal Reserve, the ECB, and the BOE raised interest rates significantly over the past year, reducing the oil demand outlook. As inflation starts to cool though, central banks are starting to lower the pace of rate hikes, raising oil demand expectations.

Increased optimism about China’s economic reopening is also providing support for oil prices. China opened its borders last week after almost three years, fuelling hopes that the country is gradually ending its strict Covid policy. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. The Chinese government eased some of its strident Covid regulations recently, abandoning its zero-Covid policy. China’s economy, however, has suffered from prolonged lockdowns and the country’s debt has ballooned over the past few years. China’s weak economy is keeping a lid on oil prices. 

This week, the US PPI inflation data on the 18th will provide a more complete picture of the direction of US inflation and are likely to affect oil prices. 

WTI 1hr chart

TRADE WTI

Bitcoin and major Cryptocurrencies 

Crypto markets surged, as soft US inflation helped to scale back recession concerns, improving risk sentiment.

Bitcoin and other major cryptocurrencies rebounded last week on improved risk sentiment. Crypto markets and stock markets surged, as soft US inflation helped to scale back recession concerns, improving risk sentiment.

The highly-anticipated US inflation report last week showed that US inflation is cooling, which may give the US Federal Reserve some leeway towards scaling back its interest rate increases. US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. 

Even though inflation rates remain high, cooling price pressures have reduced rate hike expectations, providing support for riskier assets. The Fed and other central banks are starting to scale back their aggressive rate hiking, raising hopes of a reversal in cryptocurrencies’ downfall. Many market participants believe that the cryptocurrency selloff is nearly over and that current low prices offer an investment opportunity.

Bitcoin price surged by over 20% last week. The cryptocurrency was catapulted above the $20,000 resistance level, touching $21,000 over the weekend. If the BTC price declines, support can be found near $16,370, while resistance may be encountered at $22,700. 

Ethereum price climbed above the $1,350 resistance last week, reaching $1,560 over the weekend. If Ethereum's price declines, it may encounter support near $1,180, while if it increases, resistance may be encountered near $1,670.

This week, the US PPI inflation data on the 18th will provide a more complete picture of the direction of US inflation and are likely to affect cryptocurrency prices. 

BTC/USD 1h Chart

BTCUSD 1hr chart

 

ETH/USD 1h Chart

ETHUSD 1hr chart

The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

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