Last week started off with very low volatility for most assets but ended with some unexpected developments. The USD exhibited very low fluctuation all week, with the dollar index ranging between 95.0 and 95.84. The euro fell against the dollar, with the EUR/USD rate testing its 1.131 support and going as low as 1.130. The sterling lost some of its strength, as the heavy political climate against British PM Boris Johnson weighed down the pound. USD/JPY continued moving along a downtrend, reaching the 113.6 level and close to the 113.48 support.
Gold climbed to its highest price in two months, breaking through its $1,829 per ounce resistance, amidst growing tensions between Russia and Ukraine. WTI price rose to a 7-year high of over $86 per barrel last week, oversupply concerns and tight oil inventories. Bitcoin and other cryptocurrencies crashed, as the bears seem to be winning the fight for now.
Important calendar events
The past week was quiet for the dollar, after experiencing some turbulence the week before. Last week traders were more cautious, in anticipation of the FOMC meeting on January 25-26. The dollar index, which measures the value of the U.S. dollar relative to a basket of other currencies, registered low fluctuation all week, ranging between 95.0 and 95.84.
US treasury yields rose across the US Treasury curve at the beginning of last week, with 2-year and 10-year yields hitting a 2-year high, before retreating again at the end of the week. US unemployment data rose to a three-month high, as soaring Omicron cases disrupted economic activity. Even though the surge of Omicron cases is putting pressure on the US economy, investors are mostly expecting this effect to be a temporary setback and the economy to go back on track before long.
The highly anticipated FOMC January two-day meeting is scheduled on January 25-26, after which the Fed will issue a statement announcing its first interest rates for 2022. Increased volatility is expected for the dollar after the end of the meeting, as traders will scan the Federal Reserve’s statement to gain insight into the Central Bank’s future monetary policy. The Federal Reserve’s hawkish stance is no secret and investors are expecting the US Central Bank to raise interest rates at least three times this year, starting in March. Even though the rate hikes have already been priced in, there is growing speculation that the Fed might adopt an even more aggressive attitude and tighten its monetary policy further to combat rising inflation rates.
A number of important indicators for the dollar will also be released on January 27th, such as the Quarterly advance GDP and US Unemployment claims and may cause high volatility for the currency. On January 28th, the US monthly Core PCE Price Index is scheduled to be released, which is an inflation index and may influence future monetary policy.
Last week, the European Central Bank released its monthly Current Account data, which were higher than expected, indicating a positive direction to the Eurozone’s economy. Germany’s benchmark bond yield rose above zero for the first time since 2019, as investors anticipate that central banks may gradually tighten their monetary policy in order to combat inflation. ECB head Christine Lagarde however, in an interview in France Inter radio stated that Eurozone Inflation drivers will ease gradually in 2022 and the European Central Bank will not need to take as aggressive measures to bring inflation down as the Fed. The ECB December policy meeting minutes released last week confirmed the EU Central Bank’s dovish outlook and the euro fell as expectations of a tighter monetary policy in the future diminished.
The euro retreated against the dollar, with the EUR/USD rate testing its 1.131 support and going as low as 1.130. The currency pair climbed a little on Friday and closed at 1.134, above its 1.131 support. We expect to see whether the EUR/USD will go down again the coming week, testing its support. If the currency rate goes up again this week, it might encounter resistance at the 1.1387 level, and further up at 1.1483.
The German Flash Manufacturing PMI and the German Flash Services PMI are scheduled to be released on January 24th and may cause some volatility for the euro, but the EUR/USD pair is expected to be driven mainly by the Fed’s announcements.
The pound started off strong in the beginning of last week after high inflation rates and low wages in the UK increased the chance that the BOE will announce a rate hike at its February 2nd meeting. The 12-month inflation rate released last Wednesday was the highest since September 2008, boosting the sterling. By the end of the week though, the political turmoil in the UK finally caught up with the pound, which started to slide.
The UK Prime Minister has come under pressure these past couple of weeks, after revelations that he attended parties in Downing Street during lockdown last May. The so-called ‘party gate’ investigation into the scandal that has erupted is expected to be concluded this week. If it is proved that Boris Johnson lied to the parliament and knowingly attended an event that was not work-related, his position will become even worse. Boris Johnson has been facing mounting pressure to resign and may get a vote of no-confidence from his own party if he doesn’t. Meanwhile, his approval ratings sunk to an all-time low of 28%, even though he has attempted to temper the negative political climate against him by announcing an end to all Covid-19 restrictions in the UK.
The GBP/USD pair was moving on a downtrend last week and broke through its 1.357 support, closing at 1.355 on Friday. The outlook for GBP/USD this week is still bearish, as the heavy political climate weighs the pound down. If the downtrend continues, further support may be found around 1.316, while the 1.375 level may offer some resistance if the trend is reversed.
This week, the UK Flash Manufacturing PMI and Flash Services PMI are scheduled to be released on January 24th and may cause some volatility for the sterling. The GBP is mostly going to be affected by political developments though, as this week is expected to decide the fate of Boris Johnson’s premiership.
Last week, traders anticipated the release of the BOJ’s report, in case it might contain hints of a hawkish shift in Japan’s monetary policy. BOJ Governor Haruhiko Kuroda, however, stated decisively that the central bank had no intention of raising interest rates and the Yen settled close to its previous levels. The BOJ also revised its inflation forecast for fiscal year 2023 to 1.1% from 1.0%, with Kuroda appearing content for inflation to stay below its 2% goal for years.
The USD/JPY pair continued its downtrend last week, closing at 113.67 on Friday, just above its 113.48 support. If the downtrend continues, the currency pair may test this support, while further down, support may be found at 112.55. If the USD/JPY rate goes up again, it may find resistance around the 115.69 and 116 levels.
There are no major announcements scheduled for the JPY in the week ahead. Volatility in the USD/JPY pair is more likely to be caused by the outcome of the upcoming Fed meeting, as well by the release of inflation indicators in the US.
Gold has been underperforming for the past couple of months as risk appetite grew, but has been on the rise again this past week, as tensions between Russia and Ukraine mount. US President Joe Biden warned Russia again that an invasion against Ukraine would have serious consequences, while the EU has threatened Russia with "massive" economic sanctions. A potential escalation of the Russia-Ukraine crisis would boost the price of gold further, as the 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. A potential de-escalation of the crisis might see the price of gold plummeting, although this is not considered likely at the moment.
Also driving the price of gold up is the current belief among many investors that this year’s rate hikes by the Fed have already been priced in. Traders expect the US Central Bank to raise interest rates three times this year, starting in March. In case however, that the Fed adopts a more aggressive stance to combat inflation and tightens its monetary policy even further, this may drive the price of gold down. The first interest rate decision of the year is expected to be released on Wednesday, after the Fed’s two-day meeting and, even though the rate is expected to remain unchanged at the moment, the Central Bank’s statements might provide insight into future monetary policy. Rising US yields have been keeping a lid on the price of gold, but as real yields fell across the US treasury curve at the end of last week, gold prices started to climb.
Gold prices started moving up since last Wednesday, breaking through its $1,830 per ounce resistance and climbing to over $1,845 per ounce. If the price of gold goes up, it may find resistance at the $1,877 per ounce level, while if it declines it may find support at $1,800 per ounce and further down at $1,780 per ounce.
WTI price has been on an uptrend since last month, as growing tensions between Russia and Ukraine have created an energy crisis. Russia has amassed over 120,000 troops on Ukraine’s border, and if the situation escalates, oil prices might go further up. As geopolitical tensions mount in regions that control the distribution of oil and natural gas, fears of energy shortages rise. The EU and the US threaten Russia with sanctions if it moves against Ukraine. Potential economic and trade sanctions in Russia might lead to potential natural gas shortages and may create an energy crisis, especially in Europe, boosting the price of oil even further. Geopolitical tensions also mount in the middle east, where a drone attack was launched in Abu Dhabi airport last week and a key pipeline that transports oil to Europe from Iraq via Turkey was hit by an explosion on Wednesday.
Rising demand in the winter months has been pushing the price of oil up, along with concerns of limited oil inventories and reduced supplies. The International Energy Agency in its monthly oil market report released last week, estimated that the demand for oil will not be affected significantly by the surge of Omicron cases and will rise within 2022 further than previously anticipated, while supply from OPEC may shrink. Goldman Sachs has also released a report predicting that Brent crude price would climb to over $96 per barrel within the year.
Brent crude climbed to over $88 per barrel last week, the highest price in seven years, as limited supply cannot keep up with rising demand and some analysts predict that it will rise above $100 per barrel this year. WTI price rose to over $86 per barrel, going above its October highs, breaking through the $85.7 per barrel resistance level and recording the highest price since 2014. At the end of last week, WTI price retreated a little, testing the $85.7 per barrel resistance level.
The outlook for the commodity is bullish and if it rises above the $85.7 per barrel level again, it may continue to trade along its uptrend. In case the trend is reversed, support may be found at the $77.8 per barrel level and further down around $62.8 per barrel.
At the beginning of last week, Bitcoin and Ethereum prices exhibited very low volatility, as investors appeared to be cautious to invest in high-risk assets. On one hand, as fears of the pandemic seemed to abate, risk-appetite grew which favoured cryptos. The Fed’s hawkish monetary policy on the other hand though, has put pressure on risky assets.
Bitcoin price spiked suddenly on Thursday, breaking through the $43,000 level resistance and climbing to $43,400. It quickly retreated though, falling rapidly and breaking through its $41,000-support and then crashed through its $40,000 level psychological support. Crypto markets tumbled and Bitcoin crashed below $36,000 amid stock sell-off, as investors dumped speculative assets.
A number of countries such as Italy, Spain, and the UK, have launched a crackdown on cryptocurrencies, restricting mining and advertising, which is putting pressure on cryptocurrencies. The vice-chair of the European Securities and Markets Authority Erik Thedéen raised environmental concerns on crypto mining and is advocating a ban on the energy-intensive mode of cryptocurrency mining, and Russia’s Central Bank proposed banning the use and mining of cryptocurrencies on Russian territory.
BTC is currently trading around $34,600, its lowest price since July, and the outlook for the cryptocurrency is bearish. If BTC continues its downtrend it may find support around $29,000. If the price of Bitcoin goes up, it may find resistance at $43,000 and further up at $52,000.
Ethereum suffered a similar fate last week, first breaking through the $3,220 resistance and then plummeting far below the $3,000 level support and is currently trading around $2,300. In case its price goes up, it may find resistance around $3,220 and further up around $3,400, while if the downtrend continues, it may find support around $1,700.
BTC/USD 1h Chart
ETH/USD 1h Chart
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