Important calendar events
The dollar remained under pressure last week, as US inflation continued to ease. The dollar index declined, closing just below 102 on Friday. US Treasury yields also retreated, with the US 10-year bond yielding approximately 3.55 at the start of the week to 3.48% on Friday.
US PPI data on Wednesday fell below expectations driving the dollar down. Together with the CPI data released the week before, the PPI indicators provide a more complete picture of the direction of US inflation. US inflation seems to be cooling, as Producer Price Index declined by 0.5% in December, versus estimates of a 0.1% drop. In addition, November’s PPI print was revised to reflect a 0.2% increase, instead of the original 0.3% to 0.2%.
US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. The soft inflation print has put pressure on the dollar, as cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases.
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%.
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.
US Flash Services PMI and US Flash Manufacturing PMI are scheduled to be released on the 24th and may cause volatility in dollar prices. Quarterly Advance GDP and GDP Price Index on the 26th may also affect the dollar, as they are strong indicators of the economic outlook. Traders will also be anticipating the release of the Core PCE Price Index on the 27th, which is the Fed’s preferred inflation gauge and may influence future monetary policy. As interest in the Fed’s future policy direction mounts, the dollar will also be especially sensitive to FOMC members’ speeches this week.
The Euro traded sideways against the dollar last week, with EUR/USD oscillating around the 1.082 level and closing near 1.085 on Friday. If the currency pair goes up, it may encounter resistance at 1.089 and higher up near 1.118. If the EUR/USD pair declines, it may find support at 1.048.
ECB President Christine Lagarde delivered a hawkish speech on Thursday at the World Economic Forum in Davos, bolstering the Euro. Lagarde emphasized the central bank’s commitment to raising interest rates. Lagarde stressed that the ECB will stay the course with rate hikes to tackle soaring inflation. On Friday, Lagarde spoke again in Davos, warning that China’s reopening would add to global inflationary pressures. Dutch central bank chief Klass Knot also speaking at DAVOS, stated that markets should expect multiple 50-bp rate hikes this year.
ECB Monetary Policy Meeting Accounts released on Thursday also provided support for the Euro. The accounts revealed the ECB’s commitment to raising interest rates, with many ECB members arguing in favor of a 75-bp rate hike at the previous monetary policy meeting.
Final 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. EU economic outlook is poor, and 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.
This week, Eurozone Flash Services PMI and Manufacturing PMI on the 24th may cause volatility in Euro price. Market participants will also pay close attention to ECB members’ speeches to gauge the central bank’s monetary policy direction.
The Sterling gained strength last week, with GBP/USD closing near 1.239 on Friday. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.184.
BOE Governor Andrew Bailey delivered a speech that was perceived as dovish, on Monday, putting pressure on the Sterling. Bailey was optimistic about British inflation this year, stating that that inflation looks set to fall markedly as energy prices decrease. He stressed, however, that labor shortages in the UK pose a threat to cooling inflation rates. On Thursday, Bailey stated that a corner has been turned in UK inflation, appearing confident that inflation rates will continue to decline.
UK headline inflation dropped to 10.5% in December from 10.7% in November, in line with expectations. Core CPI, which excludes food and energy, remained at 6.3%, against expectations of a 6.2% print. The Sterling went up after the release of the CPI data as UK inflation has become entrenched, remaining firmly above 10%.
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. 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 labor sector is ailing in the UK, but jobs data released on Tuesday were overall positive. UK monthly unemployment rate remained steady at 3.7% in November. The average Earnings Index rose to 6.4% from the 6.2% expected, indicating that wages go up due to labor shortages. Conversely, Claimant Count Change denotes the change in the number of people claiming unemployment rose to 19.7K in December from 16.1K in November.
The UK’s grim economic outlook may limit policymakers’ ability to increase interest rates sufficiently to rein in inflation. 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, UK Flash Services PMI and Manufacturing PMI on the 24th may affect the Sterling. BOE rhetoric is also expected to influence Sterling's price.
The Yen retreated last week, after the BOJ disappointed market expectations. USD/JPY climbed, reaching 129.5 on Friday. 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 138.2.
Trade Balance data for December showed a deficit of 1.72T, compared to the 1.60 T expected. This indicates that the cost of imported goods in Japan remains high, mainly due to import energy costs.
Japanese policymakers on Wednesday maintained ultra-low interest rates, keeping the central bank’s refinancing rate at -0.10% as expected. The Yen plummeted after the BOJ meeting, as markets were anticipating a pivot to a more hawkish direction. The BOJ was expected to further relax its yield curve control policy, but the central bank left all policy settings unchanged this month.
At the press conference following the BOJ meeting, BOJ Governor Haruhiko Kuroda defended the central bank's decision to keep its yield curve control policy unchanged. In addition, Kuroda 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 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 allow interest rates to rise, cutting off some of its monetary stimuli.
Price pressures continue to rise in Japan, as Year-on-year PPI to the end of December came in at 10.2% on Monday, exceeding expectations of a 9.5% print. National Core CPI for December released on Friday was at 4.0%, rising above November’s 3.7% print. In addition, BOJ CPI recently 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 final GDP Price Index for the third quarter annually, nomic contraction by 0.3% on an annual basis, and the Japanese economy shrank by 0.2% in the imported energy costs due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.
This week, the BOJ Summary of Opinions scheduled to be released on the 26th may give some insight into the BOJ’s outlook and may cause some volatility in Yen's price.
Gold prices soared as US inflation cooled last week, touching their highest prices since April 2022. Gold prices skyrocketed to $1,935 per ounce last week, finally closing near $1,935 per ounce on Friday. If gold prices continue to increase, 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 remained under pressure last week, as US inflation continued to ease. The dollar index declined, closing just below 102 on Friday. US Treasury yields also retreated, with the US 10-year bond yielding approximately 3.55 at the start of the week to 3.48% on Friday.
US inflation seems to be cooling, driving the dollar down and propelling gold prices upwards. US PPI data last week fell below expectations, declining by 0.5% in December, versus estimates of a 0.1% drop. In addition, November’s PPI print was revised to reflect a 0.2% increase, instead of the original 0.3% to 0.2%.
US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. 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 trade close 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.
As the Fed and other central banks start to scale back their aggressive rate hiking, gold prices surge. 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. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices.
Oil prices edged higher last week, with WTI price climbing to $81.4 on Friday. If the WTI price declines, it may encounter support near $70.2 per barrel, while resistance may be found near $82.3 per barrel.
The global economic outlook is improving with the US economy leading the way, increasing the oil demand outlook. US inflation seems to be cooling, which may give the Federal Reserve some leeway toward scaling back its interest rate increases. US PPI data on Wednesday fell below expectations, reducing Fed rate hike expectations and driving oil prices up. PPI declined by 0.5% in December, versus estimates of a 0.1% drop. Headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November.
Aggressive rate hikes stifle economic activity fuelling recession fears. 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 also supports oil prices. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. China released GDP data last week for the final quarter of 2022, which exceeded expectations, providing support for oil prices.
China’s economy has suffered from prolonged lockdowns and the country’s debt has ballooned over the past few years. China has re-opened its borders after almost three years however, fuelling hopes that the count recently ry is gradually ending its strict Covid policies government eased some of its strident Covid regulations recently, abandoning its zero-Covid policy.
OPEC released its monthly report on Tuesday, raising optimism about the oil demand outlook. The organization left its global oil demand forecast unchanged, boosting oil prices, as markets had been expecting a drop in oil demand outlook.
Crypto markets edged higher this week, as markets reacted to cooling US inflation, improving risk sentiment. The bitcoin price touched a four-month high and global cryptocurrency market capitalization hit $1 trillion for the first time in 2023.
The bitcoin price rose this week, testing the $22,700 level resistance over the weekend. If the BTC price declines, support can be found near $17,930, while further resistance may be encountered near $25,200.
Ethereum price also rose this week, climbing to $1,650 over the weekend. If Ethereum's price declines, it may encounter support near $1,370, while if it increases, resistance may be encountered near $1,670.
US PPI data last week fell below expectations, reducing Fed rate hike However, expectations. PPI declined by 0.5% per, versus estimates of a 0.1% drop. A soft inflation print was expected however and had largely been priced in by markets. Headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. US inflation seems to be cooling, which may give the Federal Reserve some leeway toward scaling back its interest rate increases.
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.
BTC/USD 1h Chart
ETH/USD 1h Chart
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