Important calendar events
The dollar remained mostly steady last week, with the dollar index hovering just below the 102 level most of the week and closing near 101.9 on Friday. US Treasury yields dipped mid-week on reduced Fed rate hike expectations but recovered a little towards the end of the week. The US 10-year bond dropped to 3.42% during the week but rallied a little, closing near 3.53% on Friday.
Advanced quarterly GDP released last week 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. US unemployment data reinforced this notion, as unemployment claims dropped to 186K from 192K last week.
US inflation seems to be cooling, as US Personal Consumption Expenditures eased in December. Annual PCE dropped to 4.4% in December, against a 4.7% print in November. This is the Federal Reserve’s preferred inflation gauge, and its decline may induce the Fed to pivot towards a more dovish direction in its policy meeting this week. Core PCE increased by 0.3% every month, in line with expectations.
In addition, Producer Price Index declined by 0.5% in December, versus estimates of a 0.1% drop. US headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. Cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases, putting pressure on the dollar.
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%.
The Fed monetary policy meeting this week on February 1st will likely affect the dollar considerably. 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. Market odds are currently split between a 50-bp rate hike and a more moderate 25-bp rate hike this week. The dollar will be under pressure if the Fed shifts towards a more dovish policy. Market participants will also be paying close attention to the Fed’s guidance through Fed Chair Jerome Powell’s press conference after the conclusion of the meeting.
The Euro traded sideways against the dollar last week, with EUR/USD testing the 1.089 level resistance, before closing slightly lower, at 1.086 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 1.070.
ECB President Christine Lagarde delivered a particularly hawkish speech last week, emphasizing the central bank’s commitment to raising interest rates. Lagarde stated that the ECB will still have to raise interest rates significantly at a steady pace to combat soaring inflation.
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.
This week all eyes are going to be on the Fed and ECB monetary policy meetings, which will likely determine the trend of EUR/USD. The ECB meeting is on February 2nd, a day after the highly-anticipated Fed meeting. Markets are pricing in another ECB 50-bp rate this week. On the other hand, market odds for the next Fed rate hike are split between a 50-bp and a 25-bp rate hike, as a pivot in the Fed’s policy is expected. If the Fed adopts a more dovish policy, the Euro is expected to gain strength against the dollar.
The Sterling was volatile last week, retreating against the dollar at the start of the week, but paring losses towards the end of the week. GBP/USD dropped to 1.226 but rallied later in the week, supported by cooling UK inflation, climbing back to 1.240. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.216.
BOE Governor Andrew Bailey last week appeared to be optimistic about British inflation this year, stating 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. Bailey also stated that a corner has been turned in UK inflation, appearing confident that inflation rates will continue to decline.
UK inflation data on Wednesday seemed to bare out Bailey’s optimism. PPI Input data, which is an indicator of consumer inflation, were released on Wednesday for two months, November and December. 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 over the past two months. PPI Output printed at -0.1% in November from 0.9% in October and at -1.1% in December, suggesting that inflation may be easing. In addition, UK headline inflation dropped to 10.5% in December from 10.7% in November.
UK inflation has become entrenched, however, 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 the latest monetary policy meeting in December, 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 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, the all-important Fed and BOE monetary policy meetings will take place on February 1st and 2nd respectively. Market participants will pay special attention to both meetings and their outcome is likely to affect the GBP/USD rate considerably. Markets are pricing in another 50-bp rate hike this week, but traders will also focus on the forward guidance given by the BOE.
The Yen retreated against the dollar last week, with USD/JPY closing near 129.8 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 134.7.
BOJ Summary of Opinions, which includes the BOJ's projection for inflation and economic growth was released on Thursday. The summary of opinions did not show any signs of a pivot to a more hawkish policy. Most policymakers maintained the stance they held in January’s meeting, reiterating that the Bank needs to continue with the current yield curve control and ultra-easy policy. Others expressed worry about inflation levels in Japan and the feasibility of raising wages sustainably.
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 released last week for December was at 4.0%, rising above November’s 3.7% print.
Monetary Policy Meeting Minutes of the BOJ’s previous meeting in December released on Monday showed that Government Officials sought a half-hour adjournment during the meeting to contact their ministries before reaching a crucial decision on the central bank’s yield curve control policy. 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 allow interest rates to rise, cutting off some of its monetary stimuli.
Japanese policymakers maintained ultra-low interest rates last week, keeping the central bank’s refinancing rate at -0.10% as expected. The BOJ was expected to relax its yield curve control policy further, but the central bank left all policy settings unchanged this month putting pressure on the Yen.
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 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.
Gold prices remained steady last week trading with limited volatility as markets await the Fed monetary policy meeting last week. Gold prices reached a 9-month high of $1,949 per ounce mid-week, but retreated towards the end of the week, closing near $1,949 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 $1,896 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 mostly steady last week, with the dollar index hovering just below the 102 level most of the week and closing near 101.9 on Friday. US Treasury yields dipped mid-week on reduced Fed rate hike expectations but recovered a little towards the end of the week. The US 10-year bond dropped to 3.42% during the week but rallied a little, closing near 3.53% on Friday.
Advanced quarterly GDP released last week 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. Markets reacted favorably to the release of robust economic data, and the dollar strengthened, pushing gold prices down toward the end of the week.
US inflation seems to be cooling, however, providing support for gold prices. Annual PCE dropped to 4.4% in December, against a 4.7% print in November. This is the Federal Reserve’s preferred inflation gauge, and its decline may induce the Fed to pivot towards a more dovish direction in its policy meeting this week. US PPI data declined by 0.5% in December, versus estimates of a 0.1% drop. US headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. Cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases, boosting gold prices.
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. 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. Gold prices are approaching overbought territory though, as they trade close to levels reached only after the crisis in Ukraine started last year.
The Fed monetary policy meeting this week on February 1st will likely affect gold prices considerably. Market odds are currently split between a 50-bp rate hike and a more moderate 25-bp rate hike this week. A potential Fed shift towards a more dovish policy will likely boost gold prices further.
Oil prices exhibited high volatility last week, with WTI price touching $82.2 per barrel, but plummeting to $78.8 per barrel on Friday. If the WTI price declines, it may encounter support near $78.1 per barrel, while resistance may be found near $82.3 per barrel.
Oil prices tumbled on Friday, as EU leaders failed to agree on the price cap of Russian oil exports. The price cap is due to take effect on February 5th and EU leaders were expected to review the price last week. Dissenting voices within the EU are causing delays in the procedures, however. Meanwhile, the Russian oil supply remains strong, suggesting that the sanctions have not significantly reduced Russian oil sales.
US Crude Oil inventories rose by 0.5M barrels last week, disappointing expectations of a 1.2M barrel build. Supply concerns boosted oil prices, as the oil demand outlook remains high.
Oil prices are also supported by optimism over China’s economic recovery. China’s economy has suffered from prolonged lockdowns and the country’s debt has ballooned over the past few years. The Chinese government recently 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. Recent data shows a marked increase in air travel and road traffic in China after the restrictions were eased, indicating increased economic activity and oil demand. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand.
US GDP data were optimistic about the state of the US economy last week, boosting oil demand expectations. Advanced quarterly 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.
In addition, US inflation seems to be cooling, which may give the Federal Reserve some leeway toward scaling back its interest rate increases. Annual PCE dropped to 4.4% in December, against a 4.7% print in November. This is the Federal Reserve’s preferred inflation gauge, and its decline may induce the Fed to pivot towards a more dovish direction in its policy meeting this week. 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.
This week is packed with news that may determine the direction of oil prices. The highly anticipated Fed meeting on February 1st is likely to affect oil prices significantly. OPEC-JMMC Meetings on February 1st are also likely to cause volatility in oil prices. The organization is likely to keep output target levels the same, but any shift in OPEC’s policy will likely cause oil price volatility.
Crypto markets extended gains last week, following a bullish trend. Risk sentiment remains uncertain, and thin trading volumes make the uptrend sensitive to changes in risk sentiment. Global recession concerns keep risk sentiment down, although cooling inflation has brought optimism for economic recovery.
Global cryptocurrency market capitalization has started to recover this month and remains above $1 trillion. Crypto bulls hope 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. Cryptocurrency prices have been going up since the start of the year, with Bitcoin prices going up by nearly 40%.
Last week, the bitcoin price rose above the $23,000 level, touching $23,800 over the weekend. If the BTC price declines, support can be found near $20,600, while resistance may be encountered near $25,200.
Ethereum price also rose last week, climbing above $1,650 over the weekend. If Ethereum's price declines, it may encounter support near $1,500, while if it increases, resistance may be encountered near $1,670.
US PPI data last week fell below expectations, reducing Fed rate hike expectations. 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. 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. Crypto markets exhibit low volatility, as market participants await the Fed monetary policy meeting next week.
The Fed monetary policy meeting this week on February 1st will likely affect cryptocurrency prices. Market odds are currently split between a 50-bp rate hike and a more moderate 25-bp rate hike this week. A potential Fed shift towards a more dovish policy will likely benefit crypto markets, enhancing the current bullish trend.
BTC/USD 1h Chart
ETH/USD 1h Chart
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