Russian stocks and bonds plummeted last week as the crisis with Ukraine affected Russia’s economic stability. The EU and the US have threatened Russia with economic and trade sanctions in the event that Russian troops will invade Ukraine. Moscow’s Moex stock index sank by more than 5.5 per cent last Monday and the Ruble lost more than 2 per cent against the dollar, tumbling to its weakest level in more than two years.
It was a tumultuous week for stock markets, commodities and currencies, with global stock markets exhibiting wild swings. Stock markets plummeted over fears of a Russian incursion into Ukraine and the Dow went down by over 1,000 points earlier in the week, but rallied again later.
The dollar was slow early in the week but picked up momentum on Wednesday, after the Federal Reserve released a more hawkish statement than anticipated, with the dollar index climbing to almost 97.5 points on Friday. Yields also rose across the US treasury curve, in expectation that the Fed will raise its benchmark interest rate this year. EUR/USD plummeted to almost 1.11 as the dollar strengthened, its lowest rate since May 2020. GBP/USD sank as low as 1.33. burdened not only by the rising dollar, but also by the political instability in the UK. The USD/JPY was catapulted to 5-year highs, boosted by the rising dollar.
Gold prices rose early in the week as investors sought a safe-haven asset, but dipped after the Fed’s announcements. Oil prices on the other hand kept rising, even in the wake of the Fed’s announcements, reaching 7-year highs, as fears of a looming energy crisis pushed the price of the commodity up. Last week was especially volatile for cryptocurrencies, as the stock sell-off early in the week triggered massive losses, but most major cryptos recovered later in the week, trading near last week’s levels.
Important calendar events
The Federal Reserve’s much-anticipated meeting concluded on Wednesday and the US Central Bank issued a statement signalling that it would start raising its benchmark interest rate as early as March. Chair Jerome Powel’s speech after the Fed meeting was more hawkish than anticipated, giving the dollar a vigorous boost. In his speech, Powel stressed the need to combat inflation using an aggressive monetary policy, since the current economic and employment conditions allow the US Central Bank to tighten its monetary policy. Even though up to three rate hikes had already been priced in by the markets, the Fed Chair did not rule out a rate hike in every Fed policy meeting of the year. The Fed Chair also left open the possibility of raising interest rates by 50 base points, rather than the more moderate 25 bs that was widely expected. The USD continued rising in the wake of the Fed’s announcements, climbing almost to 97.5 by the end of the week. Treasury yields also rose across the US Treasury curve, supported by the Federal Reserve’s announcements.
The Federal reserve is planning an aggressive policy in order 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.
A number of 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.
The Euro has been under pressure since last week, as the Federal Reserve announced raising its benchmark interest rates and tightening its monetary policy in order to combat inflation. In contrast, the ECB is persisting in an ultra-accommodating monetary policy, regardless of soaring inflation rates in the EU. ECB President Christine Lagarde is a staunch supporter of a dovish monetary policy in order to boost the Eurozone economy in the wake of the Covid-19 pandemic. The divergence between the dovish ECB policy and the more hawkish stance adopted by other major banks such as the Fed and the BOE, is putting the Euro at a disadvantage.
The Euro is also under pressure by rising geopolitical tensions between Russia and Ukraine. 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 though, which relies on Russia for key commodities, such as wheat, natural gas and oil. 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 has been experiencing heavy losses, as the Euro cannot match the rising dollar. The pair plummeted to almost 1.11 last week, its lowest rate since May 2020. EUR/USD rate fell below its 1.118 support and closed below the support level on Friday. The outlook for the pair is bearish, but 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 ECB will release its next Monetary Policy Statement on Thursday, which may cause volatility for the currency. Even though the ECB is not expected to change its interest rates, traders will scan the ECB’s statements for signs that the Central Bank might start moving towards a more hawkish direction. ECB President Christine Lagarde will give a press conference following the release of the Bank’s statement to communicate the ECB policy to investors and to answer questions from the press.
The pound weakened against the dollar last week, as the sterling was weighed down by the heavy political climate in Britain. UK Prime Minister Boris Johnson is still facing pressure for breaking lockdown rules by attending parties during lockdown in May 2020 and his approval rates have plummeted. The coming week may see the end of his premiership, as it is rumoured that the ‘party gate’ investigation into the incident may provide evidence that the PM lied to the parliament and knowingly attended an event that was not work-related. The ‘party gate’ investigation may be stalled however, as the Metropolitan Police is also investigating the breaches on lockdown regulations in Downing Street and Whitehall. Even though it is only the second time in history that a serving UK Prime Minister has been part of a criminal investigation, Boris Johnson stated that he welcomed the police investigation and that it would help to give the public the clarity it needs.
The sterling is supported though by rising anticipation that the Bank of England will signal a rate hike in its next meeting on February 3rd. As inflation in the UK has reached record highs the past few months, the BOE is expected to follow in the Fed’s footsteps and announce an increase in its benchmark interest rate in an attempt to drive inflation down. Heavy volatility is expected on Thursday for the sterling, following the UK Central Bank’s rate announcement and the ensuing speech by BOE Governor Andrew Bailey. Many investors expect that the BOE, which has already increased interest rates in December from 0.1% to 0.25%, will continue its hawkish monetary policy and will raise interest rates by another 25 base points, to a total of 0.5%.
The GBP/USD pair was moving on a downtrend last week and broke through its 1.357 support, closing at 1.340 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 1.317, while the 1.375 level may offer some resistance if the trend is reversed.
The Bank of Japan, in its latest meeting, decided to maintain its ultra-accommodating monetary policy and continue providing stimulus to the economy. With other major Central Banks, such as the Fed and the BOE raising their benchmark interest rates, the divergence in monetary policy with the BOJ, is putting the Yen at a disadvantage.
The USD/JPY was catapulted to 5-year highs last week, boosted by the rising dollar. The pair is currently testing the 115.69 resistance level, while further up resistance may be found at 116. If the currency rate declines, support may be found at 114.80 and further down at 112.55.
Gold reached a two-month high of $1,853 per ounce early last week, supported by rising geopolitical tensions and market turmoil, as investors sought safe-haven assets. Global stock markets exhibited wild swings, amid fears of a Russian incursion in Ukraine. As many assets became increasingly unstable, and real yields began to retreat, traders turned to gold for safety. Gold was also supported by the, as it turned out, erroneous belief among many investors, that the Fed’s rate hikes had already been priced in by markets.
The climate for gold changed completely after the Federal Reserve’s announcements last Wednesday. Fed Chair Powel’s speech was more hawkish than anticipated, stating that the Fed would adopt an aggressive monetary policy in order to combat rising inflation rates. Powel did not rule out that the US Central Bank may raise its benchmark interest rates up to four times within a year if needed.
The price of gold sank following the Fed’s announcements and has been on the decline since Wednesday. Rising yields across the US treasury curve are pushing the price of gold down, as gold does not pay dividends or interest, so it loses appeal as an investment when real yields rise. Gold price plummeted below its $1,800 per ounce resistance and is currently testing its $1,780 per ounce level support. If the price of gold goes up, it may find resistance at the $1,877 per ounce level, while further down, support may be found around $1,680 per ounce.
In the coming week, gold traders should pay close attention to rising tensions between Russia and Ukraine. An escalation of the Russia-Ukraine crisis might boost the price of gold, 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.
Oil prices have been rising the past couple of months, boosted by rising demand and limited supply. Last week, WTI price rose above $89.0 per barrel, registering a new 7-year high and many analysts predict it will reach three-digit figures within the year. Demand for oil is on the rise in the cold winter months and the rise of Omicron cases throughout the globe has not limited transportation as much as originally anticipated. Supply though cannot be increased so easily to match rising demand and existing inventories are tight. OPEC has agreed to increase its output by 400,000 barrels per day, but is struggling to meet this goal, as some of its member countries, such as Nigeria and Iraq, cannot meet production targets amid capacity constraints.
Rising geopolitical tensions have also been driving the price of oil up, especially between Russia and Ukraine. If the situation escalates and Russia invades Ukraine, the EU might have to enforce economic and trade sanctions against Russia. This would cut-off the supply of oil and gas in the EU, creating an energy crisis.
This coming week, an OPEC-JMMC meeting is scheduled on February 2nd and is expected to cause some volatility for the commodity. The organizations will discuss their future policy and are expected to announce oil production levels.
The outlook for the commodity is bullish and it is currently testing its $87.19 per barrel resistance. In case the trend is reversed, support may be found at the $78.8 per barrel level and further down around $77.8 per barrel.
Crypto markets tumbled early on Monday and Bitcoin crashed below $33,000 amid stock sell-off, as investors dumped speculative assets. It later managed to rebound though, and its price started moving upwards. The Federal Reserve’s plans of a tighter monetary policy have halted crypto’s advances and Bitcoin fell as low as $35,460 on Thursday, while Ethereum fell below $2,400. Cryptocurrencies have come under pressure as a risk-aversion sentiment was triggered by rising geopolitical tensions and the Fed’s signals of a rate hike as soon as March.
BTC is currently trading around $38,00, below its $40,000 support. If it continues its downtrend, it may find support around $33,000, while if the price of Bitcoin goes up, it may find resistance at $43,000 and further up at $44,300. Ethereum is currently trading around $2,610, testing its $2,640 level support. If its price goes down, it may find further support around $2,150 and further down at $1,700. In case its price goes up, it may find resistance around $3,000 and further up around $3,220.
Recent statements from regulatory bodies around the world about launching a crackdown on cryptocurrencies are also reducing the appeal of cryptocurrencies. Last Monday, the Monetary Authority of Singapore published a set of guidelines that restrict cryptocurrency marketing and advertising, becoming the latest in a number of countries such as Italy, Spain, and the UK, to propose restrictions on mining and advertising, putting pressure on cryptocurrencies. Russia’s Central Bank had also proposed banning the use and mining of cryptocurrencies on Russian territory, but Russian President Vladimir Putin spoke in favour of cryptocurrencies on Wednesday. Putin backed cryptocurrencies, stating that Russia has competitive advantages in crypto mining given the low cost of electricity and the trained personnel available in the country.
BTC/USD 1h Chart
ETH/USD 1h Chart
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