Important calendar events
The dollar gained strength last week supported by rising treasury yields, with the dollar index steadying near the 102.5 mark towards the end of the week. US treasury yields continued to gain strength, with the US 10-year bond rising above 4.05%.
US jobs data released last week exceeded expectations, boosting the dollar. A robust labor market increases the odds of a Fed pivoting towards a more dovish policy. Non-Farm Employment Change for December beat forecasts of 168K, rising to 216K against 173K new jobs in November. Average hourly earnings rose by 0.4% in December beating expectations of 0.3% growth, while the annual figure rose to 4.1% against expectations of 3.9%. Monthly unemployment rate remained unchanged at 3.7% in December, slightly below the expectation of 3.8%.
ADP Non-Farm Employment Change in December rose to 164K from 101K in November as employment growth surpassed expectations. In addition, unemployment claims for the previous week dropped to 202K from 220K the week before. JOLTS Job Openings data showed that 8.79M new jobs were created in November, falling short of expectations of 8.84M and lagging behind October’s 8.85M job openings.
ISM Services PMI for December was disappointing, dropping to 50.6 from 52.7 in November against expectations of 52.5. The data showed that growth in the Services sector is slowing down, although the index remained above the threshold of 50 denoting industry expansion. ISM Manufacturing PMI for December fell within expectations, with a 47.4 point versus 47.2 anticipated and a 46.7 value in November. The index remained below the threshold of 50, however, indicating that the US manufacturing sector is still contracting, although at a slower pace. ISM Manufacturing Prices, on the other hand, dropped sharply to 45.2 in December from 49.9 in November. This is a component of PMI, but it is also an inflation gauge, with a print below 50 indicating falling prices.
The minutes of December’s Fed meeting were released on Wednesday but did not provide a clear indication of the direction of the Fed’s policy. The minutes pointed to interest rates staying at restrictive territory for some time, but further signs of disinflation may steer the central bank in a more dovish direction.
The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Federal Reserve kept its policy settings unchanged at its latest meeting in December but showed signs of a dovish pivot. The FOMC statement emphasized that inflationary pressures in the US are easing, while economic growth remains limited. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy.
The Fed’s latest dot plot, which shows policymakers' future interest rate estimates, projects 75 base points of rate cuts within 2024 and 250 basis points by the end of 2026. Market expectations of future rate cuts are driving the dollar down, as markets are currently pricing in a 25 bp rate cut in March with over 70% probability.
The Fed’s hawkish stance over the past year has been paying off and US price pressures are cooling. Headline inflation rose by 3.1% year-on-year in November easing slightly from a 3.2% print in October. CPI rose by only 0.1% in November, while Core CPI, which excludes food and energy, rose by 0.3%.
US Final GDP data showed that the US economy expanded by 4.9% in the third quarter of 2023. The US economy continues to expand, although growth was more modest than anticipated in Q3. Low economic growth may induce the Federal Reserve to pivot to a less restrictive monetary policy. Final GDP Price Index for the first quarter of the year was also revised lower, with a final print of 3.3% versus 3.6%. This is an indicator of inflation, and a lower print indicates cooling price pressures in the US.
Core PCE price index rose by only 0.1% in November from a 0.2% growth in October against a 0.2% growth expected, bringing the annual rate to 3.2% from 3.4%. This is the Federal Reserve’s preferred inflation gauge and November’s print confirms that price pressures in the US are easing.
US inflation data are the most highly anticipated fundamentals this coming week. This week's CPI data on the 11th and PPI data on the 12th are likely to affect the Fed’s future interest rate decisions.
EUR/USD extended losses last week, closing near 1.094 on Friday. If the EUR/USD pair declines, it may find support at 1.088, while resistance may be encountered near 1.114.
The ECB’s efforts to curb inflation rates are paying off, even at the cost of decreased economic growth. Price pressures in the EU are cooling and this will likely play a decisive role in the ECB’s future policy.
Final EU CPI data showed that headline inflation in the Eurozone dropped to 2.4% year-on-year in November, its lowest level since July 2021, from 2.9% in October. Final Core CPI, which excludes food and energy, eased to 3.6% year-on-year in November from 4.2% in October. Flash CPI data for December released last week though, showed that the ECB still has some ground to cover to ensure that inflation in the Euro area drops sustainably. EU Flash CPI for December came at 2.9% year-on-year from 2.4% in November. Core Flash CPI for December, however, receded a little, dropping to 3.4% from a 3.6% print in November.
German Preliminary CPI data released on Thursday indicated that inflationary pressures in Germany are cooling, boosting the Euro. German CPI rose by just 0.1% in December against expectations of 0.2% growth. Final Services PMI data for the Eurozone exceeded expectations, with a 48.8 point in December from 48.1 in November and against a preliminary print of 48.1. The EU Services sector remains below the threshold of 50, which denotes industry expansion. This indicates that the Services sector continues to contract but at a slower pace.
ECB policymakers voted to keep interest rates unchanged at 4.50% in December. The ECB seems to have reached its rate ceiling, as the fragile Eurozone economy cannot withstand further tightening. Markets are starting to price in rate cuts in March, although ECB officials have stressed that discussions on a rate cut timeline have not started yet.
The ECB’s policy is starting to diverge from that of the Federal Reserve. At its latest policy meeting last week, the Fed signaled that interest rates would go down in 2024. ECB President Christine Lagarde, however, has stated that it is too early to talk about rate cuts. Lagarde stressed that interest rates will remain at sufficiently restrictive levels for as long as necessary to bring inflation back to the ECB’s 2% target.
The economic outlook of the Eurozone appears to be deteriorating, however, and may force the ECB to pivot to a more dovish policy. The Eurozone economy does not show signs of recovery and is on the brink of recession. Revised GDP for the Euro area showed that the Eurozone economy contracted by 0.1% in the third quarter of the year, which was in line with expectations. The Eurozone economy barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1 of 2023. Year-on-year the EU economy registered stagnation with GDP flat at 0%. The Eurozone economy is struggling and cannot withstand much further tightening.
GBP/USD was volatile last week, dipping to 1.262 mid-week, but pared losses towards the end of the week, reclaiming the 1.270 level. If GBP/USD rate goes up, it may encounter resistance near 1.282, while support may be found near 1.260.
Economic activity data released last week for the UK were mixed, indicating that the country’s economic growth remains slow. UK Construction PMI rose in December to 46.8 from November's 45.5 but remained below the 50.0 growth threshold for the fourth month in a row. Services PMI data released on Thursday showed that Britain's services sector increased at a faster rate than anticipated, reaching its highest level since June. Final Services PMI for December rose to 53.4 from 52.7 in November and a preliminary reading of 52.7. The Services PMI remained above the threshold of 50, indicating that the Services sector in the UK is expanding.
British inflation cooled more than expected in November, dropping to 2-year lows. Headline inflation slowed to 3.9% year-on-year in November, from 4.6% in October against expectations of a 4.4% print. Annual Core CPI, which excludes food and energy, grew by only 5.1% in November versus 5.7% in October and 5.6% forecast.
Inflation in the UK has been resisting the BOE’s efforts to bring it down for a long time but has been dropping at a rapid pace since October. Signs of easing inflationary pressures in the UK are reinforcing expectations that the Bank of England will end its hiking cycle and will be cutting interest rates by mid-2024.
The BOE maintained its official rate at 5.25% at its latest policy meeting, which was in line with expectations. The central bank’s outlook remains hawkish, however, with three policy members voting to increase interest rates versus six members voting to maintain current rates.
BOE Governor Andrew Bailey has kept his hawkish stance, stressing that inflationary pressures in the UK remain high and that further tightening might be required to bring inflation down to the bank’s 2% target.
The BOE has likely reached its rate ceiling but will keep interest rates on hold for a long time to bring inflation down. Even though the current restrictive policy is hurting economic growth, the BOE has no choice but to continue its battle against inflation.
Market expectations of the BOE’s future direction reflect the need to keep interest rates in restrictive territory for longer. The BOE policy is starting to diverge from that of the FED, with market odds in favor of Fed rate cuts starting in March, but BOE rate cuts are not expected before May.
The British economy remains fragile, reinforcing the notion that the BOE has reached its peak interest rates. Prolonged tightening has taken its toll on the labor market and other vital economic sectors. Final GDP data revealed that the British economy contracted by 0.1% in the third quarter of 2023, against expectations of stagnation. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter. Monthly GDP data showed that the British economy contracted by 0.3% in October. Economic growth is slowing down in the UK and the country is entering a recession.
USD/JPY was in an uptrend last week as the dollar rallied. The currency pair climbed above the 146 level but pared some gains towards the end of the week, closing near 144.6 on Friday. If the USD/JPY pair declines, it may find support near 140.6. If the pair climbs, it may find resistance near 146.5.
The BOJ has been keeping interest rates at a negative level, putting pressure on the Yen. The BOJ kept its policy settings unchanged at its December meeting. The central bank kept its short rate target steady at -0.10% and its yield curve control unchanged. The BOJ has also stated that it would reduce the amount of bonds it buys in its regular operations in the January-March quarter.
The BOJ’s forward guidance into 2024 was more dovish than expected, putting pressure on the Yen. In the past few months, BOJ policymakers have hinted that the central bank is preparing to pivot to a less accommodating policy. BOJ Governor Kazuo Ueda, however, has kept a dovish stance in the past few weeks, indicating that a policy pivot is not on the cards yet. Ueda stated that economic growth remains modest and that underlying inflation will gradually increase, but the BOJ requires sustainable, stable inflation before tightening its monetary policy.
The Fed has signaled a dovish pivot, relieving some of the pressure on the Yen, which has been weakened by the BOJ’s dovish policy. The BOJ has so far maintained its dovish bias, putting more pressure on the Yen as other major central banks, and especially the Fed, have raised interest rates to high levels.
Final GDP data for the third quarter of the year showed that Japan's economy contracted by 0.5% in the third quarter against earlier estimates of a 0.5% contraction. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking and is on the brink of recession. Final GDP Price Index showed a 5.3% annual expansion in Q2, versus 3.5% the previous quarter. This is a measure of inflation, which shows that inflationary pressures are rising in Japan, increasing the odds of a hawkish shift in the BOJ’s policy.
Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. National Core CPI cooled to 2.5% year-on-year in November from 2.9% in October print. BOJ Core CPI dropped to 3.0% year-on-year in October from 3.4% in September, against expectations of a 3.4% print.
Gold prices were under pressure last week as the US dollar and treasury yields rallied. Gold prices dropped to $2,025 per ounce but steadied towards the end of the week, climbing back to $2,045 per ounce. If gold prices increase, further resistance may be encountered near $2,088 per ounce, while if gold prices decline, support may be encountered near $2,027 per ounce.
Geopolitical tensions have been raising the appeal for safe haven assets, boosting gold prices. The violence in Gaza is showing no signs of abating. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe haven assets, propping up gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area. Attacks on ships in the Red Sea area by Yemen's Iran-backed Houthi militia increase concerns that the crisis will widen to other areas in the region. US Secretary of State Antony Blinken is due to visit the Middle East to prevent the war from spreading in the region.
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 gained strength last week, supported by rising treasury yields, with the dollar index steadying near the 102.5 mark towards the end of the week. US treasury yields continued to gain strength, with the US 10-year bond rising above 4.05%.
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. Expectations that the Fed may start cutting interest rates from the first quarter of 2024 are propping up gold prices.
The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Market expectations of future rate cuts are boosting gold prices, as markets are currently pricing in a 25 bp rate cut in March with over 70% probability.
Oil prices exhibited high volatility last week, with WTI price dropping to the $69.0 per barrel level support before rallying towards the end of the week and closing near $73.9 per barrel on Friday. If WTI price declines, it may encounter support near $69.1 per barrel, while resistance may be found near $76.0 per barrel.
US crude oil inventories released on Thursday fell short of expectations but failed to provide support for oil prices. The US Energy Information Administration reported a drop in US oil inventories by 5.5M barrels for the week to December 29, falling below expectations of a drop by 3.2M barrels. The EIA, however, reported sizeable oil product builds, putting pressure on oil prices. Gasoline and distillate oil products exceeded expectations, with a gasoline inventory build of 10.9M barrels and a weekly distillate build of 10.1M barrels.
Supply concerns boost oil prices as the crisis in the Gaza area threatens to disrupt oil distribution. Geopolitical tensions are rising in the Red Sea, spilling over the region from the war in Gaza. Tensions around the Red Sea area have been rising in the past few weeks, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution. US Secretary of State Antony Blinken is due to visit the Middle East to prevent the war from spreading in the region.
Iran-backed Houthi militants are attacking commercial vessels in the Red Sea. Iran has refused to withdraw its support from the Houthi militants and has even sent a warship to the trading route. Most oil companies, however, are resuming transit through the Red Sea despite the attacks, easing supply concerns.
OPEC+ producers recently agreed to voluntary cuts of over 2 million barrels per day to boost oil prices, extending already existing output cuts into the first quarter of 2024 and adding even more.
Oil prices are also kept in check by a strong US dollar and high-interest rates. Most major central banks, however, are hitting pause on rate hikes, boosting oil prices. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%.
The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Market expectations of future rate cuts increase oil demand outlook, boosting oil prices.
Crypto markets exhibited high volatility last week, stirred mainly by anticipation of the approval of crypto spot exchange-traded funds (ETF). Approval expectations of spot ETFs by the Securities and Exchange Commission (SEC) boosted crypto markets at the beginning of the week. BlackRock and other institutions have applied for a Bitcoin ETF, which would bring more institutional and retail money into crypto markets. BlackRock has also filed an ETH spot ETF for approval, causing Ethereum prices to surge.
Crypto markets collapsed on Wednesday though, on rumors that the SEC will reject all ETF proposals in January. A report by crypto financial services company Martixport released on Wednesday hinted that all ETF applications will be denied in January and the process will be moved down the line to the second quarter of the year. The report disappointed traders’ expectations of ETF approvals in January, triggering a crypto selloff. Crypto markets rallied later in the week on renewed hopes of ETF approvals ahead of the SEC decision expected later in the month.
This coming week anticipation of ETF approvals will peak, as the first SEC decisions are expected by the end of the week. Final revisions from exchanges that have filed proposals for SEC approval are expected by January 8th as the process for spot Bitcoin ETF launch is finalized.
Bitcoin price flirted with the $46,000 level early in the week, but then plummeted below the $42,000 level in the week and finally regained the key $44,000 level towards the end of the week, touching $44,500 over the weekend. If BTC price declines, support can be found near $41,600, while resistance may be encountered near $46,000.
Ethereum price followed a similar trajectory, skyrocketing to 2,420 early in the week, then dropping below 2,200 mid-week and steadying close to $2,250 over the weekend. If Ethereum's price declines, it may encounter support near $2,180, while if it increases, resistance may be encountered near $2,430.
Crypto markets are under pressure by rising geopolitical tensions. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area. Iran-backed Houthi militants have been attacking commercial vessels in the Red Sea. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries drive risk sentiment down putting pressure on risk assets.
Increases in central banks’ interest rates are putting pressure on risk assets. Most major central banks, however, are hitting pause on rate hikes, propping up crypto markets. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Markets are currently pricing in a 25 bp rate cut in March with over 70% probability, propping up risk assets.
BTC/USD 1h Chart
ETH/USD 1h Chart
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