Important calendar events
The dollar started the year on a strong note, supported by robust labor data early last week. The dollar index surged to 105.6 mid-week, but lost momentum towards the end of the week, closing near 103.9 on Friday.
US Treasury yields followed a declining trajectory last week, with the US 10-year bond yield dropping from 3.9% to 3.5% on diminished Fed rate hike expectations.
The dollar soared at the beginning of the week, boosted by a series of strong jobs data. JOLTS Job Openings printed at 10.46M for November, exceeding expectations. ADP Non-Farm Employment Change for December on Thursday, rose to 235K from 182K in November showing that hiring remains strong, pushing the dollar upwards.
Average Hourly Earnings, however, showed that wage growth slowed in December. Markets interpreted this as a sign of cooling US inflation and the dollar plummeted on decreased Fed rate hike expectations. Non-Farm Employment Change for December was also more optimistic than expected, but dropped from the previous month, putting pressure on the dollar.
Fed rate hike expectations have been the main factor driving the US dollar and treasury yields over the past few months. At the latest monetary policy meeting in December, FOMC members voted to raise interest rates by 50 basis points, bringing the Fed’s benchmark interest rate to a target range of 4.25% to 4.50%.
The interest of market participants is now mostly focused on what lies ahead for the Fed. Market uncertainty regarding the future direction of the Federal Reserve is causing fluctuations in dollar prices. FOMC meeting minutes released last week revealed that Fed members do not consider the current drop in US inflation to be sufficient to pause rate hikes yet and are concerned about the market’s perception that cooling inflation may cause a pivot in the central bank’s direction.
US inflation seems to be cooling, as US headline inflation dropped to 7.1% year-on-year in November. Reduced price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases in the following year. US economic outlook and inflation will likely determine the pace of rate hikes in 2023. Many analysts believe that the Fed will ease its rate hikes in 2023, but will continue raising interest rates at a slower pace until the benchmark interest rate reaches at least 5.0%. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar into 2023.
Global recession concerns remain high, boosting the dollar. US GDP data revealed that GDP rose by 3.2% for the third quarter of 2022. The US economy is still expanding, but at a slower pace than anticipated and recession looms.
Several important events are coming up this week for the dollar. Federal Reserve chair Jerome Powell is due to deliver a speech on the 10th, which will likely draw traders’ attention and may cause volatility in dollar prices. US monthly CPI and Core CPI, as well as annual CPI, are due to be released on the 12th and are this week’s most highly anticipated fundamentals. Market participants are anxiously awaiting US inflation results, which may determine the dollar’s trajectory in the weeks to come.
The Euro exhibited high volatility last week. EUR/USD dropped to 1.048 but pared losses towards the end of the week, ending the week near 1.064. If the currency pair goes up, it may encounter resistance at 1.078. If the EUR/USD pair declines, it may find support at 1.035 and further down at the parity level.
Increased price pressures combined with a weak economic outlook have brought stagflation in the Eurozone, a toxic mix of high inflation and stale economic growth. CPI data released last week though, indicate that Eurozone inflation is cooling. EU headline inflation dropped to 9.2% year-on-year in December from a 10.1% print in November, against estimates of a 9.6% print. 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. The ECB has updated its economic growth forecast by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024, and 1.8% in 2025. These are lower than previous estimates, indicating that Eurozone economic outlook is poor and that the ECB might be forced to raise interest rates in a recessionary backdrop.
Only minor fundamentals are due this week for the EU, which may cause a little volatility in the Euro price. ECB member rhetoric will likely affect the Euro this week and the dollar’s trajectory.
The Sterling weakened at the beginning of last week but benefitted from the dollar’s decline on Friday. GBP/USD dropped to 1.184 mid-week but pared losses and ended the week near 1.209. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.176.
The Sterling was affected strongly by the dollar’s movement last week. Economic activity indicators released last week for the UK were mixed overall, failing to support the currency. A climate of political uncertainty still prevails in the UK and the new British government has to overcome the public’s distrust after so many changes in leadership in the past year.
The British economy is constrained and the country is already in the grip of recession. The final GDP print for the third quarter of 2022 was -0.3%, which fell below expectations, indicating that the economy in the UK is shrinking. The BOE recently revised its economic growth projections, with GDP expected to drop by 0.1% in Q4 2022. The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down.
At the same time, 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. After a year of fiscal tightening, UK headline inflation finally dropped to 10.7% in November, alleviating some of the pressure on the BOE to raise interest rates. 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 BOE gave uncertain forward guidance at its latest policy meeting in December, leaving the door open for further rate hikes, but signaling that interest rate increases might pause within the first quarter of 2023. The UK’s grim economic outlook may limit policymakers’ ability to increase interest rates sufficiently in 2023 to rein in inflation.
On the data front, the most important fundamentals this week for the UK are scheduled to be released on the 13th. Key among those are monthly GDP data, which may cause some volatility in the Sterling price, as the state of the British economy is precarious.
The Yen plummeted in the first week of 2023. The USD/JPY soared to 134.77 within the week but eased a little as the dollar lost strength on Friday, ending the week near 132.1. If the USD/JPY pair declines, it may find support at 130.4. If the pair climbs, it may find resistance at the psychological level of 138.2.
Declining oil prices last week provided some support for the Yen. Japan is a net energy importer and decreasing oil prices boost the country’s economy. The BOJ has been conducting unscheduled bond buying this week, which may be the prelude of a pivot towards a more hawkish fiscal policy.
The BOJ caused a stir in markets in December by finally yielding to increased price pressures and tilting its monetary policy. In the latest monetary policy meeting, Japanese policymakers maintained the central bank’s refinancing rate at -0.10%. The BOJ however, changed its yield control target for its 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.
Meanwhile, BOJ Governor Haruhiko Kuroda has been reaffirming the central bank’s commitment to its ultra-easy policy. 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 final quarterly GDP for Q3 of 2022 printed at -0.2%. The Japanese economy shrank in the third quarter of 2022, mainly due to the high imported energy costs. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.
Price pressures continue to rise in Japan, as BOJ CPI rose to 2.9% on an annual basis, 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.
Gold gained strength last week on increased global recession concerns and soared towards the end of the week as the dollar plummeted. Gold prices dipped mid-week but pared losses on Friday, closing at $1,865 per ounce. If gold prices continue to increase, resistance may be encountered near $1,877 per ounce, while if gold prices decline, support may be found near $1,723 per ounce.
Gold prices were predominantly directed by the dollar’s movement last week, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar started the year on a strong note, supported by robust labor data early last week. The dollar index surged to 105.6 mid-week, but lost momentum towards the end of the week, closing near 103.9 on Friday. The dollar’s tumble towards the end of the week drove gold prices near a seven-month peak.
US Treasury yields followed a declining trajectory last week, providing support for gold prices. Based on diminished Fed rate hike expectations, the US 10-year bond yield dropped from 3.9% to 3.5% during the week.
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.
Increased global recession concerns, however, raise the appeal of gold as an investment. In China, prolonged Covid lockdowns have significantly affected the economy. Many countries are facing poor economic outlooks and high inflation rates, raising recession fears. A diminishing economic outlook may force central banks around the world to pivot to a more dovish fiscal policy in 2023. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations for 2023, providing support for gold prices.
Gold prices surge as the Fed and other central banks start to scale back their aggressive rate hiking. 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 within the first quarter of 2023.
Oil prices dropped in the year's first week of the reduced oil demand outlook. WTI price plummeted from $80.4 per barrel to $72.6 per barrel within the week, but the descent was halted towards the end of the week, closing near $73.6 per barrel. If the WTI price declines, it may encounter support near $70.2 per barrel, while resistance may be found near $82.9 per barrel.
Oil prices posted heavy losses last week as increased global recession concerns diminished the demand outlook. The global economic slowdown and recession concerns are decreasing the oil demand outlook, putting pressure on oil prices. International Monetary Fund Director Kristalina Georgieva warned that a third of the world may face recession this year, stressing that the economy of the US, China, and the EU is slowing simultaneously.
A rise of Covid cases in China threw doubts on the country’s reopening. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. The Chinese government recently eased some of its strident Covid regulations, abandoning its zero-Covid policy. China’s economy, however, has suffered from prolonged lockdowns and the country’s debt has ballooned over the past few years. China’s weak economy is raising concerns over the demand outlook for oil, pushing prices down.
Aggressive rate hikes stifle economic activity fuelling recession fears. Several major Central Banks, such as the US Federal Reserve, the ECB, and the BOE raised interest rates significantly over the past year, raising concerns that poor economic outlook and looming recession will reduce oil demand.
Bitcoin and other major cryptocurrencies kicked off the year on a positive note. Most major cryptocurrency prices had dropped near a 2-year low towards the end of 2022. Many market participants, however, believe that the cryptocurrency selloff is nearly over and that current low prices offer an investment opportunity.
Bitcoin price was near $16,500 at the start of the week and touched the $17,000 level by the end of the week. If the BTC price declines, support can be found near $15,600, while resistance may be encountered at $18,400.
Ethereum's price rose from $1,190 at the start of the week to $1,280. If Ethereum's price declines, it may encounter support at $1,077, while if it increases, resistance may be encountered near $1,350.
A strong risk-off sentiment has prevailed in the past year, driving riskier assets down. The crypto industry has suffered huge losses in trading volumes, with global cryptocurrency market capitalization dropping from $2.3 trillion at the start of 2022 to $830 billion currently.
Souring risk sentiment has dampened the appeal of cryptocurrencies, driving investors to safer assets. Cryptocurrency prices are also pushed down by a shift of major central banks towards a more hawkish fiscal policy. Most major Central Banks, such as the US Federal Reserve, the ECB, and the BOE raised interest rates considerably over the past year, fuelling global recession concerns and driving risk sentiment down.
Increased risk aversion sentiment recently hit crypto markets hard after the collapse of FTX. The FTX token faced liquidity issues, triggering a generalized crypto market sell-off and undermining confidence in the crypto industry. The FTX collapse is likely to cause ripples in the crypto industry for some time, as FTX CEO Sam Bankman-Fried has been arrested and is facing criminal charges.
BTC/USD 1h Chart
ETH/USD 1h Chart
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