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Weekly Market Outlook For March 21st to March 27th

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Written by:
Myrsini Giannouli

21 March 2022
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Ukraine crisis update

Diplomatic talks between Russia and Ukraine last week have sparked hopes of a de-escalation of the conflict, although Russian attacks continue. Diplomatic negotiations have entered a more serious phase, as both sides seem to acknowledge there is room for compromise and for finding a middle ground. 

War continues raging in Ukraine, with heavy casualties including civilians and children. Millions of refugees are fleeing Ukraine, creating an additional issue for the EU, which has vowed to accept all refugees entering its borders from Ukraine.

The ECB, the Fed, and other major Central Banks are trying to strike a balance between soaring inflation rates and economic woes since the onset of the pandemic, and the war in Ukraine is complicating matters further. Sanctions against Russia are driving the price of key commodities up, especially energy-related commodities, further increasing inflation.

Stock markets have been plummeting amid a rapid increase in the price of commodities and concerns about further military escalations. Fears that sanctions against Russia would have a severe impact on the global economy have been pushing markets down. The Rouble has plummeted to historic lows, while the Russian Stock Exchange remained closed for weeks, but is due to reopen on the 21st. Russia had trouble making its sovereign debt payments last week, with the Russian finance minister stating that Russia would make the payments in roubles rather than dollars. A national default was feared, which would be the country’s first default since 1998, but it was averted and it seems that Russia will meet its debt obligations. The Rouble gained a little ground last week as there were hopes that the crisis in Ukraine might be diffused, but lost its gains later in the week after the Russian Central Bank decided to keep its interest rate to 20%. 

Forex

Important calendar events

  • Mar 21 and Mar 23, USD: Fed President Powell speech
  • Mar 21 and Mar 22, EUR: ECB President Lagarde Speech
  • Mar 23, GBP: Annual CPI and Annual Core CPI, Annual Budget Release, BOE Gov Bailey Speech
  • Mar 24, EUR: German Flash Manufacturing PMI, German Flash Services PMI
  • Mar 24, USD: US Flash Manufacturing PMI, US Flash Services PMI, Unemployment Claims

USD

The Federal Reserve raised its benchmark interest rate by 25 base points last week, bringing its interest rate to 0.50%, and signaled that interest rates could reach up to 2% by the end of the year.

The dollar dropped last week in the wake of the Federal Reserve's latest policy meeting. In a highly-anticipated meeting last Wednesday, the Federal Reserve raised its benchmark interest rate by 25 base points, bringing its interest rate to 0.50%. In the ensuing press conference, Federal Reserve Chairman Jerome Powell signaled that the Fed’s interest rates could reach nearly 2% by the end of the year, pointing to six rate hikes within the year. The US Central bank is attempting to bring down inflation that has been rising at the fastest rate in 40 years. Fed officials have also raised inflation forecasts for 2022 to 4.3%, in a move that has been interpreted as hawkish. The 25-base point rate hike though was widely expected and had already been priced in by markets. Some investors were even expecting a steeper rate hike and the more conservative interest raise pushed the dollar down. Markets are anticipating total rate hikes of 175 base points within the year to tackle soaring inflation rates.

The dollar index had climbed to almost 100 before the Fed meeting, in expectations of a more aggressive turn to a tighter monetary policy and dropped to 97.7 after the Fed issued its policy statement. The USD picked up the pace a little at the end of the week, closing near 98.2 on Friday.

Diplomatic negotiations between Russia and Ukraine continue and hopes of de-escalation of the crisis have been driving the dollar down. The dollar is considered a safe-haven currency and rises when a risk-aversion sentiment prevails, as investors turn towards safer assets. The recent efforts to defuse the crisis have added pressure to the price of the dollar, although its price remains high as the crisis continues.

Several economic, inflation and employment indicators are set to be released this coming week for the dollar and may cause some volatility in the wake of the Fed’s rate hike. In addition, Fed Chair Jerome Powell and other FOMC members are scheduled to deliver speeches this week. These events will be scanned by investors, who seek to gain insight into the Fed’s future monetary policy.

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EUR 

ECB President Christine Lagarde stressed that the ECB needs to remain flexible and may alter its monetary policy in response to unforeseen inflationary pressures arising from the war in Ukraine.

The Euro gained ground against the dollar last week, as the dollar retreated after the Fed policy statement. The EUR/USD rate climbed to 1.113, as markets absorbed the news of the Fed rate hike and closed a little lower on Friday, near 1.105. If the currency pair goes up, it may encounter resistance at 1.148 and further up at 1.169, while if it declines, support may be found at the 1.063 level. 

The ECB has been pursuing a more cautious fiscal policy than other major Central Banks, although it has recently turned towards a more hawkish direction. The ECB has recently announced its decision to wind down its bond-purchasing program sooner than expected, placing the end of the bond-buying program at the third quarter of 2022, if financial conditions in the Eurozone allow it. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates. Europe’s finance ministers agreed to the ECB’s decision to end the quantitative easing measures at the ECOFIN Meetings on Tuesday. 

In addition, the European Central Bank has announced that it does not plan to raise its benchmark interest rate before the end of its bond-buying program in the third quarter of 2022. Many market analysts predict that the ECB will raise its interest rate by at least 30 base points in Q4 of 2022, although so far, the ECB has been reluctant to move towards a rate hike. As the Fed and the BOE have already raised their benchmark interest rates, the Euro remains at a disadvantage from the difference in interest rates.

ECB President Christine Lagarde delivered a speech last Thursday, stressing that the ECB needs to remain flexible and may alter its monetary policy in response to unforeseen inflationary pressures arising from the war in Ukraine. The ECB President, however, stated the EU Central Bank is in no hurry to raise its interest rate, reiterating the ECB’s cautious position. 

This week, important economic indicators scheduled to be released for the Euro, include the German Flash Manufacturing PMI and German Flash Services PMI, which are key indicators of economic health for the Eurozone’s leading economy and may cause some volatility for the Euro. In addition, ECB President Christine Lagarde is due to speak to events this week and her speech will be scanned by traders for hints into the ECB’s future policy.

EURUSD 1hr chart

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GBP 

The Bank of England is shifting to a more hawkish policy and a return to pre-pandemic interest rates this year in an attempt to tackle inflation, which is expected to reach a 7.25% peak in April.

The sterling declined last week after the latest Bank of England policy meeting on Thursday, in which the BOE announced that it would raise its benchmark interest rate by 25 base points. This is the third back-to-back rate hike for the BOE, bringing its interest rate to 0.75%. The BOE committee voted 8-1 for the rate hike, with one member voting to maintain the bank rate at 0.5%. The BOE’s decision comes a day after the Fed had similarly voted to raise its benchmark interest rate. The BOE issued a statement following the announcement of its interest rate decision, in which it emphasized the role of the war in Ukraine in rising inflation rates. 

UK inflation is already at a 30-year high and expected to rise further, as the war in Ukraine raises the price of key commodities and energy. Rising commodity prices and soaring inflation rates in the UK are competing against an economy that is still sluggish in the wake of the pandemic. The Bank of England is shifting to a more hawkish policy and a return to pre-pandemic interest rates this year in an attempt to tackle inflation. Inflationary pressures are expected to culminate in April and the BOE has upped its forecast for inflation to a 7.25% peak in April, against a backdrop of strong growth and a robust labor market in the U.K. 

The BOE’s raise of its benchmark interest rate was highly anticipated and had already been priced in by markets. Even though the BOE raised its interest rate and is tightening its monetary policy, the UK Central Bank’s overall statement was perceived as dovish and the sterling collapsed following its release. 

The GBP/USD plummeted to 1.308 after the BOE’s announcement but quickly started recovering, as investors had time to digest the BOE’s statement, closing near 1.317 on Friday. If the GBP/USD rate goes up, there may be resistance at the 1.364 level, while if it declines, support may be found near the 1.299 level. 

The sterling has been under pressure since the war between Russia and Ukraine broke out and investors turned towards safer assets. The past week, however, diplomatic negotiations between Russia and Ukraine are sparking hopes of a de-escalation of the crisis and are easing some of the pressure on the currency.

Several important financial indicators are set to be released this week for the sterling, including Annual CPI and Annual Core CPI, and Annual Budget Release. The CPI data, in particular, are key indicators of inflation and their release may cause some volatility for the pound, especially coming after the BOE policy statement last week, which cited high inflation as the main reason for the increase in the BOE’s benchmark interest rate. Inflation data next week may exceed current estimates, and investors predict inflation will rise to 5.9%, as the spike in oil prices will start catching up with inflation. This week, UK finance minister Rishi Sunak is also due to announce his half-yearly budget update pressure to increase government spending to mitigate the impact of the growing cost-of-living. Also of importance this week, are scheduled speeches by BOE Governor Bailey and other MPC members, that may provide some pointers as to the BOE’s future direction and can cause some volatility for the sterling.

GBPUSD 1hr chart

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JPY 

In its monetary policy meeting on Friday, the Bank of Japan maintained its ultra-accommodating monetary policy, with unlimited bond purchases and a benchmark interest rate of -0.10%.

The USD/JPY rate climbed above the 118.5 level resistance last week, closing near 119.1 on Friday, as the Yen retreated against the dollar. The USD/JPY is currently trading in an uptrend and is at its highest level since 2016. If the USD/JPY declines, support might be found at 114.8 and further down at 113.4.

In its monetary policy meeting on Friday, the Bank of Japan maintained its ultra-accommodating monetary policy, with unlimited bond purchases. The BOJ also did not raise its negative interest rate from -0.10%, with Bank of Japan Governor Haruhiko Kuroda stating that there is no need for Japan to raise interest rates at all. Low inflation rates in Japan and a weakening economy are steering the BOJ towards maintaining its dovish monetary policy. Inflation in Japan is far below the BOJ’s 2% goal, although as prices of imported goods and energy continue to increase, inflation may rise, while overall economic health declines. Japan’s core CPI may climb around 2% in April, similar to other countries that are expected to see a peak in inflation rates at the same time, largely due to increased oil prices.

The BOJ’s meeting came after the Fed and BOE meetings, in which the two major Central Banks raised their benchmark interest rates. The difference in interest rates with other major Central Banks puts the Yen at a disadvantage and, if the BOJ continues its dovish policy, it may drive the Yen further down.

The Yen also retreated last week, amid rising hope for a resolution to the Ukraine crisis. The Yen is considered a safe-haven currency and was supported by the war in Ukraine. The Yen, however, has not picked up pace as much as other safe-haven assets, as the BOJ’s fiscal policy is keeping the currency down.

USDJPY 1hr chart

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Gold

Global inflationary pressures, increased by the war in Ukraine, are pushing major Central Banks towards a more hawkish fiscal policy.

Gold price retreated last week from the highs of the previous weeks, closing near $1,921 per ounce on Friday. If the price of gold decreases, support may be found near 1,877 per ounce, while resistance may be found at around $2,000 per ounce. 

During the past few weeks, the gold price had climbed up to $2,050 per ounce, its highest level since the peak of the pandemic, in August 2020. The war in Ukraine has triggered a risk-aversion sentiment, driving investors towards safe-haven assets. Diplomatic talks between Russia and Ukraine continue, sparking hopes of a de-escalation of the conflict. Negotiations have entered a more serious phase, as both sides seem to feel there is room for compromise, although so far, a solution does not seem near and gold price benefits from the ongoing crisis.

Sanctions against Russia have been driving commodities up, especially energy-related commodities, contributing towards rising inflation. The price of gold benefits from rising inflation, since it is often used as an inflation hedge. The effect of rising inflation on gold seems to be temporary though. Global inflationary pressures, increased by the war in Ukraine, are pushing major Central Banks towards a more hawkish fiscal policy. 

The Federal Reserve raised its benchmark interest rate by 25 base points last week, bringing its benchmark interest rate to 0.50%. The BOE followed suit a day later, raising its benchmark interest rate by 25 base points, to 0.75%. Treasury yields rose across the US treasury chest last week, as a result of the rise in the Fed’s interest rates. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.

XAUUSD 1hr chart

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Oil

The International Energy Agency estimates that as much as 3 million barrels per day of Russian crude oil could be removed from the market, as a result of sanctions and of boycotting on Russian oil.

Oil prices dropped at the start of last week, but rallied near the end of the week, climbing back up again above the psychological level of $100 per barrel and closing near $105.5 per barrel on Friday. Reports of renewed negotiations between Russia and Ukraine this week had sparked hopes of a de-escalation of the crisis, driving oil prices down. The negotiations seem to drag on, however, with no tangible result so far and the war in Ukraine rages on. Oil price went up again on Thursday, amid fears that the war in Ukraine would disrupt the oil supply. The International Energy Agency (IEA) estimates that as many as 3 million barrels per day of Russian crude oil could be removed from the market, as a result of sanctions and of boycotting on Russian oil.

The US has banned all oil and gas imports from Russia, catapulting oil prices to over $130 per barrel. The UK has similarly vowed to phase out its dependency on Russian oil and major British oil companies are already boycotting Russian oil. US sanctions raised fears that the EU would also impose an embargo on Russian energy-related products. A potential EU oil and gas ban would have a considerably higher impact, creating a severe energy crisis and driving oil prices further up. The EU however, has not yet imposed direct bans on Russian oil and gas imports, since the Eurozone relies heavily on Russian energy-related imports, with almost 30% of the crude oil imports, 47% of its coal, and over 40% percent of its gas imports coming from Russia. 

Over the past few months, the oil price has been going up, driven by increasing demand and limited supply. The war in Ukraine has further increased risks of disruption in the supply of oil, pushing its price further up. Last week, however, reports of a new wave of covid cases in China, forcing the country to enter lockdown once again, have pushed prices down. If the pandemic is re-ignited and countries start imposing new restrictions and re-entering lockdowns, it may signal another drop in the demand for oil and its price will decrease. 

Meanwhile, the US and the EU are aiming to find alternative sources of oil and put an end to their dependency on Russian oil.  Negotiations of an Iran oil deal over its nuclear program have stalled though, as Russia, which is a signatory in the deal, seeks guarantees that its trade with Iran would not be affected by Russian sanctions. If the deal goes through, Iran could add as many as 900,000 barrels a day to global supplies, which might provide some relief to the energy crisis.

WTI 1hr chart

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Bitcoin and major cryptocurrencies

Cryptocurrency prices climbed after the announcement of the Fed rate hike, as the interest rate raise fell within market expectations and was already priced in by markets.

The shift of major central banks towards a more hawkish fiscal policy has been putting pressure on cryptocurrencies over the past few months. Last week, the Federal Reserve raised its benchmark interest rate by 25 base points, bringing its benchmark interest rate to 0.50%. The BOE also announced a 25-base points rate hike after its monetary policy meeting last Thursday, raising its interest rate to 0.75%. 

After the announcement of the Fed rate hike, however, cryptocurrency prices climbed, as the interest rate raise fell within market expectations and was already priced in by markets. Similarly, the BOE rate hike on Thursday had seemingly little effect on cryptocurrencies. The Fed and BOE policy statements were interpreted by investors as less hawkish than expected, benefitting cryptos. 

Bitcoin remained above the $40,000 psychological level during the weekend, trading around $41,000. If Bitcoin price falls, it may find support at $36,000 and $33,000, while resistance may be found at $40,000 and further up near $44,300. Ethereum price also went up, climbing above $2,900 in the weekend. Ethereum may find support at $2,489. In case its price goes up, it may find resistance at $3,000 and further up at $3,400.

Cryptos have been under pressure since the beginning of the year, hit by a bout of risk-aversion. Mounting geopolitical tensions have been driving the price of cryptos down, as investors shy away from risk assets. Last week, however, diplomatic talks between Russia and Ukraine have sparked hope of a de-escalation of the crisis. In addition, most major cryptocurrencies have received a boost over the past couple of weeks, as demand from Russian and Ukrainian markets increased. Bitcoin volume from Russian markets has increased considerably, as Russian investors aim to escape the plummeting Rouble and Russian sanctions.

BTC/USD 1h Chart

BTCUSD 1hr chart

 

ETH/USD 1h Chart

ETHUSD 1hr chart

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Written by:
Myrsini Giannouli

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