Important calendar events
The dollar reached a 20-year high last week, buoyed by strong US inflation data, with the dollar index climbing to 104.97. The dollar pared some of its gains on Friday though, closing at 104.47, pushed down by disappointing consumer sentiment data.
US Preliminary UoM Consumer Sentiment data released on Friday were below expectations, dropping to their lowest level since 2011. Low expectations of consumer spending reflect reduced economic activity in the US, putting pressure on the dollar.
Monthly PPI and Core PPI data released for the US last week, showed that wholesale inflation rose by 0.5% last month and by 11% year to year in April. Producer prices keep rising, indicating that inflation rates are accelerating in the US.
US CPI and Core CPI data also exceeded expectations, showing that US inflation is not slowing down as much as forecasted. US consumer prices rose at an annual pace of 8.3% in March, boosting the dollar even further. Inflation rates in the US are expected to rise even further, as April’s inflation rates are going to reflect the recent rise in energy prices.
The US dollar has been rising these past few weeks, surpassing its pandemic high of 2020, supported by hawkish Fed monetary policy and strong inflationary pressures. US yields also remained high last week, with the US 10-year treasury note yield rising above 3%.
The dollar has been boosted by hawkish Fed policy and increased risk-aversion sentiment. Continued Russian hostilities against Ukraine have increased risk-aversion sentiment these past two months, providing support for the safe-haven dollar. As there is still no end in sight to the crisis, the dollar’s appeal as an investment remains high.
In its latest monetary policy meeting, the US Federal Reserve raised its benchmark interest rate by 50 base points to 1%. This is the first time that the Fed has performed such a steep rate hike since 2000. The Fed has also announced that it would move towards a policy of gradual quantitative tightening. The Fed’s balance sheet has risen to approximately 9 trillion USD during the pandemic and the US Central Bank has decided to start trimming its balance sheet.
Several FOMC Members delivered hawkish speeches last week, with Fed member John Williams emphasizing the need to tackle high inflation rates and stating that 50 bs rate hikes at the Fed’s next policy meetings are a sensible option. Similarly, Fed Member Bullard stated that a 50 bp rate hike seems appropriate for the next monetary policy meeting. On Friday, FOMC Member Loretta Mester was added to the list of Fed members who support a 50 bp rate hike in the summer, increasing the probability that the voting in the next policy meeting will be in favor of such a rise.
US President Joe Biden also delivered a speech last week, stating that tackling inflation is the US Government’s number 1 priority at the moment, together with maintaining a high level of employment in the US.
This week, several financial indicators are scheduled to be released for the US, and more notably: Core Retail Sales, Retail Sales, Philly Fed Manufacturing Index, Unemployment Claims, and Existing Home Sales. Retail Sales data are especially important as they reflect the change in economic activity, while unemployment rates may also affect the dollar.
In addition, several FOMC Members are due to deliver speeches this week, which may cause some volatility for the dollar, as Fed rhetoric has been supporting the dollar for the past few weeks.
The Euro ended the week trading sideways against the dollar, after falling heavily most of the week. The EUR/USD rate plummeted from 1.051 at the beginning of the week to 1.040 on Friday. This week, the pair is expected to resume testing the 1.036 level support that represents the 2016 low. The outlook for the pair is still bearish, but if the currency pair goes up, it may encounter resistance at 1.093 and further up at 1.118. If the currency pair falls even further, it may encounter support near a 20-year low of 0.985.
On Friday, Eurozone Industrial Production data were more optimistic than expected, showing improved economic health in the EU, which supported the Euro. Russian gas sanctions on the EU were announced last week, added to inflationary and economic pressures, weighing down the Euro.
German CPI data released last week were in line with expectations at 7.4%, showing an incremental rise in inflation rates in the Eurozone as the effect of the increase in energy prices is starting to show in April’s inflation data. German CPI is considered to act as a barometer for Eurozone inflation, with French CPI data scheduled to be released later in the week. Eurozone CPI flash inflation estimates have risen by 7.5% on an annual basis, highlighting the problem of rising energy and commodity prices in the EU. Core CPI estimates rose to 3.5%, further increasing the likelihood of an ECB rate hike in July. Markets are pricing in 3 ECB rate hikes this year, of at least 25 base points each.
Increased risk-aversion sentiment and hawkish Fed policy have boosted the dollar at the expense of other currencies, with the Euro suffering heavy losses these past few weeks. Fears of an energy crisis in the EU also keep the Euro down, as the EU may announce an oil ban on Russian oil imports within the week.
The US Federal Reserve has raised its benchmark interest rate by 50 base points to 1%, highlighting the difference in monetary policy between the EU and the US and driving the Euro down. The ECB has so far been hesitant to raise its interest rates though, as the Eurozone economy is still struggling to recover from the effects of the pandemic. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates.
Many of the ECB’s members have repeatedly expressed concern about the high inflation levels in the EU and are in favor of taking immediate steps towards monetary policy normalization. ECB President Christine Lagarde is in favor of a more dovish stance but has recently shown signs of wavering, as rising inflationary pressures are forcing the ECB to act to drive inflation down. Last week, Lagarde showed a shift towards a more hawkish stance, stating that the ECB will likely end its bond-buying program in the third quarter of 2022 and a rate hike might follow just a few weeks later.
German Buba President Joachim Nagel, who is one of the more hawkish ECB members, stated last week that he expects the ECB to gradually start raising interest rates this summer. He emphasized that inflation rates are expected to rise even further and emphasized that the ECB should end its Quantitative Easing program in June and start raising its interest rates in July to tackle soaring inflation rates. ECB members are starting to agree on a more hawkish policy starting in the third quarter of the year and the consensus between them seems to be that the ECB will perform its first rate hike in decades at its next policy meeting in July.
Several economic indicators are scheduled to be released this week for the Euro, the most important of which is the annual Final CPI and Core CPI indicators, to be released on Wednesday, May 18th. The CPI data are key indicators of consumer inflation and may have a strong impact on the Euro as they can influence the ECB’s decision to raise its interest rates. Headline inflation in the Eurozone is expected to remain close to 7.5%, although there is a possibility that inflation figures will be higher than forecasted.
The sterling has been under pressure for the past few weeks, falling against the dollar. Last week, the pound continued to retreat, weighed down by negative financial data for the UK, with the GBP/USD rate closing near 1.225 on Friday. If the GBP/USD rate goes up, it may encounter resistance at the 1.263 level and further up near the 1.331 level, while if it declines, support may be found near the two-year low at 1.206.
Several economic data were released last week for the sterling, including Annual Preliminary GDP, Construction Output, Monthly GDP, Goods Trade Balance, Index of Services, Industrial Production, Manufacturing Production, and Preliminary Business Investment. These are indicators of economic health and activity and were less optimistic than expected. The UK economy is still vulnerable, suffering from the effects of the pandemic and the war in Ukraine. Economic growth is stalling, with quarterly GDP rising by 0.8%, versus the 1% expected. Monthly GDP contracted by 0.1% in March, highlighting the risks that the British economy is facing.
Brexit issues have come once again into the foreground after elections to the Northern Ireland Assembly. Last week, the EU rejected the latest UK proposal regarding the Northern Ireland protocol and the situation could trigger Article 16 of the Brexit deal, adding pressure to the pound.
The sterling has been losing ground against the dollar due to the divergence in monetary policy between the Fed and the BOE. Although the BOE started the year with a strong hawkish policy, it has recently backed down and moderated its stance, weighted down by the still fragile British economy. In contrast, the increasingly hawkish Fed policy is boosting the dollar against the pound.
In its latest monetary policy meeting, the Bank of England raised its benchmark interest rate by 25 base points, bringing its rate to a 13-year high of 1%. The BOE stressed once more the dangers of recession, as the economic contraction is battling with inflation rates that are predicted to surge to 40-year highs of 10% in the coming months. The cost of living in the UK has been increasing, driven primarily by the high cost of energy imports, putting pressure on UK households. Stagflation is a risk for the UK economy, as for many other countries, as economic stagnation coupled with rising inflation creates a toxic mix for the economy.
Even though both the Fed and the BOE have brought their benchmark interest rates to 1%, investors see the Fed adopting a more decisive approach towards tackling rising inflation rates than the more hesitant BOE. We are starting to see a divergence between Fed and BOE policies, with the Fed moving towards a more aggressive economic tightening by raising its interest rate by 50 bp, versus the 25 bp of BOE’s interest raise. The difference between the Fed’s and the BOE’s stance has been driving the sterling down and propping up the dollar.
Several economic data are scheduled to be released this week for the sterling, including CB Leading Index, Annual CPI, Core CPI, Monthly PPI Input and Output, and Monthly Retail Sales. The release of the Annual CPI data is eagerly awaited by market participants, as these are key indicators of consumer inflation. With inflation rates reaching record highs in the UK, inflation data may affect the BOE’s policy. Markets typically react to news of high inflation in favor of the currency, as high inflation rates should increase the probability of the BOE moving towards a more hawkish direction. Current economic conditions however are fragile, and soaring inflation rates add more pressure to struggling British households, which could lead the BOE to move towards alleviating the cost of living in the UK.
In addition, several MPC Members are due to deliver speeches this week. Their speeches may cause some volatility for the sterling as they may provide insight into the BOE’s future monetary policy direction.
The USD/JPY pair started last week near a 20-year high above the 131 level but retreated later in the week, closing near 129 on Friday. If USD/JPY continues to rise, it may find resistance at the 2002 high of 135.3. If the USD/JPY declines, support might be found near the 121.3 level and further down near the 118 level.
Last week, Bank Lending and Current Account data were released for Japan, and were more optimistic about the state of the economy, providing support for the Yen. The Yen has been retreating for months, with market investor interest in the currency slowing down, despite global economic risks. The currency, which has been oversold, regained some of its lost ground at the end of last week, but the outlook for the USD/JPY pair remains bullish, as the dollar keeps gaining strength.
Japan’s 30-year government bond yield auction held last Thursday, gave an average yield of 1.02%, showing that Japanese bond yields are weakening due to low demand. Overall, bond yields fell across Japan’s treasury curve last week, giving low results, as active bids were low.
Japan’s 10-year government bond yield auction maintained the 0.25% interest rate as the BOJ continues to buy an unlimited amount of Japanese treasury bonds, defending their current low yield. In contrast, the respective US 10-year bond is offered with a yield of over 3%, more than an order of magnitude higher than the Japanese bond. The large divergence in bond yields makes the low-yielding Yen less appealing to investors than the dollar, pushing its price further down.
The primary driver of the Yen over the past few months has been the BOJ’s fiscal policy, with the BOJ following an ultra-easy monetary policy to support the struggling economy. While other countries are moving towards quantitative tightening to return to pre-pandemic fiscal policies, Japan continues to pour money into the economy. The persistently dovish stance of the BOJ has been putting pressure on the Yen.
In its latest monetary policy meeting, the Bank of Japan continued its ultra-accommodating policy and maintained its negative interest rate of -0.10%, in contrast to other Central Banks, which are moving towards a policy normalization after the pandemic and are raising their benchmark interest rates. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down.
The safe-haven dollar is boosted by continuing Russian hostilities against Ukraine. The Yen is also considered a safe-haven currency but has been underperforming, despite an increased risk-aversion sentiment, and many investors have been doubting its safe-haven status.
Important economic data this week for the Yen include Annual Preliminary GDP Price Index and Quarterly Preliminary GDP, scheduled to be released on Wednesday the 18th and may affect the currency.
Gold prices reached a 13-week low of $1,799 per ounce last week after falling for four weeks straight, pushed down by the strong dollar and US yields. If the price of gold decreases, further support may be found at $1,782 per ounce, while resistance may be found at around 1,920 per ounce and higher up at $2,000 per ounce.
The price of gold has been driven by conflicting market forces over the past weeks and balances between increased risk aversion and rising yields. Gold is supported by increased risk-aversion sentiment but is undermined by increasingly hawkish Fed policy, which boosts the dollar and real yields. As investors predict more aggressive Fed rate tightening, the dollar gains strength against competing assets.
Gold prices faced heavy losses last week, as yields extended gains. Hawkish Fed policy and increased risk-aversion sentiment, buoyed the dollar to 20-year highs last week. US CPI and PPI data released last week showed that inflationary pressures continue to grow, catapulting the dollar index to a 20-year high of 104.97.
Inflationary pressures are known to support the price of gold, which is often used as an inflation hedge. As US inflation rises though, the USD and US yields grow stronger, pushing the price of gold down,
US yields have been boosted by a tightening in the Fed’s monetary policy, with the US 10-year treasury note yielding over 3% last week. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.
Gold’s safe-haven status supports its price, as the ongoing crisis between Russia and Ukraine drives investors away from riskier assets as global economic growth is stalled. Continued Russian hostilities against Ukraine have increased risk-aversion sentiment, providing support for gold. Geopolitical tensions have propelled gold prices close to an all-time high of $2,075 per ounce earlier in the year.
Even though the war continues without an end in sight, gold has been overbought in the past few months and its potency as a safe-haven asset is beginning to wan. Even though risk aversion drives investors towards safe-haven assets, the dollar has been surpassing other assets in popularity, decreasing the appeal of gold.
Oil prices exhibited high volatility last week, dropping sharply at the beginning of the week, but rallying towards the end of the week. WTI climbed above the $106.4 per barrel resistance, closing above $110 per barrel on Friday. If the WTI price drops, support can be found at the $94.5 per barrel level and further down at the $90 per barrel level, while further resistance can be found near $118.3 per barrel.
Last week, US crude oil inventories jumped by 8.5 million barrels for the past week but failed to curtail the rise in oil prices. OPEC+ announced its production output for April which shows that OPEC missed its output goal under the OPEC+ deal. OPEC+ members have decided to raise their production output by 432,000 barrels per day for next month. However, the agreement has failed to materialize so far, as some of the organization’s members have been failing to meet their production quota. On Thursday, OPEC+ also cut its demand forecast for 2022, as the war in Ukraine limits oil demand.
Oil prices are especially volatile, as competing factors affect oil supply and demand. Stalling global economic growth and lockdowns in China reduce demand. China is the largest importer of crude oil and continuing Covid lockdowns have dampened oil demand, pushing prices down. The zero-Covid lockdown rules, especially in Shanghai, have fuelled concerns of a slowdown in the world’s biggest importer of crude. As Covid cases are starting to fall in China, however, fears of prolonged lockdown ease, driving oil prices back up. Health authorities in China have signaled that the lockdown in Shanghai may end soon, possibly around May 20th. The end of pandemic restrictions in China would increase oil demand once more, driving oil prices further up.
The crisis between Russia and Ukraine has been intensifying concerns of disruptions in oil distribution, supporting oil prices. The US has already banned all oil and gas imports from Russia, with as many as 3 million barrels per day of Russian crude oil potentially removed from the market as a result of sanctions and of boycotting Russian oil.
The EU has drafted a new package of Russian sanctions, including a ban on Russian oil crude imports. Even though the ban, if implemented, will likely throw the Eurozone into an energy crisis, it will likely not take effect for some time. The EU is hesitant to cut off Russian oil imports abruptly, as most EU member states are in favor of gradually weaning off Russian oil imports. If approved, the EU ban will likely result in phasing out Russian oil imports over the next six months to a year. EU’s Russian oil sanctions have stalled though, as some EU member states, such as Hungary, Slovakia, and Bulgaria, oppose the ban and are threatening to veto the plan. Hungary in particular refuses to stop Russian oil flows from its pipeline, which accounts for approximately 50% of total EU inflows.
Russia is retaliating against the EU however, by limiting Natural Gas exports to Europe. This strategic move has exasperated the EU’s energy problem, with Europe's gas prices skyrocketing, further adding to inflationary pressures in the Eurozone.
During the weekend, Bitcoin and Ethereum struggled to keep key support levels of $30,000 and $2,000 respectively. Bitcoin fell below the $30,000 level support last week, touching a 16-month low near $26,000 before paring its losses and climbing back up to $29,000. If Bitcoin price declines further, support may be found near $19,400, while resistance may be found at $40,000 and further up near $48,200.
Ethereum also retreated last week, trading below the $2,000 level support. If the Ethereum price continues to decline further support may be found near $1,700, while resistance may be encountered near $3,174.
This week is expected to be crucial for cryptocurrencies. If the market sell-off continues, it may give rise to investors panicking and dumping cryptocurrencies, which may lead to a liquidation cascade.
A strong risk-off sentiment has prevailed, driving investors to safer assets and dampening the appeal of cryptocurrencies. In the past six months, the cryptocurrency market has lost almost $2 trillion. A massive sell-off of tech stocks was triggered last week, sending cryptocurrencies into free fall. Most major cryptocurrencies plummeted this week, as crypto markets have been following the overall trends of stock markets and especially of tech stocks.
Stablecoin TerraUSD collapsed last week, losing its dollar peg and trading as low as 5 cents, raising fears that other cryptocurrencies will follow in its wake. Luna has also crashed, losing 99% of its value. Stablecoin Tether also lost its $1 peg briefly last week after suffering $3 billion in withdrawals, falling to 0.95 before regaining its dollar peg. Tether is the largest of the world’s so-called stable coins and its fall has put to question the digital assets’ stability. If its price continues to fall it may lead to market contagion, exasperating cryptocurrency sell-off.
Last week, US CPI and PPI data showed that US inflation continues to soar. US consumer prices rose at an annual pace of 8.3% in March, boosting the dollar.
The dollar reached a 20-year high last week, buoyed by hawkish Fed policy and risk-off sentiment. The rising dollar diminishes the appeal of high-risk assets such as cryptocurrencies. Continued Russian hostilities against Ukraine are also increasing risk-aversion sentiment, putting pressure on crypto markets.
In the past couple of weeks, the Fed raised its benchmark interest rate by 50 base points, its highest rate hike in 22 years and the BOE also increased its interest rate by 25 bp. The shift of major central banks towards a more hawkish fiscal policy has been putting pressure on cryptocurrencies over the past few months. Most major Central Banks are turning towards a tighter policy and a return to pre-pandemic interest rates, driving cryptocurrency prices down.
BTC/USD 1h Chart
ETH/USD 1h Chart
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