Important calendar events
The US dollar has been rising these past few weeks, surpassing its pandemic high of 2020 and reaching a 20-year record of 103.9. Yields also rose across the US treasury curve this past week and continued rising on Monday, with the US 10-year treasury note rising to 3% for the first time since 2018.
Over the past few weeks, Fed rhetoric has been one of the primary drivers of USD price, as the Fed signals a faster pace of policy tightening in the US. Markets are beginning to price in a steep rate hike of 50 base points at the Fed’s next policy meeting on Wednesday. Markets have been pricing in a total of over 225 base points of additional interest rate hikes this year, boosting the dollar.
The highly-anticipated Fed meeting is scheduled for this Wednesday, May 4th and its outcome is expected to affect the dollar considerably. The US Federal Reserve is expected to raise its benchmark interest rate by at least 50 base points on Wednesday, based on recent FOMC members' statements. A series of Fed rate hikes have already been priced in by markets for this year, driving the dollar up over the past few weeks. If the Fed decides on a conservative rate hike of 25 bps, it might seem less hawkish than expected and could drive the dollar down, while a more hawkish policy and a higher rate hike of 75 base points could see the dollar climbing even further. Even a rate hike of 50 bps may have been fully priced in and could see the dollar decline.
Another aspect that will affect the dollar is the Fed’s potential decision to move towards a policy of quantitative tightening this week. The Fed’s balance sheet has risen to approximately 9 trillion USD during the pandemic and many market participants expect the US Central Bank to address this at its meeting on Wednesday and decide to start trimming its balance sheet.
Continued Russian hostilities against Ukraine have increased risk-aversion sentiment these past two months, providing support for the safe-haven dollar. The situation between Russia and Ukraine continues to escalate, as Russian President Vladimir Putin makes threats about using nuclear weapons, while he cuts off the gas supply to Poland and Bulgaria.
Several US key indicators are scheduled to be released this week, including JOLTS Job Openings, Factory Orders, and Wards Total Vehicle Sales. The release of this data might cause some volatility for the dollar ahead of the Fed meeting later in the week.
The Euro has been under pressure by the rising dollar these past few weeks, with the EUR/USD rate trading near the 1.050 level, below a five-year low. If the currency pair falls even further, it may find support near the 2016 low around the 1.036 level. The outlook for the pair is bearish, but if the currency pair goes up, it may encounter resistance at 1.118.
Increased risk-aversion sentiment and hawkish Fed rhetoric have boosted the dollar at the expense of other currencies, with the Euro suffering heavy losses last week after Russian President Vladimir Putin announced that Russia would suspend gas supplies to Poland and Bulgaria. The Fed is expected to move towards a tighter fiscal policy and has been performing a series of rate hikes, with a 50 base point rate hike expected to be announced this week.
Last week, Eurozone CPI flash inflation estimates rose 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.
The ECB however, has so far been hesitant to raise its interest rates, 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. As the Fed is expected to raise its benchmark interest rate significantly at its policy meeting this week, the Euro remains at a disadvantage from the difference in interest rates.
Many of the Central Bank’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, however, and has stated that Eurozone inflation is expected to rise in the following months, while economic growth is expected to stall. Even Lagarde however, has shown recent signs of wavering though, as rising inflationary pressures are forcing the ECB to act to drive inflation down. Last week, Lagarde delivered a speech that was considered more hawkish than expected, stressing that the ECB will be following a different route than the Fed, but leaving the door open for a rate hike in July.
Several important indicators are scheduled to be released for the Eurozone this week, including German Trade Balance, Spanish Unemployment Change, Spanish and Italian Services PMI, French and German Final Services PMI, and Eurozone Final Services PMI. These data provide a measure of economic activity for some of the Eurozone’s leading economies. The PMI data, in particular, are key indicators of economic health and may impact the ECB’s monetary policy.
The sterling remained under pressure last week and continued falling against the dollar, with the GBP/USD rate falling as low as 1.240. If the GBP/USD rate goes up, it may encounter resistance at the 1.331 level and further up near the 1.341 level, while if it declines, further support may be found near the two-year low at 1.206.
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, there are signs that its stance may soften in the coming months, weighed down by a fragile economy. In contrast, the increasingly hawkish Fed rhetoric is boosting the dollar against the pound.
BOE Governor Andrew Bailey has stated that the BOE is walking a tight line between inflation and economic recession and warned of the risks of tightening monetary policy too fast. Recent economic data show that the British economy is sluggish and economic recovery is still a long way off.
The cost of living in the UK has been increasing, driven primarily by the high cost of energy imports, putting pressure on UK households. Rising commodity prices and import costs in the UK are driving inflation rates higher, with headline inflation reaching 7%. UK inflation has hit a 30-year high and is expected to rise further in the coming months, with a peak rate close to 9% in Q4. Soaring inflation rates in the UK increase market expectations that the BOE will raise its benchmark interest again in the second quarter of 2022, after already lifting the Bank Rate from 0.1% to 0.75% in the past few months.
The Official BOE interest rate is going to be announced this week on Thursday, May 5th, just a day after the Fed’s interest rate announcement. The Bank of England is expected to raise its benchmark interest rate on Thursday by at least 25 base points, after already performing two consecutive rate hikes in its previous meetings, bringing its rate to 1%. Markets have already priced in approximately six BOE rate hikes this year, although recent BOE rhetoric seems to move towards a more conservative monetary policy. It is also possible that the BOE will keep its interest rate unchanged in this meeting, while a steeper rate hike than 25 base points is considered highly unlikely at the time.
In this BOE meeting, we expect to see a divergence between Fed and BOE policies, with the Fed moving towards a more aggressive economic tightening. The difference between the Fed’s and the BOE’s stance over the past few weeks has been driving the sterling down and propping up the dollar, with most market participants becoming more modest in their expectations of a BOE rate hike. Another important aspect that will likely affect the pound, is the BOE’s potential move towards quantitative tightening. In its last policy meeting in February, the BOE announced that it would move towards a passive tightening of its fiscal policy, by not reinvesting maturing gilts to keep their holdings constant. The BOE retains approximately GBP875 billion of UK government bond holdings and may decide to move towards a more active tightening this week by selling UK gilts, to gradually reduce this amount.
The Yen plummeted to a 20-year low last week, following the BOJ’s latest monetary policy meeting. The USD/JPY traded above 131, its highest price in 20 years. The USD/JPY has been gaining strength these past few weeks, pushing past the resistance level of the 2015 high at 125.8. If USD/JPY continues its ascend, 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.
The primary driver of the Yen over the past few months has been the BOJ’s fiscal policy. Last week, the Yen has been pushed down by the persistently dovish stance of the BOJ. Bank of Japan officials acknowledge the impact on the Japanese economy from increased import costs due to the weak yen but persist in 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 BOJ announced its main interest rate last Thursday and released an outlook report, detailing the factors that shape its monetary policy. The Bank of Japan continued its ultra-accommodating policy and massive stimulus program. The BOJ also 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 BOJ released a press conference after the conclusion of the meeting, with BOJ Governor Haruhiko Kuroda issuing a dovish statement that pushed the Yen to record lows. Kuroda vowed to continue the bank’s ultra-easy monetary policy, stating that the weakening Yen is not part of the BOJ’s considerations.
The BOJ also stated that it would continue to buy an unlimited amount of Japanese treasury bonds, defending their current low yield. Japan’s 10-year government bond yield is currently close to 0.25%, more than an order of magnitude lower than the respective US 10-year bond, which is offered with a yield close to 2.8%. The large divergence in bond yields makes the low-yielding Yen less appealing to investors than the dollar, pushing its price further 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.
This week, May 3-5 are bank holidays in Japan and very few economic events are scheduled for this week in Japan. As a result, the Yen is expected to be influenced mainly by external factors this week, such as the war in Ukraine, the USD status, and the US Fed meeting.
Gold price declined further last week and continued trading lower on Monday, trading below the $1,893 per ounce support level and falling even below the 1,877 per ounce support. If the price of gold decreases, further support may be found at 1,782 per ounce, while resistance may be found at around $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 arising from the war in Ukraine. Gold price is undermined by increasingly hawkish Fed policy though, which boosts the dollar and real yields.
The rising dollar and US yields put pressure on the price of gold. The dollar has gained strength these past few weeks, with the dollar index rising to the 103.9 level, its highest point in 20 years, spurred by hawkish Fed rhetoric, ahead of the Fed policy meeting on Wednesday. Increasing odds of a sharp rate hike of at least 50 base points at the Fed’s meeting have been boosting the market appeal of the dollar against other safe-haven assets.
Rising yields across the US treasury curve also contribute to the gold price. Real yields have been boosted by a tightening in the Fed’s monetary policy, with the 10-year real treasury yield hitting positive territory. 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. The situation between Russia and Ukraine continues to escalate, as Russian President Vladimir Putin threatens about using nuclear weapons, while he cuts off the gas supply to Poland and Bulgaria. Even though risk aversion drives investors towards safe-haven assets, the dollar has been surpassing other assets in popularity, decreasing the appeal of gold.
Concerns about the state of the economy in China, after the fresh rise of Covid cases and the lockdown in Shanghai, also boost the price of gold.
Oil prices rallied last week, rising above the key $100 per barrel level, and remained firm on Monday, with WTI trading above $105 per barrel. 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 resistance can be found near $106.4 per barrel and further up near $118.3 per barrel.
Oil prices are especially volatile, as competing factors affect oil supply and demand. Stalling global economic growth and lockdowns in China dampen demand. Covid restrictions in China have raised fears of a large decrease in global oil demands. China is the largest importer of crude oil and the strict Covid lockdowns had been reducing global oil demand. The large economic hub in Shanghai has been in a zero-Covid lockdown for weeks now and there are fears that China’s capital city of Beijing will soon follow with strict Covid restrictions.
The crisis between Russia and Ukraine however, has been intensifying concerns of disruptions in oil distribution, supporting oil prices. Continued Russian hostilities against Ukraine provide support for the price of oil, as western allies discuss fresh sanctions on Russia, while the Russian President, Vladimir Putin, cut off the gas supply to Poland and Bulgaria, intensifying fears of an energy crisis in Europe.
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 is still hesitant to enforce an embargo on Russian oil, as many of its member states, especially Germany, depend heavily on Russian oil imports. The EU is expected to enforce fresh sanctions on Russia within the next few days and it is reported that the Eurozone will enforce a direct embargo on Russian oil imports for the first time. Rumors that Germany has dropped its opposition against the embargo have been pushing up oil prices within the last few days, as such a move will create an energy shortage in Europe. It is likely, however, that the new sanctions will not signal an abrupt cutting off of Russian oil, as most EU member states are in favor of gradually weaning off Russian oil imports.
This week, all eyes are going to be on the next Ministerial OPEC+ meeting, on Thursday, May 5th. Strong volatility in the price of oil is expected in the days leading up to the meeting, as well after the event, depending on its outcome. Increased supply concerns, combined with high demand, may encourage OPEC and its allies to increase its current output goal.
Cryptocurrency prices slipped last week and continued their decline on Monday, ahead of the next FOMC policy meeting, as increasingly hawkish Fed policy has led to expectations of a sharp rate hike this week.
The shift of major central banks towards a more hawkish fiscal policy has been putting pressure on cryptocurrencies. Most major Central Banks are turning towards a tighter policy and a return to pre-pandemic interest rates, driving cryptocurrency prices down. Increasingly hawkish Fed rhetoric is pointing to a steep rate hike of 50 base points at the Fed’s next policy meeting on Wednesday, boosting the dollar and putting pressure on cryptocurrencies.
Crypto markets have been following the overall trends of stock markets and especially of tech stocks. Last week, rising tech stocks boosted cryptos, although crypto markets remain under pressure from the rising dollar. Cryptocurrency prices are expected to remain volatile this week, as continued risk-aversion sentiment, coupled with hawkish Fed policy may drive their prices down.
On Monday, rising stock markets again supported crypto markets, although the dollar’s advance pushed crypto prices down, with Bitcoin trading below the $39,000 level on Monday. If Bitcoin price declines, it may find support at $37,500 and $36,000, while resistance may be found at $40,000 and further up near $48,200 and at the psychological level of $50,000.
Ethereum traded sideways on Monday, testing its $2,820 level support. If the ETH price declines, it may find support at $2,440, while resistance may be encountered near $3,174.
Continued Russian hostilities against Ukraine have increased risk-aversion sentiment, putting pressure on crypto markets. The situation between Russia and Ukraine continues to escalate, as Russian President Vladimir Putin makes threats about using nuclear weapons, while he cuts off the gas supply to Poland and Bulgaria.
BTC/USD 1h Chart
ETH/USD 1h Chart
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