Important calendar events
The dollar soared last week as US inflation continued to rise, and the dollar index was catapulted to 105.3. US Treasury yields also rose, with the US 10-year bond yield climbing above 4.32%.
The dollar is expected to be driven in the next few weeks by Fed rate hike expectations. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years.
The Fed’s aggressively hawkish policy over the past year has been paying off and inflationary pressures in the US are easing. Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently.
The Fed is widely expected to keep interest rates unchanged after its policy meeting this week on Wednesday the 20th. FOMC Economic Projections on Wednesday will be of special interest to market participants looking for forward guidance. Odds that the Fed will raise interest rates one more time this year are increasing, although most analysts predict that the Fed has already reached its rate ceiling. The US economy is showing signs of picking up, giving the Fed more leeway to raise interest rates. At the same time, inflationary pressures are proving quite stubborn and may force the Fed to continue its hawkish policy.
Sticky US inflation boosted the dollar last week. PPI data on Thursday showed that inflationary pressures are not easing just yet, despite the Fed’s high interest rates. PPI rose by 0.7% in August, exceeding expectations of a 0.4% rise. Core PPI, which excludes food and energy, decelerated a little, rising by 0.2% in August compared to a 0.4% growth in July. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US.
Consumer inflation is also accelerating, with CPI rising by 0.3% in August from 0.2% in July against expectations of a 0.2% print. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Core inflation, which excludes food and energy, also rose by 0.3% in August from 0.2% in July. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.
Preliminary GDP for the second quarter of 2023 showed that the US economy expanded by only 2.1% against expectations of 2.4% growth. The preliminary GDP price index for the 2nd quarter of the year also came in below expectations at 2.0% versus 2.2% anticipated.
EUR/USD plummeted last week, dropping to the 1.063 level after the ECB rate announcement on Thursday but pared some losses on Friday, ending the week near 1.066. If the EUR/USD pair declines, it may find support at 1.063, while resistance may be encountered near 1.076.
The ECB raised interest rates by 25 bp at its monetary policy meeting on Thursday, bringing its main refinancing rate to 4.50%. The ECB had the difficult task of assessing the risk to the fragile Eurozone economy against high inflation rates. In the end, persistently high inflation induced the central bank to raise interest rates again on Thursday.
The rate hike was not fully priced in, as the market's odds were split between a 25-bp rate hike and a pause in a rate hike. Nevertheless, the Euro dropped sharply on Thursday as the ECB hinted that it had reached its interest rate ceiling. Most market analysts believe that the ECB has reached its terminal rate. ECB President Christine Lagarde signaled an end to rate hikes at the press conference after the conclusion of the meeting. Lagarde warned, however, that interest rates will remain at sufficiently restrictive levels for as long as necessary.
Economic activity data released last week for the Eurozone were mixed. German ZEW Economic data were optimistic, indicating improved economic health. The German ZEW indicator came at -11.4 in September. While a negative print indicates pessimism, markets were expecting an even lower print of -15.0, and September’s value is less pessimistic than August’s -12.3. Conversely, ZEW Economic data for the Eurozone as a whole dropped below expectations, showing a deterioration in economic health. September’s print of -8.9 was considerably worse than August’s -5.5 and failed to meet expectations of -6.2.
Flash CPI data for August showed that Euro Area headline inflation remained unchanged at 5.3% year-on-year against expectations of a drop to 5.1%. Core CPI, which excludes food and energy, however, dropped to 5.3% from 5.5% in July.
Final GDP data for the Euro area were disappointing, showing that the Eurozone economy expanded by only 0.1%, in the second quarter of the year, against expectations of 0.3% growth. The Eurozone economy barely grew in the second quarter after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening.
The Sterling weakened last week as the rivaling dollar gained strength and GBP/USD dropped to 1.238. If the GBP/USD rate goes up, it may encounter resistance near 1.255, while support may be found near 1.231.
The Sterling was weighed down last week by disappointing British GDP data. Britain’s economy contracted by 0.5% month-on-month in July after expanding by 0.5% in June. The prognosis was more optimistic, with markets forecasting a 0.2% decline in GDP. The state of the British economy is fragile, as prolonged tightening has taken its toll on the labor market and other vital economic sectors. The British economy weakened more than expected in July and this may play a decisive role in the BOE’s monetary policy decision this week.
RICS House Price Balance data last week showed that British house prices had the most widespread falls in 14 years in August. Housing demand in the UK dropped due to elevated mortgage costs and economic uncertainty.
UK labor data released last week were mixed and failed to provide support for the Sterling. The UK labor market is still weak, with the jobless rate climbing to 4.3% in the three months to July. Wage growth was higher than anticipated, however, and above the rate of inflation. Average weekly earnings growth in the three months to July rose to 8.5% year-on-year, exceeding expectations of 8.2%. Unemployment claims dropped to 0.9K in August from 7.3K in July, against expectations of 17.1K.
High inflation in the UK is putting pressure on BOE policymakers to increase interest rates. Inflation in the UK is showing signs of cooling, demonstrating the effectiveness of the BOE’s consistently hawkish policy. Headline inflation dropped to 6.8% year-on-year in July from 7.9% in June. Core CPI, which excludes food and energy, remained steady at 6.9% though. Even though inflationary pressures in the UK are easing, inflation is still high, and policymakers are likely to continue raising interest rates to bring it down.
The BOE raised interest rates by 25 basis points at its latest policy meeting, bringing the bank rate to a 15-year high of 5.25%.
A combination of a struggling economy and high inflation is making the BOE’s task more difficult. Further tightening is needed to bring inflation down at the risk of tipping the British economy into recession. The BOE will announce its interest rate decision this week on the 21st. The BOE is seen as likely to continue raising interest rates and markets are pricing in another 25-bp rate hike on Thursday.
The interest rate decision this week is unlikely to be unanimous as in recent votes some MPC members were more dovish than others. Nevertheless, market odds are in favor of yet another rate hike in November and a lot is riding on the forward guidance the BOE will give this week. The BOE rate votes on Thursday and the Monetary Policy Summary will be scrutinized by traders for hints into the central bank’s future policy direction.
The Yen weakened against the dollar last week with USD/JPY closing near the 147.8 level on Friday. If the USD/JPY pair declines, it may find support near 145.8. If the pair climbs, it may find resistance at 148.
BOJ Governor Kazuo Ueda hinted last week that a policy shift may finally be on the horizon. In an interview with the Yomiuri Shimbun newspaper, Ueda admitted the BOJ will be exploring new policy options, if economic and price conditions continue moving upward. Ueda warned that the present ultra-easy policy will continue for some time but indicated that the BOJ is considering policy adjustments further down the track.
Ueda’s unexpectedly hawkish comments boosted the Yen briefly early last week. After a short reprieve, however, the Yen resumed its descent. Even though Ueda hinted at a policy shift, a policy change is not imminent and will depend on future economic and inflation data.
The central bank maintained its short-term interest rate target steady at -0.10% at its latest policy meeting in July. The BOJ, however, has loosened its yield curve control. This will maintain the rate ceiling but effectively allow rates to float beyond the cap, allowing for rises by a further 50 basis points.
The BOJ monetary policy meeting will be held this week on Friday the 22nd. The ECB already hiked rates one more time last week and the BOE is likely to follow suit on Thursday, while the Fed is seen as likely to pause raising interest rates this week but deliver a hawkish message. The Yen becomes even more vulnerable as other major central banks continue raising interest rates.
The BOJ is almost certain to maintain its negative interest rate on Friday. Markets, however, will be focused on the BOJ’s forward guidance as the central bank is finally showing signs of relaxing its ultra-easy policy.
The Yen has been weakening, pushed down by the BOJ’s ultra-accommodating monetary policy. The Yen’s weakness has been the subject of concern for Japanese authorities as it undermines the country’s importing potential and causes financial distress in households.
Japanese authorities have been repeatedly warning speculators against excessive short-selling of the Yen. The Yen’s continued weakness is raising market awareness of another intervention by the Japanese currency to support the ailing currency. Many market analysts view the USD/JPY 150 level as the line in the sand for another intervention.
National Core CPI dropped to 3.1% in July from 3.3% in June. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. BOJ Core CPI dropped slightly to 3.0% in July from 3.1% in June.
Final GDP data for the second quarter of the year showed that the Japanese economy expanded by 1.2%, disappointing expectations of 1.4% growth. The final GDP Price Index showed a 3.5% annual expansion, versus 3.4% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
Gold prices plummeted on Thursday, bouncing off the key $1,900 per ounce support as US inflation surprised again on the upside. Gold prices jumped up on Friday though, climbing to $1,930 per ounce and closing near $1,923 per ounce on Friday. If gold prices increase, resistance may be encountered near $1,930 per ounce, while if gold prices decline, support may be found near $1,900 per ounce.
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 soared last week as US inflation continued to rise, and the dollar index was catapulted to 105.3. US Treasury yields also rose, with the US 10-year bond yield climbing above 4.32%.
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. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years.
Market participants will be focusing on the Fed’s interest rate announcement this week on the 20th and the Fed’s forward guidance. Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently.
The Fed is expected to keep interest rates stable after its meeting on Wednesday, but analysts do not discount another rate hike in November. The Fed’s monetary policy outlook this week is likely to affect gold prices considerably. If the Fed maintains a hawkish stance, it could drive gold prices down further.
Hotter-than-expected US inflation data pushed gold prices down last week. PPI data on Thursday showed that inflationary pressures are not easing just yet, despite the Fed’s high interest rates. PPI rose by 0.7% in August, exceeding expectations of a 0.4% raise. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US.
Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.
Oil prices rose to their highest level in 2023 last week, with WTI prices climbing above $91.0 per barrel. If WTI price declines, it may encounter support near $85.0 per barrel, while resistance may be found near $93.0 per barrel.
An unexpected increase in US crude oil inventories halted oil prices’ rally mid-week but oil prices surged again towards the end of the week. Supply concerns outweighed oil inventory build on and oil prices resumed their ascent.
The US Energy Information Administration reported an increase in US stockpiles by 4.0M barrels for the week to September 8. The news helped to ease supply concerns a little, especially coming after a draw of 6.3M barrels the week before.
Supply concerns have been driving oil prices up. On Tuesday, oil prices jumped to their highest level in 2023 on a tighter oil supply outlook. OPEC maintained its forecasts of oil demand growth for 2023 and 2024 at 2.4 million barrels per day and 2.2 million barrels per day respectively. The organization’s forecast of economic growth was also optimistic, anticipating global economic growth to remain unchanged at 2.7% and 2.6% for this year and the next respectively.
The OPEC+ alliance has been limiting oil production to keep oil prices up. Oil prices jumped to their highest level in ten months last week after Saudi Arabia and Russia announced new supply cuts. Saudi Arabia and Russia will extend production cuts that have already been in place for some months now, through the end of the year. Saudi Arabia has been reducing its output by one million barrels a day since early summer and Russia followed shortly after with a reduction of 300,000 barrels a day. Both countries were widely expected to extend the production cuts, but most analysts expected that this strategy would continue to be reviewed monthly and were taken by surprise by this move to extend them by three months.
Deterioration in China’s economic outlook is keeping oil prices down, however. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and a weaker Chinese oil demand outlook has put pressure on oil prices. China’s economy showed signs of improving this week, though, boosting oil prices.
The Fed’s hawkish monetary policy has reduced oil demand outlook, putting pressure on oil prices. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years. A pause in rate hikes seems likely this week, increasing oil demand outlook, and boosting oil prices.
A lot is riding on the Fed’s forward guidance this week, as the US central bank may not be done with rate hikes just yet. Market odds in favor of another rate hike in November are increasing. Even if the Fed has reached its interest rate ceiling, rates are likely to stay high for longer to bring inflation down.
US inflation data last week came in hotter than anticipated, increasing rate hike expectations, and limiting oil demand outlook. PPI data on Thursday showed that inflationary pressures are not easing just yet, despite the Fed’s high interest rates. PPI rose by 0.7% in August, exceeding expectations of a 0.4% raise. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US.
US headline inflation also came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.
Crypto markets were volatile last week, collapsing on Monday but rallying later in the week as crypto bulls wrestled back control from the bears. The bullish trend continued even after the release of hotter-than-expected US inflation data towards the end of the week.
Bitcoin price dropped sharply on Monday but rallied later in the week, reaching the $26,600 level over the weekend. If BTC price declines, support can be found near $24,900, while resistance may be encountered near $27,000.
Ethereum price also collapsed on Monday but pared losses soon after, trading around the $1,630 level over the weekend. If Ethereum's price declines, it may encounter support near $1,530, while if it increases, resistance may be encountered near $1,660.
Reports of a $3 billion sell-off by the FTX drove cryptocurrency prices down early last week. The bankrupt FTX exchange is holding $3.4 billion in crypto assets waiting to be liquidated. The impending liquidation of FTX will involve selling the assets in batches of $100-$200 million per week. The company received approval from the Delaware Bankruptcy Court to liquidate its assets last week. After the initial panic faded, however, markets took the news in stride.
Increases in central banks’ interest rates sour risk sentiment, driving risk assets down. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years. Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently.
US inflation surprised on the upside last week, increasing rate hike expectations and putting pressure on crypto markets. Inflationary pressures are not easing just yet, despite the Fed’s high-interest rates. US headline inflation also came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.
Several major central banks are holding their monetary policy meetings this week and this is expected to raise volatility in cryptocurrencies. The main event of the week is the Fed’s interest rate announcement on the 20th. Even though it is widely anticipated that the Fed will keep interest rates stable this month, a lot is riding on the central bank’s forward guidance. A hawkish message may see crypto markets dipping once more.
BTC/USD 1h Chart
ETH/USD 1h Chart
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