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Weekly Market Outlook For September 5th To September 11th

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Written by:
Myrsini Giannouli

05 September 2022
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Forex

Important calendar events

  • September 5, EUR: Spanish, Italian, French, German Services PMI, EU Final Services PMI, Retail Sales
  • September 5, GBP: Final Services PMI
  • September 6, JPY: Average Cash Earnings, Household Spending, 30-y Bond Auction
  • September 6, USD: Final Services PMI, ISM Services PMI
  • September 7, EUR: German Industrial Production, Italian Retail Sales, Final Employment Change, Revised GDP
  • September 7, GBP: Monetary Policy Report Hearings
  • September 7, USD: FOMC Members Mester, Barr, and Brainard's speeches
  • September 8, JPY: Bank Lending, Current Account, Final GDP Price Index, Final GDP:
  • September 8, EUR: French Trade Balance, Main Refinancing Rate, Monetary Policy Statement, ECB Press Conference
  • September 8, USD: Unemployment Claims, Fed Chair Powell Speech
  • September 9, EUR: French Industrial Production, Eurogroup Meetings

USD

Fed rhetoric remained firmly hawkish, with FOMC member Loretta Mester stating that she sees the Fed benchmark interest rate rising to 4% and no rate cuts through 2023.

The dollar ended the week strong, closing at 109.6 on Friday, after reaching new 20-year highs during the week, as the dollar index touched 110 for the first time since June 2022. US Treasury yields climbed across the curve with the 2-year note reaching a 15-year high of 3.5% during the week and the 10-year treasury note climbing above 3.2%, boosted by increased Fed rate hike expectations. 

The USD retreated a little at the end of the week, after the release of mixed US jobs data on Friday. Non-Farm Payrolls (NFPs) exceeded expectations, as 315,000 NFPs were generated in August, versus the 295,000 expected. This still represented a significant drop compared to last month’s 526,000 though. In addition, US unemployment rose to 3.7% from 3.5% last month and average laborers’ earnings increased at a lower-than-expected rate. The mostly negative jobs data, slightly dampened expectations of a large rate hike later this month.  

Several indicators of financial health and employment were released on Thursday, such as US Unemployment claims. These were mixed overall, with unemployment claims falling below expectations but Unit Labor Costs coming down from last month’s values. ISM Manufacturing data were also released on Thursday, which is a leading indicator of economic health and this week’s data exceeded expectations, boosting the dollar. 

US inflation remains at a multi-decade high of 9.1%, but its ascend seems to have been arrested for the time being, mainly due to a slowdown in energy costs. Cooling inflation shows that the Federal Reserve’s aggressively monetary tightening yields results and removes some of the pressure on the Fed to increase interest rates. 

Fed rhetoric remained firmly hawkish last week though, indicating that the Fed is committed to increase interest rates until inflation has been brought under control. FOMC member Loretta Mester stated on Wednesday that she sees the Fed benchmark interest rate rising to 4% and no rate cuts through 2023. Markets are pricing in a significant Fed rate hike for September, as market odds are leaning towards a 75-bp rate hike.

The Fed is tasked with battling soaring inflation without the benefit of a strong economic background. US economic data in the next few weeks are expected to affect the Fed’s interest rate decision. A robust economic outlook is required to enable the Fed to tighten its monetary policy further. 

This week, ISM Services PMI is due on the 6th and may cause some volatility in dollar prices, as they are key indicators of economic health. More importantly, several FOMC members are due to deliver speeches this week, which may affect the dollar, especially Fed Chair Powell’s speech on the 8th.

TRADE USD PAIRS

EUR

Gazprom’s decision to shut down the Nord Stream 1 pipeline, ostensibly for maintenance, was largely seen as a move to intimidate Europe, which is facing an alarming energy crisis. 

The Euro struggled to maintain the parity level against the dollar last week, finally closing near 0.995 on Friday. EUR/USD is expected to continue testing the parity support level during this week. The parity level is strong psychological support, which is not easy to overcome. If the currency pair goes up, it may encounter resistance at 1.019 and further up at 1.036. The dollar index rose to the 110 level last week, for the first time since June 2022, pushing down competing currencies, such as the Euro.

Europe is facing an energy crisis, which seems to be escalating, driven by the EU’s dependency on Russian energy. G7 finance ministers agreed last week to impose a cup on Russian oil prices in an attempt to reduce Russia's ability to fund its war against Ukraine. The Russian side is retaliating by threatening to cut off supplies to countries that will implement the ban. Another worrying development was Gazprom’s decision to shut down the Nord Stream 1 pipeline last week, ostensibly for maintenance, but this was largely seen as a move to intimidate Europe. 

EU Economic activity indicators, released last week mostly exceeded expectations, showing that the Eurozone economy is moving in a positive direction and boosting the Euro a little. 

On Wednesday, Eurozone headline CPI jumped to 9.1% on an annual basis in August, the highest on record, while Core CPI rose to 4.3% from 4.1% last month. Inflation in the EU is expected to rise even further in the following months, possibly reaching double digits, driven by the high cost of energy in the Eurozone. Increased price pressures are forcing the ECB to take swift action to tackle inflation. Rising Eurozone inflation is expected to figure largely in determining the future ECB monetary policy. 

In its latest policy meeting, the ECB raised its interest rate by 50 base points, bringing its benchmark interest rate from -0.50% to 0%. The ECB’s interest rate remains low, especially compared to the Fed’s 2.50% interest rate. The economic outlook in the EU remains poor, however, limiting the ECB’s ability to raise interest rates.

This week, all eyes are going to be on the ECB and its much-anticipated policy meeting on the 8th. Reports of a steep rate hike of 75 bps in Thursday’s meeting are boosting the Euro. ECB members’ speeches at the recent Jackson Hole Symposium were more hawkish than anticipated, fuelling expectations of a shift towards a tighter monetary policy.

EURUSD 1hr chart

TRADE EUR PAIRS

GBP 

The Sterling posted its worst monthly low in August since 2016, pushed down by Britain’s grim economic outlook and political instability.

The British Pound continued losing ground against the dollar last week. GBP/USD declined, falling below the 1.150 level on Friday. If the GBP/USD rate goes up, it may encounter resistance near the 1.190 level, while if it declines, support may be found near 1.140, representing the 2020 low. 

The Sterling posted its worst monthly low in August since 2016, pushed down by Britain’s grim economic outlook and political instability. In addition, the dollar has been propped up by rising expectations of a steep rate hike in September, driving competing currencies down.

British Final Manufacturing PMI data released last week climbed to 47.3 exceeding expectations and were higher than last month’s 46.0, indicating that economic activity in the UK is increasing.

The latest UK GDP data have shown that the British economy is contracting, confirming the BOE’s forecast of reduced economic growth. The BOE has warned that recession is expected to hit the UK in the fourth quarter of this year, and is forecasted to last for five quarters, until the end of 2024, with GDP falling to 2.1%. 

Britain’s poor economic outlook is preventing a more hawkish fiscal policy and is hampering the BOE’s attempts to bring inflation down. UK inflation reached double digits in July, with CPI climbing to 10.1% on an annual basis and is expected to rise even higher in the following months. Soaring energy and food prices put pressure on British households. According to the British Chambers of Commerce forecasts, inflation in the UK  may hit 14% later in the year.

In its latest monetary policy meeting, the Bank of England decided to raise its interest rate by 50 base points, bringing the total interest rate up to 1.75%. The BOE has adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. Soaring inflation rates in the UK however, are forcing the BOE to take more decisive action. Markets are pricing in three rate hikes of at least 50 bp each, at the remaining BOE policy meetings in September, November, and December.

Political instability after British PM Boris Johnson’s resignation is also keeping the Sterling down, as the Tory Leadership race continues. Political developments are likely to influence the currency this week, as members of the Conservative Party are due to select a new British prime minister on September 5th

Concerns about the UK’s monetary policy direction also push the Sterling down. Foreign Secretary Liz Truss appears to be ahead in the polls of fellow candidate Rishi Sunak. Truss has repeatedly condemned BOE policy and her rhetoric includes a review of the BoE’s mandate, which is likely to cause the Sterling to slip even lower. 

This week, BOE members’ speeches are also likely to affect the pound, as well as the release of the Monetary Policy Report Hearings on the 7th.

GBPUSD 1hr chart

TRADE GBP PAIRS

JPY

The Yen tumbled to a fresh 24-year low against the dollar, as the increased divergence between the US and Japanese monetary policies widened the gap between their respective bonds. 

The Yen crashed last week, weakened by the rising dollar. The USD/JPY rate climbed above the resistance representing the yearly high of 139.39, reaching above 140.50 on Friday. If the USD/JPY pair falls, support might be found at 134.2. If the pair climbs, it may find further resistance at the 1998 high of 147.7. 

The Yen tumbled to a fresh 24-year low against the dollar last week, as the increased divergence between the US and Japanese monetary policies widened the gap between their respective bonds. US Treasury yields climbed across the curve with the 2-year note reaching a 15-year high of 3.5% during the week and the 10-year treasury note climbing above 3.2%, while Japanese bonds declined.

The dollar rose to 20-year highs last week, pushing competing currencies, such as the Yen, down. Risk sentiment has soured in the past couple of weeks on increased Fed rate hike expectations. US Fed officials are displaying an aggressively hawkish stance, increasing the odds of a steep rate hike in September. 

Several minor economic indicators were released last week for Japan, which exceeded expectations overall, indicating that the economic outlook is improving in Japan. Encouraging data for the economy in Japan last week, provided some support for the plummeting Yen.

Inflationary pressures are increasing in Japan, mainly due to the high cost of imported energy. The combination of a weak currency, low wages, and rising inflation is burdening Japanese households.

The recent drop in fuel prices, however, is providing some support for the Yen. Japan is a net energy importer and the reduction in energy costs is providing some relief to the economy.

The BOJ maintains its ultra-easy monetary policy, keeping its main refinancing rate at -0.10%. Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The difference in interest rates with other major Central Banks puts the Yen at a disadvantage, driving its price down. 

This week important economic indicators for Japan are scheduled to be released on the 8th. Final GDP and Final GDP Price Index data especially may provide information on Japan’s economic outlook and may cause some volatility in the Yen price.

USDJPY 1hr chart

TRADE JPY PAIRS

Gold

NFP data on Friday exceeded expectations, bringing the dollar down from its 20-year highs and providing a much-needed boost for gold.

Gold prices retreated for the third week in a row, although gold pared some of its losses on Friday, ending the week at $1,712 per ounce. During the week, gold had dropped below the psychological level of $1,700 per ounce, touching $1,690 per ounce. If gold prices decline further, support may be found again at $1,700 per ounce and further down at the yearly low near $1,681 per ounce, while resistance may be found around 1,802 per ounce and higher up at $1,870 per ounce.

Gold has been retreating, pushed down by the rise of competing assets, such as the dollar and US treasury yields. The dollar ended the week strong, closing at 109.6 on Friday, after reaching new 20-year highs during the week, as the dollar index touched 110 for the first time since June 2022. US NFP data on Friday exceeded expectations, bringing the dollar down from its 20-year highs and providing a much-needed boost for gold.

US Treasury yields climbed across the curve with the 2-year note reaching a 15-year high of 3.5% during the week and the 10-year treasury note climbing above 3.2%, boosted by increased Fed rate hike expectations. 

Fed rhetoric remains firmly hawkish, indicating that the Fed is committed to increase interest rates until inflation has been brought under control. Federal Reserve Chair Jerome Powell recently voiced his determination to bring inflation rates down at the Jackson Hole symposium. Last week Fed rhetoric continued along the same lines, propping up the dollar. FOMC member Loretta Mester stated on Wednesday that she sees the Fed benchmark interest rate rising to 4% and no rate cuts through 2023. 

The pivot of most major Central Banks toward a tighter monetary policy to combat rising inflation rates is putting pressure on the price of gold. Assets yielding interest become a more appealing investment compared to gold, as interest rates rise. 

This week, the ECB Monetary Policy meeting on the 8th may affect gold prices, as well as Federal Reserve Jerome Powell’s speech on the same day.

XAUUSD 1hr chart

TRADE GOLD

Oil

OPEC is likely to keep oil output quotas unchanged for October and may even cut down production to offset the potential return of Iranian barrels to oil markets.

Oil prices withdrew last week, with WTI falling below the $90 per barrel support and reaching $87.3 per barrel on Friday. If the WTI price declines further, it may encounter support near $82 per barrel, while resistance can be found near $98 per barrel and higher up at the $100 per barrel level. 

G7 finance ministers agreed last week to impose a cup on Russian oil prices in an attempt to reduce Russia's ability to fund its war against Ukraine. Oil prices have dropped worldwide, as the US and its allies prepare to put a limit on the price of Russian oil. The ban is expected to take effect in the following months, alongside the next batch of EU sanctions. Russia has managed to bypass western sanctions by diverting oil to countries such as China and India. 

The Russian side is retaliating by threatening to cut off supplies to countries that will implement the ban. Another worrying development was Gazprom’s decision to shut down the Nord Stream 1 pipeline last week, ostensibly for maintenance. This was largely seen as a move to intimidate Europe, which is facing an energy crisis. 

Rising odds of aggressive rate hikes also push oil prices down. Severe rate hikes stifle economic activity fuelling recession fears. The global economic slowdown and recession concerns are decreasing the oil demand outlook, putting pressure on oil prices. Last week, Fed rhetoric remained aggressively hawkish, with FOMC member Loretta Mester stating that she sees the Fed benchmark interest rate rising to 4% and no rate cuts through 2023. 

Economic woes in China also push oil prices down, as China is the largest importer of crude oil and repeated Covid lockdowns have dampened oil demand. China’s weak economic outlook is raising concerns over the demand outlook for oil, pushing prices down.

Reports of an impending deal between the EU, aided by the US, and Iran are also adding pressure to oil prices. The EU has proposed to restore the 2015 Joint Comprehensive Plan of Action, effectively lifting sanctions on Tehran. If the deal goes through, it can add more than a million barrels of oil per day to the global market providing some relief to oil demand.

Several key events are likely to affect oil prices this week. The energy crisis in Europe continues and further developments from the Russian side are possible. 

In addition, the OPEC meeting on the 5th is likely to cause volatility in oil prices. OPEC is likely to keep oil output quotas unchanged for October and may even cut down production to offset the potential return of Iranian barrels to oil markets. The organization may curtail oil production in the following months, to keep oil prices high.

WTI 1hr chart

TRADE WTI

Bitcoin and major Cryptocurrencies 

Bitcoin exhibited low volatility last week, maintaining tight ranges, as Bitcoin price struggled to hold on to the key $20,000 support level.

Risk sentiment has cooled in the past couple of weeks, as hawkish Fed comments increased the odds of a steep rate hike in September. Rising prospects of aggressive economic tightening renewed recession fears, putting pressure on riskier assets, such as cryptocurrencies. US stock markets have weakened amid interest rate hike fears. The decline of stock markets has pushed cryptocurrency prices down, as crypto markets have been following stock market trends. 

The dollar climbed to new 20-year highs last week, as the dollar index reached 110. The dollar’s ascended has been fuelled by rising rate hike expectations, putting pressure on competing assets. Severe rate hikes stifle economic activity, putting pressure on cryptocurrencies. Markets are pricing in a Fed rate hike of at least 50 bp in September, with increasing odds towards a 75-bp hike.

Bitcoin exhibited low volatility last week, maintaining tight ranges. Bitcoin price struggled to hold on to the key $20,000 level last week, falling to $19,800 during the weekend. Bitcoin price is expected to continue testing this key support level throughout the week. Further support can be found at the $19,200 level, while resistance may be encountered near $21,800. 

Ethereum was also testing the key $1,550 support level throughout the week, rising just above this level during the weekend. If Ethereum's price declines, it may encounter support near $1,300 and further down at the $1000 level, representing its lowest price since January 2021, while resistance may be encountered near $1,720 and higher up at $1,800.

Ethereum price has been boosted in the past month in anticipation of the so-called ‘merge’, which has been set to launch on September 19th. The Merge from the Proof-of-Work to the Proof-of-Stake method will be a significant network upgrade that is expected to lead to an increase in demand for Ethereum. Last week, the Ethereum price received a further boost from reports that the Ethereum Foundation is making significant progress toward the merger. The proof-of-stake Beacon chain may now take place ahead of schedule, between September 15 and 16.

BTC/USD 1h Chart

BTCUSD 1hr chart

 

ETH/USD 1h Chart

ETHUSD 1hr chart

The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

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