Weekly Market Outlook for January 9th to 15th

Important calendar events

• January 10, EUR: Unemployment rate
• January 12, USD: Release of monthly CPI and Core CPI
• January 13, USD: Release of monthly PPI
• January 14, USD: Release of monthly Retail and Core Retail Sales
• January 14, GBP: Balance of trade

USD

The past year saw an increase in the price of the dollar, as the pandemic started to recede and the global economy was set on the path to recovery. The dollar index, which measures the USD against a basket of other major currencies, has been climbing over 2021, from a little over 90.0 to 95.6 at the end of the year.

Within the past few months, Federal Reserve officials have been hinting at an imminent rate hike, indicating a hawkish shift in the bank’s monetary policy, which benefits the dollar. Last Wednesday, the Fed released minutes of its meeting, confirming the bank’s plans to go ahead with a rate hike and begin raising its benchmark interest rate in March and Fed officials announced that they expect three rate hikes within the year. Rising inflation rates in the US influenced the bank’s decision, which seems to set on a tighter monetary policy in an effort to combat inflation. The Fed also plans to taper its bond-buying program, gradually withdrawing stimulus and signalling a return to its pre-pandemic monetary policy. The dollar index climbed to 96.4 on Thursday, following the Fed’s announcements, and the EUR/USD rate fell slightly to 1.128. The dollar index fell slightly following the release of the jobs data in the US, closing at 95.7 and the EUR/USD exchange rate closed at 1.136.

Next week, traders should take special note of the release of US monthly indicators. On Wednesday, January 12^th, the monthly Consumer Price Index and Core CPI will be announced and on Thursday, January 13^th, the monthly Producer Price Index will be announced. Both CPI and PPI are indicators of inflation.  With rising inflation rates in the US, indicators of inflation influence USD price providing insight into the Fed’s future monetary policy. On Friday, January 14^th, the monthly Retail and Core Retail Sales will be released, which provide a measure of the overall economic activity in the US.TRADE USD PAIRS

EUR

Last year, the EUR/USD exchange rate had been on a downtrend until the beginning of December. For the past month, the pair has been trading sideways, around the 1.13 mark. Within the past month, the BOE and the Fed have shown signs of a more hawkish monetary policy and a gradual return of their interest rates to pre-pandemic levels. In contrast, the ECB maintains a dovish stance and does not seem to be in a hurry to increase interest rates despite rising inflation rates in the Eurozone. The ECB’s persistence on a dovish policy is weakening the currency and putting the Euro at a disadvantage compared to the dollar and the pound.

Last week the release of Eurozone’s CPI data showed a rise in inflation rates, which puts more pressure on ECB to tighten its monetary policy. Investors however do not expect the Central bank to change its monetary policy soon, as the ECB’s president Christine Lagarde seems set to continue the bank’s monetary policy support for the eurozone economy into 2022.  The EUR/USD rate was relatively steady last week, with the dollar gaining some strength on Thursday after the release of the Fed’s minutes, but weakening again on Friday after the release of the jobs data in the US. The EUR/USD pair closed at the 1.136 level on Friday, regaining some of the ground it had lost during the week.

The outlook for the pair next week is neutral, with a resistance point at the 1.138 level and support at 1.122. Key calendar events to note next week include the US CPI, PPI and Retail Sales data that will be released on January 12^th, 13^th and 14^th respectively and on January 10^th, the Eurozone is going to announce unemployment rates.

TRADE EUR PAIRS

GBP

After declining for most of last year, the GBP started gaining strength in mid-December, following the Bank of England’s announcement of a future rate hike. The BOE appears to be committed to normalizing its monetary policy as soon as possible, which boosts the currency. The first week of the year started strong for the sterling, with the GBP/USD pair almost reaching the 1.36 mark on Wednesday. After the release of the Fed’s minutes, the dollar gained strength temporarily amongst most major currencies as the Fed’s hawkish stance favours the dollar. The pound fell against the dollar on Thursday, but regained strength on Friday, closing at almost the 1.36 level.

The sterling is considered a risk-sensitive currency and was hit hard during the pandemic. However, as fears over the Omicron strain ease, the global economy is expected to continue on its path to recovery. In the UK, Prime Minister Boris Johnson has resisted imposing stricter lockdown measures even as infection rates soared, and travel restrictions were relaxed on Wednesday, signalling a return to normalcy. Short positions on the sterling have been scaled back over the past couple of weeks, further boosting the currency.

Next week, the outlook for the pound is bullish and the outlook for the GBP/USD pair is slightly bullish. The 1.36 level provides a resistance point for GBP/USD and the pair is currently testing this resistance. If the pair breaks through this barrier, the uptrend is expected to continue. If the uptrend is reversed, support points can be found around the 1.335 and 1.316 levels. Traders should pay close attention next week to announcements of monthly indicators in the US. In the UK, the balance of trade and other economic indicators will be released on Friday, giving insights into the state of the country’s economic condition.

TRADE GBP PAIRS

JPY

The Japanese currency has been in a downtrend for most of the past year, due to a combination of Japan’s weakening economy and the BOJ’s dovish monetary policy. The Yen’s decline continued last week, with the USD/JPY rate going above 116 for the first time in five years. The price of the USD/JPY spiked on Thursday following the Fed’s hints that it will start a rate hike sooner than expected. As fears over the spread of the Omicron variant abate, there is hope that the global economy will start recovering and most central banks are expected to return gradually to their pre-pandemic levels. In contrast, the Bank of Japan favours monetary expansion and most traders believe that it will not raise its interest rates soon. The BoJ appears to be committed to keeping interest rates close to zero, making the Yen sensitive to rising U.S. yields.

After spiking on Thursday, the USD/JPY pair declined a little on Friday, trading sideways between 115.5 and 116. The following week we expect to see whether the uptrend for the pair is going to hold. The 116-Yen mark presents a strong resistance point for the dollar and if the pair breaks through this point again, it is likely to go up towards the 117.5 level. If the trend is reversed and the USD/JPY rate starts to decline, support points are offered at the 113.5 and 112.5 level. Monday is a national holiday in Japan, so it is expected to be a slow day for the currency. Throughout the week, the release of economic indicators in the US is expected to affect the USD/JPY rate. CPI, PPI and Retail Sales data released on January 12^th, 13^th and 14^th respectively, will influence the dollar price.

TRADE JPY PAIRS

Gold

For the past month, gold has been trading sideways against the dollar, around the $1,800 per ounce level. Gold is a safe-haven asset and its price climbs in times of economic decline, as investors seek risk-free assets. The emergence of the Omicron variant of Covid-19 has benefited gold in the past couple of months, although it is far from the highs of $2,089 per ounce, reached at the peak of the pandemic. Fears of renewed lockdowns are still keeping the price of gold up, as the Omicron variant surges throughout the globe.

Within the first week of 2022, the price of gold experienced heavy volatility. It dropped to below $1,800 per ounce on Monday, climbed to $1,830 within the next couple of days and fell again below $1,800 per ounce on Thursday, following the release of the Fed’s minutes signalling the start of a rate hike in the following months. Even with renewed fears of the pandemic, most central banks seem determined to start cutting down economic stimulus. The US 10-year yield rose above 1.7% following the Fed’s announcements and climbed even above 1.77 after the release of strong jobs data in the US. Rising real yields in the US can push the price of gold down, as they offer a more attractive alternative to investors.

On Friday, gold started to recover some of its lost ground, closing around $1,797 per ounce on Friday night. At the moment, gold is moving between its $1,753/ounce support and the $1,832/ounce resistance levels. Next week, the release of economic indicators in the US is expected to cause fluctuations in the price of gold, as traders will look for extra signs of the Fed’s future monetary policy. The price of the commodity is not expected to drop dramatically though, as it is still supported by fears of a new economic slump caused by the pandemic.

TRADE GOLD

Oil

The price of gas has been going up in the past few months, fuelled by growing tensions between Russia and Ukraine. A potential invasion by Russia in Ukraine could signal the end of the $11 billion natural gas pipeline Nord Stream 2 controlled by Russian natural-gas colossus Gazprom. With gas prices surging throughout Europe in the winter and a potential energy shortage looming ahead, the demand for oil is also increasing.

WTI price has been in an uptrend since last month, breaking through the $73/barrel resistance barrier. If the trend is reversed, WTI will find support at this level. Last Tuesday, OPEC+ agreed to boost oil output by 400,000 barrels per day in February, amidst concerns over energy shortage. Even though an increase in oil output usually serves to lower the price of the commodity, OPEC’s announcement sent the price further up. The increase in the oil output was rather seen as a reaction to the growing demand for oil as Omicron fears abate. By Friday, the price of WTI had gone up to approximately $80.5 per barrel, before closing at $79 per barrel at the end of the day.

Next week, the uptrend in oil price is expected to continue and the outlook for the commodity is bullish. Although initially there were fears that the spread of the Omicron variant might result in renewed lockdowns and restrictions, it seems that energy demand has not been affected considerably, and demand has far outpaced supply. Factors that may affect the price of oil include news of a potential escalation of the Russian-Ukraine crisis and extensive lockdowns resulting from the Covid-19 pandemic.

TRADE OIL

Bitcoin and major cryptocurrencies

Cryptocurrencies did not get off to a good start in 2022. The Federal Reserve’s minutes released last Wednesday confirmed the Fed’s plans to go ahead with a rate hike and begin raising its benchmark interest rate in March. The expected reduction in economic stimulus turned investors away from high-risk assets, such as cryptocurrencies. Most major cryptocurrencies experienced a sharp drop in their price following the Fed’s hawkish announcement, as many traders decided to cash in their gains and benefit from the high prices the cryptocurrencies had gained within 2021.

Bitcoin plunged below $44,000, setting off a cascade of liquidations that reached $222 million in less than an hour. Ethereum was hit even harder, falling approximately 13.5% within 24 hours to $3,300, compared to bitcoin’s 9% drop. On Friday, Bitcoin dropped even further to $40,500 and ETH crashed to $3,000, down by $700 within a week. Many traders fear that this is going to be the start of a bearish market for cryptos, with BTC going as low as $38,000 in the following days and even dropping below September’s $30,000 lows, while Ethereum might fall even below $2,000, reaching July’s support levels.

During the weekend, there was little fluctuation in the price of BTC, which moved sideways along the $42,000 level, while ETH dropped below the $3,000 level on Saturday before climbing again slightly on Sunday. More volatility in the crypto market is expected in the coming week, as the release of CPI and retail sales data in the US are expected to provide further insights into the Fed’s monetary policy. Some economists, however, predict that Bitcoin will soon gain stability, providing a hedge against inflation for investors.

BTC/USD Graph

ETH/USD Graph

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

Share the article: