Important calendar events
The dollar gained strength last week on hot US inflation data, with the dollar index closing near the 102.5 level on Friday. US treasury yields remained firm, with the US 10-year bond yielding approximately 4.0%.
US CPI data on Thursday surprised on the upside boosting the dollar. Headline inflation rose by 3.4% year-on-year in December from a 3.1% print in November against the expectation of a 3.2% raise. Monthly CPI rose by 0.3% in December, exceeding expectations of a 0.2% print. Core CPI, which excludes food and energy, rose by 0.3%, in line with expectations. Inflation in the US remains sticky and may put pressure on the Fed to keep interest rates at high levels for longer.
US PPI data on Friday, however, were lower than expected, showing that inflationary pressures are easing. PPI dropped by 0.1% in December, against expectations of a monthly growth of 0.1%. Core PPI, which excludes food and energy, remained at the same levels against a 0.2% drop anticipated.
US unemployment claims released on Thursday fell to their lowest level in nearly three months, propping up the dollar. Unemployment claims dropped to 202K against expectations of 209K.
The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Federal Reserve kept its policy settings unchanged at its latest meeting in December but showed signs of a dovish pivot. The FOMC statement emphasized that inflationary pressures in the US are easing, while economic growth remains limited. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy.
Even though inflationary pressures remain high, markets expect a Fed pivot to a dovish stance this year. Markets currently anticipate more than 155 basis points of easing in 2024, compared to 130 basis points last week. Market expectations of future rate cuts are driving the dollar down, as markets odds of a 25 bp rate cut in March are up to 70% from 60% last week.
Markets might be getting ahead of themselves, however. The drastic rate cuts currently priced in are not very likely to come about given the current economic conditions in the US. The US economy is expanding, while unemployment is very low, depriving the Fed of an incentive to pivot to a more accommodating policy. At the same time, core inflation remains sticky, increasing the likelihood that interest rates will remain in restrictive territory for longer.
US Final GDP data showed that the US economy expanded by 4.9% in the third quarter of 2023. The US economy continues to expand, although growth was more modest than anticipated in Q3. Low economic growth may induce the Federal Reserve to pivot to a less restrictive monetary policy. Final GDP Price Index for the first quarter of the year was also revised lower, with a final print of 3.3% versus 3.6%. This is an indicator of inflation, and a lower print indicates cooling price pressures in the US.
Core PCE price index rose by only 0.1% in November from a 0.2% growth in October against a 0.2% growth expected, bringing the annual rate to 3.2% from 3.4%. This is the Federal Reserve’s preferred inflation gauge and November’s print confirms that price pressures in the US are easing.
Traders will be focusing on Fed members’ speeches in the next few weeks for hints into the Fed’s policy outlook. Fedspeak is likely to be hawkish in the weeks to come as the central bank may try to rein in market expectations of rate cuts.
EUR/USD traded sideways last week, closing near the 1.095 level on Friday. If the EUR/USD pair declines, it may find support at 1.088, while resistance may be encountered near 1.100.
The latest ECB economic bulletin was released on Thursday and provided some information on the central bank’s decision-making process and policy outlook. The bulletin stressed the need to bring Euro area inflation down to the ECB’s 2% target, highlighting the need to keep interest rates at sufficiently restrictive levels for as long as necessary.
ECB policymakers voted to keep interest rates unchanged at 4.50% in December. The ECB seems to have reached its rate ceiling, as the fragile Eurozone economy cannot withstand further tightening. Markets are starting to price in rate cuts in March, although ECB officials have stressed that discussions on a rate cut timeline have not started yet.
The ECB’s policy is starting to diverge from that of the Federal Reserve. At its latest policy meeting last week, the Fed signaled that interest rates would go down in 2024. ECB President Christine Lagarde, however, has stated that it is too early to talk about rate cuts.
Economic activity data released last week for the Eurozone were mixed. German industrial production dropped by 0.7% in November, falling short of expectations for 0.4% growth. This marks the sixth consecutive monthly decline, following a 0.3% drop in October. French Trade Balance remained negative in November, indicating that fewer goods were exported than imported. The difference in the value of imports versus exports, however, was smaller than anticipated, pointing to an improved economic outlook. EU Unemployment rate dropped to 6.4% in November from 6.5% in October against expectations of a 6.5% print.
The ECB’s efforts to curb inflation rates are paying off, even at the cost of decreased economic growth. Price pressures in the EU are cooling and this will likely play a decisive role in the ECB’s future policy.
Final EU CPI data showed that headline inflation in the Eurozone dropped to 2.4% year-on-year in November, its lowest level since July 2021, from 2.9% in October. Final Core CPI, which excludes food and energy, eased to 3.6% year-on-year in November from 4.2% in October. Flash CPI data for December released last week though, showed that the ECB still has some ground to cover to ensure that inflation in the Euro area drops sustainably. EU Flash CPI for December came at 2.9% year-on-year from 2.4% in November. Core Flash CPI for December, however, receded a little, dropping to 3.4% from a 3.6% print in November.
The economic outlook of the Eurozone appears to be deteriorating and may force the ECB to pivot to a more dovish policy. The Eurozone economy does not show signs of recovery and is on the brink of recession. Revised GDP for the Euro area showed that the Eurozone economy contracted by 0.1% in the third quarter of the year, which was in line with expectations. The Eurozone economy barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1 of 2023. Year-on-year the EU economy registered stagnation with GDP flat at 0%. The Eurozone economy is struggling and cannot withstand much further tightening.
GBP/USD edged higher last week, with the currency rate climbing to 1.274. If the GBP/USD rate goes up, it may encounter resistance near 1.282, while support may be found near 1.260.
The British economy remains fragile, reinforcing the notion that the BOE has reached its peak interest rates. Monthly GDP rose more than expected in November, however, inspiring more optimism on the UK’s economic outlook. The British economy expanded by 0.3% in November against expectations of a 0.2% growth and 0.3% contraction in October. Final quarterly GDP data revealed that the British economy contracted by 0.1% in the third quarter of 2023, against expectations of stagnation. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter.
BRC Retail Sales Monitor data released on Tuesday showed that retail sales in the UK are dropping. Retail sales rose by only 1.9% in December against a 2.6% growth in November and a 2.3% growth anticipated.
The BOE maintained its official rate at 5.25% at its latest policy meeting, which was in line with expectations. The central bank’s outlook remains hawkish, however, with three policy members voting to increase interest rates versus six members voting to maintain current rates.
BOE Governor Andrew Bailey has kept his hawkish stance, stressing that inflationary pressures in the UK remain high and that further tightening might be required to bring inflation down to the bank’s 2% target.
Bailey testified on Wednesday on the Financial Stability Report before the Treasury Select Committee, in London. Bailey avoided commenting directly on the BOE’s monetary policy outlook but stressed the need to bring British inflation down to target. Bailey also commented on the drop in housing mortgages, stating that he hoped that the recent fall in the cost of mortgages would continue.
The BOE has likely reached its rate ceiling but will keep interest rates on hold for a long time to bring inflation down. Even though the current restrictive policy is hurting economic growth, the BOE has no choice but to continue its battle against inflation.
Market expectations of the BOE’s future direction reflect the need to keep interest rates in restrictive territory for longer. The BOE policy is starting to diverge from that of the FED, with market odds in favor of Fed rate cuts starting in March, but BOE rate cuts are not expected before May.
British inflation cooled more than expected in November, dropping to 2-year lows. Headline inflation slowed to 3.9% year-on-year in November, from 4.6% in October against expectations of a 4.4% print. Annual Core CPI, which excludes food and energy, grew by only 5.1% in November versus 5.7% in October and 5.6% forecast.
Inflation in the UK has been resisting the BOE’s efforts to bring it down for a long time but has been dropping at a rapid pace since October. Signs of easing inflationary pressures in the UK are reinforcing expectations that the Bank of England will end its hiking cycle and will be cutting interest rates by mid-2024.
USD/JPY was volatile last week, surging to 146.3 on Thursday, then paring some gains and closing near the 145 level on Friday. If the USD/JPY pair declines, it may find support near 142.5. If the pair climbs, it may find resistance near 146.5.
Weak Japanese labor data on Wednesday put pressure on the Yen. Wages in Japan rose by only 0.2% in November against expectations of a 1.5% growth. Inflation-adjusted wages dropped by 3% year-on-year in November, after falling 2.3% in October.
Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. Tokyo Core CPI released on Tuesday revealed that the key inflation indicator dropped slightly to 2.1% in December from 2.3% in November. National Core CPI cooled to 2.5% year-on-year in November from 2.9% in October print. BOJ Core CPI dropped to 3.0% year-on-year in October from 3.4% in September, against expectations of a 3.4% print.
The BOJ has been keeping interest rates at a negative level, putting pressure on the Yen. The BOJ kept its policy settings unchanged at its December meeting. The central bank kept its short rate target steady at -0.10% and its yield curve control unchanged. The BOJ has also stated that it would reduce the amount of bonds it buys in its regular operations in the January-March quarter.
The BOJ’s forward guidance into 2024 was more dovish than expected, putting pressure on the Yen. In the past few months, BOJ policymakers have hinted that the central bank is preparing to pivot to a less accommodating policy. BOJ Governor Kazuo Ueda, however, has kept a dovish stance in the past few weeks, indicating that a policy pivot is not on the cards yet. Ueda stated that economic growth remains modest and that underlying inflation will gradually increase, but the BOJ requires sustainable, stable inflation before tightening its monetary policy.
The Fed has signaled a dovish pivot, relieving some of the pressure on the Yen, which has been weakened by the BOJ’s dovish policy. The BOJ has so far maintained its dovish bias, putting more pressure on the Yen as other major central banks, and especially the Fed, have raised interest rates to high levels.
Final GDP data for the third quarter of the year showed that Japan's economy contracted by 0.5% in the third quarter against earlier estimates of a 0.5% contraction. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking and is on the brink of recession. Final GDP Price Index showed a 5.3% annual expansion in Q2, versus 3.5% the previous quarter. This is a measure of inflation, which shows that inflationary pressures are rising in Japan, increasing the odds of a hawkish shift in the BOJ’s policy.
Gold prices exhibited high volatility last week, dipping to the $2,015 per ounce level on Thursday then surging to $ 2,060 per ounce level on Friday and closing near $2,045 per ounce. If gold prices increase, resistance may be encountered near $2,088 per ounce, while if gold prices decline, support may be encountered near $2,000 per ounce.
Gold prices surged towards the end of last week, as heightened geopolitical tensions raised the appeal of safe-haven assets. The violence in Gaza is showing no signs of abating. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, propping up gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area.
Attacks on ships in the Red Sea area by Yemen's Iran-backed Houthi militia increase concerns that the crisis will widen to other areas in the region. Reports that Chinese shipping company Cosco has suspended shipping via the Red Sea propped up gold prices last week, following the announcement of Danish shipping company Maersk that it would not be using Red Sea shipping routes for the foreseeable future. The US and the UK have launched a coordinated action against Houthi rebels in Yemen. The coalition delivered a series of air and sea strikes against Houthi targets in Yemen, risking retaliation from Iran.
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 gained strength last week on hot US inflation data, with the dollar index closing near the 102.5 level on Friday. US treasury yields remained firm, with the US 10-year bond yielding approximately 4.0%.
US CPI data on Thursday surprised on the upside boosting the dollar and putting pressure on gold prices. Headline inflation rose by 3.4% year-on-year in December from a 3.1% print in October against the expectation of a 3.2% raise. Monthly CPI rose by 0.3% in December, exceeding expectations of a 0.2% print. Inflation in the US remains sticky and may put pressure on the Fed to keep interest rates at high levels for longer.
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. Expectations that the Fed may start cutting interest rates from the first quarter of 2024 are propping up gold prices.
The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Market expectations of future rate cuts are boosting gold prices, as markets are currently pricing in a 25 bp rate cut in March with over 70% probability, up from 60% the week before.
Oil prices were volatile last week, driven by geopolitical tensions, with WTI price ending the week near $72.8 per barrel. If WTI price declines, it may encounter support near $69.1 per barrel, while resistance may be found near $76.0 per barrel.
US crude oil inventories released on Wednesday showed a larger-than-expected build in US stockpiles, putting pressure on oil prices. The US Energy Information Administration reported a rise in US oil inventories by 1.3M barrels for the week to January 5th, exceeding expectations of a drop by 0.2M barrels, following a large drop of 5.5M barrels the week before.
Supply concerns boost oil prices as the crisis in the Gaza area threatens to disrupt oil distribution. Geopolitical tensions are rising in the Red Sea, spilling over the region from the war in Gaza. Tensions around the Red Sea area have been rising in the past few weeks, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution.
Iran-backed Houthi militants are attacking commercial vessels in the Red Sea. Iran has refused to withdraw its support from the Houthi militants and has even sent a warship to the trading route. A Marshall-Islands-flagged oil tanker was boarded on Thursday by an armed group in Oman, with reports suggesting that Iran had claimed responsibility for the attack. The incident raised the prospect of escalating conflict in the Middle East causing volatility in oil prices.
Reports that Chinese shipping company Cosco has suspended shipping via the Red have provided support for oil prices, following the announcement of Danish shipping company Maersk that it would not be using Red Sea shipping routes for the foreseeable future. The US and the UK have launched a coordinated action against Houthi rebels in Yemen on Thursday night. The coalition delivered a series of air and sea strikes against Houthi targets in Yemen, risking retaliation from Iran. Oil tankers diverted course from the Red Sea, boosting oil prices on Friday, as traders feared potential retaliatory attacks.
Reports that Saudi Arabia has lowered its official selling price for February shipments destined for Asia put pressure on oil prices early in the week. China’s poor economic outlook is increasing concerns of reduced oil demand, pushing oil prices down despite increasing geopolitical risks. OPEC+ producers recently agreed to voluntary cuts of over 2 million barrels per day to boost oil prices, extending already existing output cuts into the first quarter of 2024 and adding even more.
Oil prices are kept in check by a strong US dollar and high-interest rates. Most major central banks, however, are hitting pause on rate hikes, boosting oil prices. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%.
The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Market expectations of future rate cuts increase oil demand outlook, boosting oil prices.
Crypto markets were volatile last week, stirred mainly by anticipation of the approval of crypto spot exchange-traded funds (ETF). BlackRock and other institutions applied for a Bitcoin ETF by the Securities and Exchange Commission (SEC). BlackRock has also filed an ETH spot ETF for approval, boosting Ethereum prices.
A false SEC announcement on Wednesday triggered volatility in crypto markets. The SEC's social media account was hacked, releasing a fake announcement stating that a raft of ETFs had been approved. The announcement was removed minutes later, and the SEC issued a retraction, stating that its Twitter account had been compromised.
Bitcoin price surged on Thursday following the SEC's long-awaited approval of spot Bitcoin ETFs. News of the approval boosted Bitcoin price on Thursday, transferring to other cryptocurrencies as well. The SEC approved 11 applications, including those from BlackRock, Ark Investments, and Fidelity. The approval of the first spot Bitcoin ETFs is drawing investors’ attention and is likely to bring more institutional and retail money into crypto markets. Spot Bitcoin ETFs give access to the cryptocurrency to traders through a regulated product, eliminating the risks of buying from unregulated exchanges. The enthusiasm over the approvals did not last long, however, and a massive Bitcoin selloff was triggered on Friday.
Bitcoin price spiked after the approval of the first spot Bitcoin ETFs on Thursday. Bitcoin skyrocketed to $48,800, its highest level since January 2022. Bitcoin price suffered a massive correction on Friday though, retreating to the $42,000 level over the weekend. If BTC price declines, support can be found near $40,000, while resistance may be encountered near $49,000.
Ethereum price also surged on Thursday, touching $2,690 for the first time since May 2022. Ethereum pared some of its gains at the end of the week though, dropping to $2,500 over the weekend. If Ethereum's price declines, it may encounter support near $2,180, while if it increases, resistance may be encountered near $2,700.
Crypto markets are under pressure by rising geopolitical tensions. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area. Iran-backed Houthi militants have been attacking commercial vessels in the Red Sea. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries drive risk sentiment down putting pressure on risk assets. The US and the UK have launched a coordinated action against Houthi rebels in Yemen. The coalition delivered a series of air and sea strikes against Houthi targets in Yemen, risking retaliation from Iran.
Increases in central banks’ interest rates are putting pressure on risk assets. Most major central banks, however, are hitting pause on rate hikes, propping up crypto markets. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Markets are currently pricing in a 25 bp rate cut in March with over 70% probability, propping up risk assets.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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