Important calendar events
The dollar gained strength last week, with the dollar index climbing from 103.7 at the beginning of the week, to 105.6 on Friday. US Bond yields retreated on the other hand, with the US 10-year treasury note yielding below 2.9% on Friday for the first time in three weeks.
The global economic outlook is poor, with a recession threatening many countries. Rampant inflation, combined with tightening monetary policy creates a toxic economic mix. Recession fears are boosting the safe-haven dollar, outweighing concerns of a US economic downturn spurred by weak economic data.
Increased risk aversion sentiment due to geopolitical risks also favors the safe-haven dollar. The G7 leaders agreed last week to take further action against Russia, by imposing “severe and immediate economic costs” on Russia.
On the downside for the dollar, US economic indicators released last week mostly fell short of expectations. Weak economic data indicate that the US economy is struggling, pushing the dollar down.
ISM Manufacturing PMI data released on Friday were lower than expected and decreased since last month, hitting their lowest level since August 2020. These are indicators of economic health and activity and show that the US economy remains sluggish.
Core PCE Price Index data released on Thursday also fell below projections. Core PCE data are the Fed’s preferred method of gauging inflation and affect the dollar, as the severity of the Fed’s monetary tightening policy is likely to depend on inflation rates. Core PCE in May fell to 4.7% from 4.9% in April, showing that inflationary pressures have eased a little. Several economic data released for the US on Thursday, such as Unemployment Claims and Personal Spending, were weak, indicating that economic health in the US is not improving.
US Consumer Confidence and Richmond Manufacturing data released on Tuesday fell below expectations. US Durable Goods and Homes Sales data released on Monday exceeded expectations, providing support for the dollar.
In a panel discussion on Wednesday titled "Policy panel" at the European Central Bank Forum on Central Banking in Portugal, Fed Chair Jerome Powell commented on the state of the US economy and his speech was especially hawkish. Powell stressed that time for lowering inflation is running out, and while recession remains a risk, tackling inflation is a priority for the Fed.
Deteriorating economic health in the US is raising recession concerns and limits the US Federal Reserve’s ability to tighten its fiscal policy. The dollar has been supported by hawkish Fed policy but the precarious state of the US economy is putting pressure on the currency.
In its latest policy meeting, the US Federal Reserve voted to raise its benchmark interest rate by 75 points, taking aggressive action against inflation and bringing its interest rate to 1.75%. Record high US inflation rates have forced the Fed to ramp up its efforts by performing its steeper rate hike since 1994.
High US inflation rates are forcing the Fed to tighten its monetary policy. PPI climbed 0.8% for the month and 10.8% on an annual basis, falling close to the historically high levels reached in March. CPI in May increased by 8.6% on an annual basis, the largest year-on-year increase since 1981 according to the US Labour Department. Rising costs of food and energy have contributed to soaring inflation rates in the US.
This week, Monday is the 4th of July holiday for the US and is expected to be a slow day for the dollar. JOLTS Job Openings and Final Services PMI data on July 6th are important economic indicators and may affect the dollar. FOMC Meeting Minutes are also going to be released on the 6th and may cause volatility in the dollar’s price. Several FOMC members are due to deliver speeches next week, which may influence the dollar, as they may provide additional insight into the Fed’s monetary policy direction.
The Euro lost ground against the dollar last week, as the dollar gained strength, with the EUR/USD rate falling below the 1.040 level. If the currency pair goes up, it may encounter resistance at 1.078. If the EUR/USD continues to fall, it may find support near the 1.036 level that represents the 2016 low and further down at the 20-year low of 0.985.
The Euro has been supported these past few weeks by expectations of an ECB shift to a more hawkish direction. As the ECB announced the end of the quantitate easing program in July however, worries about high debt levels in some Eurozone countries were revived. The ECB is struggling to deal with financial fragmentation in the EU caused by the wide range of lending rates across Eurozone states, limiting the ECB’s monetary tightening options.
In addition, the EU economic outlook remains bleak, putting pressure on the currency. Manufacturing PMI data released on Friday for some of the EU’s leading economies and the Eurozone as a whole were disappointing, showing a decline in most cases from last month’s readings. EU Annual CPI and Core CPI Flash estimates were also released on Friday. CPI data showed that Eurozone inflation has reached a record high of 8.6%, an increase from 8.1% in May. Soaring inflation rates seem to be driven primarily by rising food and energy costs. Core CPI data, which excludes food and energy fell to 3.7% from last month’s 3.8%.
Economic and inflation indicators released on Thursday for some of the EU’s leading economies and the Eurozone as a whole were overall mixed, indicating that the Eurozone economy is still sluggish. German retail sales increased by 0.6% compared with the previous month, although they fell below expectations. French CPI data released on Thursday showed that annual inflation in France reached a record high of 5.8% in June.
ECB President Christine Lagarde participated in a panel discussion on Wednesday at the ECB Forum on Central Banking, in Portugal, along with Fed Chair Jerome Powell and BOE Governor Andrew Bailey. Powell’s statements in the discussion were especially bold and hawkish, while Lagarde’s were more moderate by comparison, pushing the Euro down. Lagarde stated on Wednesday that inflation is unlikely to return to pre-pandemic levels and that Central Banks need to adjust to significantly higher price growth expectations.
ECB President Christine Lagarde delivered a speech on Tuesday at the ECB Forum on Central Banking, in Portugal, which was more hawkish than expected. In her speech, Lagarde downplayed EU recession risks and emphasized the ECB’s commitment to battling inflation. Even though Lagarde stated that the ECB is ready to raise its interest rate at a faster pace, the Euro continued to decline, as markets have already priced in several rate hikes this year.
Indications that the Eurozone economy is slowing down are raising fears of a recession in the EU. The sluggish Eurozone economy increases the odds that the ECB may be forced to moderate its plans for raising interest rates, dragging the Euro down. Even though the ECB has pointed clearly to a shift towards a more hawkish policy, stagnating Eurozone economies limit the ECB’s flexibility to increase interest rates to combat high inflation.
In its latest monetary policy meeting, the ECB kept its interest rate unchanged but pointed to a small rate hike at its next meeting in July. The Fed’s decisive 75 base point rate hike emphasized, even more, the gap between ECB and Fed policies, putting pressure on the Euro. The ECB has kept its interest rates below zero for over a decade and an increase in interest rates represents a hawkish turn in its monetary policy, to counter unprecedented inflation rates.
EU members have recently announced a gradual ban on Russian oil imports, while Russia has retaliated by limiting its natural gas exports to certain EU countries, raising fears of a potential energy crisis in the EU.
This week, several economic indicators are scheduled to be released for the Eurozone. Most notably, Eurozone Final Services PMI is set to be released on the 5th, and EU Economic Forecasts on the 6th. As the ECB prepares to lift its interest rate in July, such economic data are especially important as they may help determine the level of fiscal tightening that the ECB will apply.
The Sterling dipped against the dollar last week, with the GBP/USD rate falling to the 1.200 level, testing the support at this level. If the GBP/USD rate goes up, it may encounter resistance near the 1.308 level, while if it declines, support may be found near 1.200 and further down near 1.140.
Political woes are holding the Sterling back, as the Tories have suffered defeat in two UK by-elections, with the ruling party losing two seats in the parliament. British Prime Minister Boris Johnson aims to pass legislation through parliament this year to scrap some of the rules on post-Brexit trade with Northern Ireland, while Scotland has proposed an independence referendum.
Deteriorating economic health in the UK is keeping the currency down, while global recession fears are putting pressure on the risk-sensitive Sterling.
British manufacturing PMI data released on Friday showed a decline from last month’s data and fell short of expectations, indicating that the economic outlook in the UK is not improving.
Final quarterly GDP data released on Thursday were in line with expectations, although other economic indicators on Thursday fell below expectations, showing that economic health in the UK remains poor. Current account data showed a record shortfall for Britain in the first three months of this year, as the deficit ballooned to 51.7 billion pounds
BOE Governor Andrew Bailey participated in a panel discussion on Wednesday titled "Policy panel" at the ECB Forum on Central Banking, along with ECB President Lagarde and Fed Chair Powell. Powell’s strong hawkish comments emphasized the divergence between Fed and BOE policies, pushing the Sterling down.
Britain’s uncertain economic outlook limits the BOE’s ability to shift towards a more aggressively hawkish policy. In its latest policy meeting, the BOE raised its benchmark interest rate by 25 base points, bringing its interest rate to 1.25%.
By performing a modest rate hike the BOE is trying to strike a balance between battling inflation and supporting the sluggish economy. With the Fed raising its interest rate by 75 base points, the divergence in monetary policy between the Fed and the BOE becomes highlighted, putting pressure on the Sterling.
UK inflation has risen to 40-year highs touching 9.1% on an annual basis. The cost of living in the UK has been increasing, driven primarily by the high cost of energy imports, putting pressure on UK households. Soaring inflation rates add more pressure on the BOE to continue increasing its interest rates. Stagflation is a risk for the UK economy, however, as for many other countries, economic stagnation coupled with rising inflation creates a toxic mix for the economy.
Several minor financial indicators are scheduled to be released this week for the UK and especially on July 5th. The financial data that will be released this week is expected to provide further information about the state of the British economy. Such information is especially important at this time, as it may affect the BOE’s policy direction.
In addition, BOE Governor Andrew Bailey and other MPC members are due to deliver speeches this week, which may cause volatility in the price of the Sterling.
The Yen lost ground against the dollar early last week, with the USD/JPY pair testing the 136.7 level resistance. The currency rate pared its gains later in the week, closing near 135.3 on Friday, near the resistance representing the 2002 high. If the USD/JPY declines, support might be found near the 130.5 level and further down at the 127 level. If the pair climbs it may find resistance at the 136.7 level and further up at the 1998 high of 147.7.
The Yen rallied late last week as a risk-aversion sentiment prevailed, boosting the safe-haven currency. US treasury yields declined, propping up the competing Yen. Oil prices also retreated last week, providing support for the economy in Japan, which is a net energy importer.
Final Manufacturing PMI and other economic data were released on Friday for Japan and were on the whole disappointing for the state of the economy in Japan. Tokyo CPI data were also released on Friday and showed that inflation in Japan remains above the BOJ’s 2% target, reaching 2.1% on an annual basis. The combination of a weak currency and rising inflation is burdening Japanese households. BOJ Core CPI data released on Tuesday showed that the BOJ Core annual CPI was at 1.5%, which was in line with expectations.
BOJ Governor Haruhiko Kuroda on Wednesday reiterated the BOJ’s commitment to keeping its ultra-loose monetary policy. The BOJ has kept its benchmark interest rate at -0.10%, despite the rising inflation rates in Japan. Inflation in Japan remains above the BOJ’s 2% target, reaching 2.1% on an annual basis for the second month. The combination of a weak currency and rising inflation is burdening Japanese households.
The BOJ’s decision to keep its interest rate unchanged emphasizes the divergence between the BOJ’s fiscal policy and that of other major Central Banks, especially following the Fed’s 75 base point rate hike. While other countries are moving towards quantitative tightening, Japan continues to pour money into the economy and maintains its negative interest rate. The difference in interest rates with other major Central Banks puts the Yen at a disadvantage, driving its price down.
The BOJ continues to buy an unlimited amount of Japanese treasury bonds, defending their current low yield. In contrast, the respective US 10-year bond is offered with a yield of over 3%, more than an order of magnitude higher than the Japanese bond. The large divergence in bond yields makes the low-yielding Yen less appealing to investors than the dollar, pushing its price further down.
Several important economic indicators are scheduled to be released on July 8th in Japan. These include Household Spending, Bank Lending, Current Account, and Economy Watchers Sentiment and may cause some volatility in the price of the Yen.
Gold fell as low as $1,785 per ounce last week, testing the support at this level before closing near $1,810 per ounce on Friday. If the price of gold decreases, support may be found at $1,805 per ounce and further down at $1,786 per ounce, while resistance may be found at around 1,870 per ounce and higher up at $1,920 per ounce.
A strong dollar and US bond yields have been putting pressure on gold prices in the past few weeks, while increased rate hike expectations also dampen the appeal of gold.
The dollar gained strength last week, with the dollar index climbing from 103.7 at the beginning of the week, to 105.6 on Friday. US Bond yields retreated on the other hand, with the US 10-year treasury note yielding below 2.9% on Friday for the first time in three weeks. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.
Major Central Banks, including the Fed and the BOE, aim to tighten their fiscal policies further this year to rein in inflation. On Wednesday, Fed Chair Jerome Powell’s hawkish comments increased the chances of a steep rate hike at the Fed’s next policy meeting, reducing the appeal of gold.
In addition, India increased its import duties on gold last week, reducing the demand outlook for gold and putting pressure on its price.
Gold is supported though by the ongoing crisis between Russia and Ukraine. G7 leaders have decided to take further action against Russia by imposing an embargo on Russian gold exports. Gold exports provide revenue of tens of billions of dollars and, if the ban on Russian gold is implemented, it can boost gold prices considerably.
Stalling global economic growth gives rise to recession fears, supporting the price of gold. In the past few weeks, recession fears have mounted, as many countries show signs that their economy is slowing down. At the beginning of the year, the global economy was on the road to recovery from the effects of the pandemic. The war in Ukraine however, has set economic growth back, with prices of energy and food rising and inflation reaching peak levels, crippling economic growth.
High inflation rates are also known to support the price of gold, which is often used as an inflation hedge, and with global inflationary pressures increasing, the gold price is boosted. High inflation, however, is a two-edged sword for the price of gold, as it increases the chances of Central Banks raising their interest rates, which reduces the appeal of gold.
Oil prices withdrew last week, with WTI prices dropping below $106 per barrel, before closing near $109 per barrel on Friday. If the WTI price retreats, support can be found further down near $103 per barrel, while resistance can be found near the $121.2 per barrel level and higher up at $130 per barrel.
Concerns that interest rate hikes could slow global economic growth, and reduce energy demand, have pushed oil prices down in the past couple of weeks. An increasing number of major Central Banks are moving towards a tighter fiscal policy to tame soaring inflation rates. Stalling economic growth, combined with fiscal tightening gives rise to fears of recession, halting the ascend of oil prices. On Wednesday, Fed Chair Powell’s hawkish comments increased the odds of a sharp rate hike at the Fed’s next policy meeting, dragging oil prices down.
OPEC and OPEC+ held their 2-day meeting on Wednesday and Thursday. The joint organization discussed its output goals for August but refrained from setting a goal for September’s production. OPEC+ resisted pleas, especially from the US Government, to ramp up oil production, and kept its production goals for August to the same levels set in its previous meeting. The organization’s members agreed to raise their output by approximately 648,000 barrels a day. It remains to be seen, however, whether the bans on Russian oil will allow the organization to reach its output quotas. Many OPEC members continue to underperform, raising doubts about whether the organization can maintain its output goal, and adding to supply concerns.
Geopolitical tensions support oil prices, as tight supply raises fears of an energy crisis, especially in the EU. G7 leaders decided on Tuesday to take further action against Russia, by imposing “severe and immediate economic costs” on Russia. Further sanctions on Russian oil exports are expected, possibly by enforcing a price cap on Russian oil exports, although details have yet to be decided. In addition, the latest package of EU sanctions against Russia includes a ban on Russian oil imports that will effectively reduce EU oil imports from Russia by 90% by the end of the year and end the EU’s dependency on Russian oil.
Oil demand outlook has increased, as the zero-Covid lockdown in Shanghai has ended, increasing demand outlook and boosting oil price. It seems however that Covid restrictions are not over in China, creating uncertainty in oil demand. China is the largest importer of crude oil and Covid lockdowns have dampened oil demand, pushing prices down.
Stock markets and crypto markets continued to withdraw last week, ending the second quarter of 2022 in a slump. Stock markets have had their worst first half of the year in decades, while crypto markets have suffered huge losses since the beginning of the year. Cryptocurrency prices have been following stock market trends and the pressure on stocks has been transferred to cryptos.
Bitcoin traded below the $20,000 key level during the weekend, testing the $19,200 level support and reaching its lowest price since November 2020. If Bitcoin price declines, support may be found at the psychological level of $15,000, while resistance may be found near $23,000 and $32,300.
Ethereum's price also remained low during the weekend and is currently testing the support at the psychological level of $1000. This represents its lowest price since January 2021. If the Ethereum price continues to decline, it may encounter support at the psychological level of $500, while resistance may be encountered at $2,000 and higher up at $2.170.
A steep cryptocurrency selloff was triggered in the past few weeks, as bearish tendencies have prevailed in crypto markets. The crypto industry has been under pressure since the beginning of the year and the results are becoming apparent, with mounting layoffs in crypto firms and huge losses in trading volumes. Crypto hedge fund Three Arrows Capital was added to the list of companies in the industry that have crashed recently, as it fell into liquidation.
An increasing number of major Central Banks, such as the Fed and the BOE are moving towards a tighter fiscal policy to tame soaring inflation rates. Stalling economic growth combined with fiscal tightening gives rise to fears of recession, promoting a risk-aversion sentiment and putting pressure on cryptocurrencies.
BTC/USD 1h Chart
ETH/USD 1h Chart
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