Important calendar events
The dollar gained strength last week, rising from 101.9 at the beginning of the week, to 104.2 on Friday. The dollar climbed considerably, especially after the ECB’s interest rate announcement on Thursday, which weakened the Euro. Bond yields also rose, with the US 10-year treasury note yielding firmly above 3.1% on Friday.
US consumer inflation data released on Friday exceeded expectations, boosting the dollar, as high inflation rates increase the odds that the Fed will have to raise its interest rate to tackle inflation. 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. Core CPI data, which exclude food and energy were also higher than expected, reaching 6% year on year.
US economic indicators released last week were mixed for the US economy. US unemployment Claims released on Thursday were higher than expected, showing that employment levels in the US are falling, while Wholesale Inventory data were negative for the US economy, failing to provide support for the currency.
On Tuesday, the dollar was boosted by the strong US economy and by US Treasury Secretary Janet Yellen’s speech before the Senate Finance Committee. Yellen stressed in her speech that the current levels of inflation in the US are unacceptably high and emphasized the need for swift action to tackle soaring inflation.
Last week, renewed risk aversion sentiment pushed stock markets down, while boosting the safe-haven dollar. Continued Russian hostilities against Ukraine have increased risk-aversion sentiment, providing support for the dollar. As there is still no end in sight to the crisis, the dollar’s appeal as an investment remains high, although risk appetite seems to be gradually returning to markets.
US economic data and Fed rhetoric remain the primary drivers of the dollar. In its latest monetary policy meeting, the US Federal Reserve raised its benchmark interest rate by 50 base points to 1%. Fed rhetoric has become more cautious though, as inflation woes were balanced out by recession fears. FOMC members point to a series of rate hikes of 50 base points each, confirming that the Fed intends to move with a gradual but steady pace towards monetary policy normalization.
Markets have already priced in a series of aggressive rate hikes this year, and the Fed’s more guarded stance recently is causing the dollar to slip. In the coming weeks, the USD price will be affected by US economic, employment, and inflation data, as these will likely determine the aggressiveness of the Fed’s monetary policy tightening. Fed member's speeches will also likely cause volatility in USD price, as market investors will scan these speeches to gauge the US Central Bank’s intentions.
This week, all eyes are going to be on the upcoming policy meeting on Wednesday. The Fed is expected to raise its benchmark interest rate in its monetary policy meeting on Wednesday, continuing its policy of monetary tightening and gradual return to pre-pandemic rates. A large number of Fed officials have pointed to a 50 base point rate hike in Wednesday’s meeting, which is a significant increase, although it has been considered conservative by several market analysts. Following the release of soaring US inflation data, however, many market participants are expecting that the Fed will move to a steeper rate hike of 75 base points. A strong probability of a 75 bps rate hike is being priced in by markets, boosting the dollar. If the Fed disappoints market expectations, the dollar will likely fall.
The Euro plummeted last week, following the ECB interest rate decision on Thursday, with the EUR/USD rate closing near 1.051 on Friday. If the currency pair goes up, it may encounter resistance at 1.093. If the currency pair falls, it may encounter support at the 1.036 level which represents the 2016 low and further down near a 20-year low of 0.985.
Economic data released last week for the Eurozone were mixed, with German Industrial Production, French Trade Balance, and Italian Retail Sales falling below expectations. Eurozone Final Employment Change and revised GDP on the other hand, were higher than expected, providing support for the currency. German factory orders also fell below expectations, but investor confidence in the EU is on the rise.
Clear indications from the ECB that it would move towards a more hawkish policy this year, had bolstered the Euro in the past few weeks, with markets pricing in up to 130 base points rate hikes throughout the year. The ECB meeting last Thursday came as a disappointment though and the Euro plummeted after the ECB’s announcement. The ECB kept its interest rate unchanged, as expected, putting pressure on the currency. Some market participants were expecting a rate hike though, and markets were pricing in the possibility of a small, 10-base points rate hike.
Even though the EU Central Bank was not widely expected to change its benchmark interest rate at this meeting, the ensuing Monetary Policy Statement was more dovish than expected, driving the Euro down. The ECB pointed to a small rate hike of 25 base points at its next meeting in July, which was more modest than expected, as markets were pricing in an interest rate increase of up to 50 base points.
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. The ECB has also signaled that it may gradually quicken the pace of monetary tightening, by raising its interest rate by 50 base points in September if inflation doesn’t improve.
Economic growth in the EU has been stalling after the pandemic, raising fears of a potential recession. 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. CPI estimates, which are leading indicators of consumer inflation, showed that EU inflation is on the rise. Inflation in the Eurozone climbed to record highs, reaching 8.1% in May, driven by rising food and energy costs.
In addition, EU members recently announced a gradual ban on Russian oil imports. Concerns about rising energy costs in the EU that would bring inflation even higher up are putting pressure on the Euro.
This week only minor economic indicators are scheduled to be released for the Eurozone, which is not expected to generate high volatility for the currency. The Euro is more likely to be driven by the much-anticipated Fed and BOE meetings. The outcome of these meetings will likely have a strong impact on the Euro, especially if the two major Central Banks move towards a more hawkish policy than anticipated, further widening the gap, especially between their fiscal policies and those of the ECB.
The sterling crushed week, as the dollar gained strength, with the GBP/USD rate falling to 1.230 on Friday. 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 the two-year low at 1.206. The dollar’s rally puts pressure on competing assets, driving the sterling down.
The Sterling has been slipping, weighed down by a discouraging economic outlook and political instability. The British PM Boris Johnson faced a vote of no-confidence from within his party last week after the threshold of 15% of the party voted against the UK PM. Boris Johnson won the vote by a margin of 211 to 148, but an unexpectantly large number of Tories voted against him and the political climate in the UK remains tense putting pressure on the currency.
Last week, UK economic data were weak, indicating that the economic outlook for the UK remains discouraging and that the British economy is still sluggish, raising fears of a possible recession. UK Construction PMI data released on Wednesday were lower than last month’s and slightly lower than expected, putting pressure on the currency. The UK 10-year bond yielded 2.3% at Wednesday’s auction and a relatively high bid-to-cover ratio, providing support for the currency. UK Final Services PMI data released on Tuesday were higher than expected though, indicating that the British economy is moving in a positive direction and providing support for the Sterling.
Headline inflation in the UK rose to a new 40-year high of 9% in April, while core inflation hit 6.2%. The cost of living in the UK has been increasing, driven primarily by the high cost of energy imports, putting pressure on UK households. Stagflation is a risk for the UK economy, as for many other countries, as economic stagnation coupled with rising inflation creates a toxic mix for the economy.
The sterling has been losing ground against the dollar due to the divergence in monetary policy between the Fed and the BOE. Although the BOE started the year with a strong hawkish policy, it has recently backed down and moderated its stance, weighted down by the still fragile British economy. In its latest monetary policy meeting, the Bank of England raised its benchmark interest rate by 25 base points, bringing its rate to a 13-year high of 1%.
This week, the primary focus of investors will be the BOE monetary policy meeting on the 16th. Coming just a day after the Fed’s policy meeting, the outcome of the BOE’s meeting and the ensuing Monetary Policy Statement, are expected to have a strong impact on the Sterling. Britain’s uncertain economic outlook may force the BOE to hold back from shifting to an aggressively hawkish monetary policy to tame soaring inflation rates. A 25-base point rate hike is widely expected in this week’s monetary policy meeting, which will help the BOE to strike a balance between battling inflation and supporting the sluggish economy. Markets are pricing in an interest rate increase of over 30 base points, with the odds in favor of a 25 bp rate hike but some traders expect a 50 bp rate hike. Although this will be the fifth consecutive rate hike for the BOE, something that hasn’t been done in 25 years, market participants may consider a 25 bp rise in interest rate a sign that the BOE is slowing down its pace, which may drive the Sterling down, especially if the Fed moves to a 50 bp rate hike.
The Yen retreated against the dollar last week, with the USD/JPY pair closing near 134.3 on Friday. If USD/JPY rises, it may find resistance at the 2002 high of 135.3. If the USD/JPY declines, support might be found near the 127 level and further down at the 121.3 level.
The dollar’s recovery is making the Yen less appealing to investors as the two currencies are competing as safe-haven assets. The Yen has been losing its status as a safe-haven currency, however, and has been retreating since the beginning of the year, while the dollar has been outperforming compared to competing assets.
Several financial indicators were released last week for Japan, such as Bank Lending, Current Account, Final GDP Price Index, Final GDP, and Economy Watchers Sentiment. Overall, the data released were mixed, indicating that the Japanese economy is still struggling to recover from the effects of the pandemic.
The primary driver of the Yen over the past few months has been the BOJ’s fiscal policy, with the BOJ following an ultra-easy monetary policy to support the struggling economy. On Monday, BOJ Governor Haruhiko Kuroda stated that the Bank’s primary focus was to support the Japanese economy which is still struggling from the impact of the pandemic, and remained emphatically against a monetary policy tightening. Kuroda stressed that the BOJ’s accommodative policy is set to continue, despite Japan’s CPI breaching the BOJ’s 2% target, reaching 2.1% for the first time in seven years. Kuroda stated that Japan’s rising inflation rates are temporary and are mainly due to commodity and energy price rises rather than the result of a growing economy. In addition, Kuroda spoke in favor of a weak yen, although the combination of a weak currency and rising inflation is burdening Japanese households.
Bond yields have fallen across Japan’s treasury curve due to low demand. Japan’s 10-year government bond yielded a 0.24% interest rate at the bond auction on Thursday with a low number of bids made per bid accepted. 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 approximately 2.8%, 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.
This week, the BOJ Monetary Policy Meeting on the 17th is expected to have a strong impact on the Yen. Despite the rising inflation rates in Japan, the BOJ is expected to keep its interest rate the same, putting pressure on the Yen. Coming in the wake of the Fed and the BOE meetings, the BOJ meeting will likely emphasize the divergence between the BOJ’s fiscal policy and that of other major Central Banks, especially since both the Fed and the BOE are expected to raise their benchmark interest rates this week. While other countries are moving towards quantitative tightening to return to pre-pandemic fiscal policies, Japan continues to pour money into the economy and maintains its negative interest rate. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down.
Gold price slipped last week as the dollar rallied, but pared its losses on Friday, climbing above $1,870 per ounce, boosted by record US inflation data. If the price of gold decreases, support may be found at $1,786 per ounce, while resistance may be found at around 1,920 per ounce and higher up at $2,000 per ounce.
The price of gold is balanced between conflicting market forces, supported by risk aversion sentiment but pushed down by high dollar and real yields.
As the dollar and US bond yields rise, competing assets, such as gold, become less appealing as an investment. The dollar gained strength last week, rising from 101.9 at the beginning of the week, to 104.2 on Friday. Bond yields also rose, with the US 10-year treasury note yielding firmly above 3.1% on Frid ay. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.
Increased risk aversion sentiment due to the war in Ukraine has boosted gold prices over the past few months. As however, the crisis drags on, and risk sentiment is slowly returning to markets, undermining gold price. Rising geopolitical tensions work in favor of safe-haven assets, increasing the dollar’s appeal as an investment. Gold is also considered a safe-haven asset, but the dollar has been outperforming its rivals.
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. US consumer inflation data released on Friday reached record highs, boosting the price of gold. 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. Core CPI data, which exclude food and energy were also higher than expected, reaching 6% year on year. 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.
Stalling global economic growth also gives rise to fears of recession, further supporting the price of gold. Concerns about the state of the economy in China, after the extensive Covid lockdowns in Shanghai and other cities, also boost the gold prices.
Oil prices rallied last week, with WTI trading at a three-month high, above $123 per barrel, before closing near $121 per barrel on Friday, testing the $121.2 per barrel resistance level. If WTI the price retreats, support can be near $112 per barrel, while further resistance can be found near $130 per barrel.
The oil demand outlook has increased, as the beginning of the summer marks the start of the travel season, with increased traveling and driving, boosting oil demand. Last week, renewed Covid restrictions in Shanghai put a lid on the ascend of oil prices, although the Chinese economy is showing signs of recovery. The zero-Covid lockdown in Shanghai has officially ended, increasing the demand outlook and boosting oil prices. 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.
Rising geopolitical tensions also support oil prices, as tight supply raises fears of an energy crisis, especially in the EU, as the latest package of EU sanctions against Russia includes a ban on Russian oil imports. This plan 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.
OPEC+ agreed in their latest meeting to raise their output goal by almost 648,000 barrels a day in July and August. Market investors doubt whether OPEC can meet its production targets though and deliver its promised output. Last week, the energy minister of the United Arab Emirates, Suhail Al-Mazrouei, admitted that OPEC+ is currently pumping 2.6 million barrels per day below its output goal. Some of the group’s members are struggling to maintain their production quota, with supply worries further increasing oil prices.
Global stock markets slipped last week, dragging cryptocurrency prices down. Crypto markets have been known to follow the overall trends of stock markets and especially of tech stocks. Market sentiment has been fragile during the past couple of weeks, causing volatility in stock markets and cryptocurrencies alike. A strong risk-off sentiment has prevailed since the beginning of the year due to geopolitical tensions, driving investors to safer assets and dampening the appeal of cryptocurrencies. As however, the crisis drags on, and risk sentiment is slowly returning to markets.
Bitcoin price retreated last week falling below the $30,000 key psychological support level and trading around $28,000 during the weekend. If Bitcoin price declines, support may be found further down near $26,700, while resistance may be found near $32,300 and at $40,000.
Ethereum price also retreated last week, trading below the $1,720 level support and reaching below $1,500. If the Ethereum price declines, further support may be found at the psychological level of $1,000, while resistance may be encountered near $2,170 and higher up at $2.960.
The dollar rose last week, boosted by a weakening Euro and high US inflation data. US inflation in May increased 8.6% on an annual basis, the largest year-on-year increase since 1981, due to rising costs of food and energy. Soaring inflation rates in the US increase the chances of a more hawkish fiscal policy, driving cryptocurrency prices down.
The shift of major central banks towards a more hawkish fiscal policy has been putting pressure on cryptocurrencies over the past few months. Most major Central Banks are turning towards a tighter policy and a return to pre-pandemic interest rates, driving cryptocurrency prices down. The ECB’s decision to keep its interest rate unchanged last week provided support for cryptocurrency prices.
This week, the US Federal Reserve is expected to raise its benchmark interest rate by 50 base points and the BOE by 25 bp. Cryptocurrency prices are falling ahead of the Fed meeting, as the expectation of a tighter US fiscal policy boosts the dollar, decreasing the appeal of competing assets. The Fed and BOE rate hikes have been already priced in, however, and a more dovish than expected outcome may provide a much-needed boost to crypto markets.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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