Important calendar events
The dollar was volatile last week, declining mid-week but rallying on Friday. The dollar index dropped as low as 102.7 during the week but recovered towards the end of the week, closing near 103.6 on Friday. US Treasury yields also retreated mid-week and gained strength towards the end of the week, with the US 10-year bond yielding close to 3.74% on Friday.
US Unemployment Claims on Thursday exceeded expectations, putting pressure on the dollar. Unemployment claims this week rose to 196K, against expectations of 191K and a previous print of 183K.
Fed rhetoric week remained hawkish last week, albeit cautiously so. The initial market interpretation of Fed members’ speeches was ambiguous, as markets have been anticipating a pause in rate hikes after the Fed’s next policy meeting. Repeatedly hawkish Fedspeak has begun to drive the message home that further rate rises should be expected and that interest rates will need to remain high for a long period.
Fed’s Barkin emphasized on Thursday the importance of continued tightening to rein in inflation. On Wednesday, FOMC member Williams stressed that a restrictive stance must be maintained for a few years, but did not commit to a specific ceiling for the Fed’s interest rates this year. Fed’s Cook on Wednesday was more hawkish, stating that the central bank aims to restore price stability, which will require a restrictive monetary policy for some time.
After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy. The Federal Reserve raised interest rates by only 25 basis points last week, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. However, a pivot towards a more dovish policy was expected by markets and had been largely priced in.
Fed Chair Jerome Powell, at his press conference after the conclusion of the meeting defended the central bank’s decision to relax its hawkish policy. Powell caused a stir in markets, expressing himself as satisfied with the ‘disinflation’ process. Powell emphasized that ongoing rate hikes are appropriate since substantially more evidence is necessary that inflation is under control. On Tuesday, Fed Chair Jerome Powell confirmed that the disinflation process has begun but emphasized that it still has a long way to go. Powell’s speech was cautious, reinforcing the notion that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy.
Many analysts believe that the Fed will continue raising interest rates at a slower pace until the benchmark interest rate reaches at least 5.0%. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. Rate hikes have become less aggressive, but the Fed might continue raising interest rates for longer than previously expected.
US inflation seems to be cooling, as US headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. Cooling price pressures have given the US Federal Reserve some leeway towards scaling back its interest rate increases, putting pressure on the dollar.
Advanced quarterly GDP data revealed that the US economy is expanding at a higher rate than anticipated. US GDP for Q4 of 2022 grew by 2.9% against expectations of a 2.6% growth. The US is likely headed for an economic ‘soft landing’ and recession concerns ease.
This week, US inflation data are expected to significantly impact dollar prices. Consumer inflation data (CPI) on the 14th are this week’s most highly anticipated fundamentals. Signs that the disinflation process is progressing may see the dollar tumbling once again. Producer price data (PPI) on the 16th will help paint a clearer picture of US inflation and will also likely cause volatility in dollar prices.
The Euro lost strength against the dollar last week, with EUR/USD dropping to the 1.067 level. If the currency pair goes up, it may encounter resistance near 1.103. If the EUR/USD pair declines, it may find support at 1.048.
ECB rhetoric last week remained strongly hawkish. ECB’s Kazaks stated on Wednesday that the central bank has no reason to pause rate hikes after next month's meeting. ECB member Knot also appeared to be in support of further rate hikes, emphasizing that the ECB has more distance to cover than the Fed.
The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde recently emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June. Even though the ECB seems prepared to continue raising interest rates to bring inflation down, the market response was negative towards the Euro, which plummeted.
EU inflation rates are decreasing, but they are still far from the ECB’s 2% goal and are forcing the central bank to hike rates aggressively. Final EU headline inflation dropped to 8.5% year-on-year in January from a 9.2% print in December, indicating that Eurozone inflation is cooling. The continued drop in inflation signals that the ECB’s efforts to tame inflation are bearing fruit. Price pressures in the Eurozone remain high though, and interest rates need to rise significantly to combat entrenched inflation.
The Sterling was volatile last week, but GBP/USD ended the week back where it started, closing near 1.205 on Friday. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.195.
GDP data released on Friday showed that the British economy is slowing down, putting pressure on the Sterling. The monthly GDP for December showed a 0.5% contraction in the British economy, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.
The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.
BOE Monetary Policy Report Hearings last Thursday caused volatility in the price of the Sterling. During the hearings, BOE Governor Bailey was joined by MPC members, Pill, Tenreyro, and Haskel at the Treasury Select Committee to testify on inflation and the economic outlook before Parliament's Treasury Committee. Thursday’s hearings indicated that BOE officials are divided over the central bank’s future monetary policy. MPC members Haskel and Pill appeared to be hawkishly advocating for further tightening, BOE Governor Bailey seemed to be on the fence on further rate hikes, while MPC member Tenreyro stated she may consider voting for a rate cut. The dichotomy between MPC members does not bode well for the British economic outlook, as there is a high risk that inflation will become entrenched.
The BOE raised interest rates by another 50 bp at its February meeting, bringing the official bank rate to 4.0%. The BOE Monetary Policy Report issued after the meeting was more dovish than expected, pointing to a possible pause in rate hikes. The policy report stated that “if there are more persistent price pressures then only will further tightening be required”.
Inflation data have shown that inflation in the UK is cooling. UK headline inflation dropped to 10.5% in December from 10.7% in November. With inflation remaining firmly above 10% though, additional measures would be required to bring price pressures down.
This week, British inflation data are likely to cause volatility in the price of the Sterling. If CPI data due on the 15th show that headline inflation in the UK is cooling, it can provide support for the currency.
The Yen traded sideways against the dollar last week, with USD/JPY oscillating around the 131.4 level. If the USD/JPY pair declines, it may find support near 127.2 and further down at 114.2. If the pair climbs, it may find resistance at 132.9.
BOJ Governor Haruhiko Kuroda is due to retire in April and rumors have already surfaced regarding his successor. Japanese Prime Minister Fumio Kishida is due to submit nominees for BOJ Governor to parliament this week and rumors abound on who is going to succeed Kuroda as head of the BOJ. Kishida highlighted the prerequisites for the new head of the BOJ last week in Parliament, stating that, “Since the Lehman crisis, close coordination among major central bank leaders, as well as the ability to receive and deliver high-quality communication to and from domestic and overseas markets, have become extremely important". There are rumors that this description fits former BoJ Deputy Governor Hiroshi Nakaso, although it is as yet unclear if he would be willing to take up the post.
The Japanese Government has reportedly approached Deputy BOJ Governor Masayoshi Amamiya for the position of BOJ Governor, although Japanese government officials have since denied this. Amamiya is also a firm supporter of the central bank’s ultra-loose monetary policy, though. A change in leadership with Amamiya at the helm would probably make little difference to BOJ policy. Market reaction reflected this eventuality, and the Yen tumbled after the rumors surfaced. Asian media have also reported that former BOJ member Kazuo Ueda is set to be offered the position of governor.
BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy. Kuroda’s successor may decide to unwind the BOJ’s ultra-easy policy and a pivot in Japan’s monetary policy within 2023, which would boost the Yen considerably. Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10% as expected.
BOJ Core CPI rose to 3.1% year-on-year, exceeding expectations of a 2.9% print. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. National Core CPI for December was at 4.0%, rising above November’s 3.7% print. In addition, wages in Japan increased for the first time in nine months by 4.8% year-on-year in December. Increased price pressures and wages raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.
The final GDP Price Index for the third quarter of 2022 showed economic contraction by 0.3% on an annual basis and the Japanese economy shrank by 0.2% in the third quarter of 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.
This week, preliminary GDP data for the final quarter of 2022 on the 14th will provide information on Japan’s economic outlook and may influence the Yen.
Gold prices tumbled last week, closing near $1,865 per ounce on Friday. If gold prices increase, resistance may be encountered near $1,960 per ounce, while if gold prices decline, support may be found near $1,825 per ounce.
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 was volatile last week, declining mid-week but rallying on Friday. The dollar index dropped as low as 102.7 during the week but recovered towards the end of the week, closing near 103.6 on Friday. US Treasury yields also retreated mid-week and gained strength towards the end of the week, with the US 10-year bond yielding close to 3.74% on Friday.
Fed rhetoric last week remained hawkish driving gold prices down. The initial market interpretation of Fed members’ speeches was ambiguous, as markets have been anticipating a pause in rate hikes after the Fed’s next policy meeting. Repeated speeches by Fed members though have begun to drive the message home that further rate rises should be expected and that interest rates will need to remain high for a long period. Market expectations of a dovish pivot in the Fed’s policy were quashed last week, causing gold prices to tumble.
Fed’s Barkin emphasized on Thursday the importance of continued tightening to rein in inflation. On Wednesday, FOMC member Williams stressed that for a few years, a restrictive stance must be maintained but did not commit to a specific ceiling for the Fed’s interest rates this year. Fed’s Cook on Wednesday was more hawkish, stating that the central bank aims to restore price stability, which will require a restrictive monetary policy for some time.
Last week Fed Chair Jerome Powell expressed himself as satisfied with the ‘disinflation’ process but stressed that ongoing rate hikes are appropriate to bring inflation under control. On Tuesday, Powell confirmed that the disinflation process has begun but emphasized that it still has a long way to go. Powell’s speech was cautious, reinforcing the notion that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy.
Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment than gold as interest rates rise. After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy, boosting gold prices. The Federal Reserve raised interest rates by only 25 basis points last week, bringing the benchmark interest rate to a target range of 4.50% to 4.75%.
US inflation seems to be cooling, providing support for gold prices. Gold prices surge as the Fed and other central banks start to scale back their aggressive rate hiking. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices.
This week, US inflation data are expected to significantly impact the dollar price, which will almost certainly be transferred to gold prices as well. Consumer inflation data (CPI) on the 14th are this week’s most highly anticipated fundamentals. Signs that the disinflation process is progressing may see the dollar tumbling once again. Producer price data (PPI) on the 16th will help paint a clearer picture of US inflation and will also likely cause volatility in dollar prices.
Oil prices rallied last week, posing weekly gains of over 8%, with WTI price climbing to $80 per barrel. If the WTI price declines, it may encounter support near $72.4 per barrel, while resistance may be found near $82.3 per barrel.
A price cap on Russian oil exports was set on February 5th. G7 leaders set the price cap of Russian oil exports at $100 per barrel on diesel and other products that trade at a premium to crude and $45 per barrel for products that trade at a discount.
Oil prices skyrocketed on Friday after Russia announced plans to reduce oil production next month. Russia threatened to cut oil output by 500,000 barrels per day as a retaliation for the price cap on the country's oil exports.
Oil prices are also supported by optimism over China’s economic recovery. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. Fatih Birol, chief of the International Energy Agency recently stated that he expects half of global oil demand growth this year to come from China. The Chinese government has eased some of its strident Covid regulations, abandoning its zero-Covid policy. China has re-opened its borders after almost three years, fuelling hopes of economic recovery.
US crude oil stocks continued to rise last week, putting pressure on oil prices. US crude oil inventory data on Wednesday showed a rise of 2.4 million barrels, exceeding expectations of a rise of 2.0 million barrels, putting pressure on oil prices.
Fed rhetoric last week was hawkish, putting a lid on oil prices. The initial market interpretation of Fed members’ speeches was ambiguous, as markets have been anticipating a pause in rate hikes after the Fed’s next policy meeting. Repeated speeches by Fed members though have begun to drive the message home that further rate rises should be expected and that interest rates will need to remain high for an extended period. Oil prices dipped on Thursday as market odds began to swing in favor of the Fed raising interest rates further.
Fed Chair Jerome Powell reiterated last week that the disinflation process has begun but emphasized that it still has a long way to go. Recession concerns still run high and aggressive rate hikes stifle economic activity, limiting the oil demand outlook. As inflation starts to cool though, central banks are starting to lower the pace of rate hikes, which may raise future oil demand expectations.
Risk sentiment was uncertain last week, causing volatility in crypto markets. Cryptocurrencies plummeted mid-week as risk sentiment soured. Prolonged rate hikes fuel global recession concerns, driving risk assets down.
Fed rhetoric last week was hawkish, putting pressure on crypto markets. The initial market interpretation of Fed members’ speeches was ambiguous, as markets have been anticipating a pause in rate hikes after the Fed’s next policy meeting. Repeatedly hawkish Fedspeak though has begun to drive the message home that further rate rises should be expected and that interest rates will need to remain high for an extended period.
On Tuesday, Fed Chair Jerome Powell confirmed that the disinflation process has begun but emphasized that it still has a long way to go. Fed’s Barkin emphasized on Thursday the importance of continued tightening to rein in inflation.
On Wednesday, FOMC member Williams emphasized that a restrictive stance must be maintained for a few years, but did not commit to a specific ceiling for the Fed’s interest rates this year. Fed’s Cook on Wednesday was more hawkish, stating that the central bank aims to restore price stability, which will require a restrictive monetary policy for some time. Rate hikes have become less aggressive, but the Fed might continue raising interest rates for longer than previously expected.
Bitcoin price dropped plummeted during the week and continued trading below the $22,000 level over the weekend. If the BTC price declines, support can be found near $20,450, while further resistance may be encountered near $24,200.
Ethereum price also tumbled last week, trading near $1,540 during the weekend. If Ethereum's price declines, it may encounter support near $1,500, while if it increases, resistance may be encountered near $1,715.
Global cryptocurrency market capitalization has started to recover this year and remains above $1 trillion. Crypto bulls are hoping that the recent cryptocurrency selloff has passed and that market confidence in the industry will be restored. Bears are fighting back, however, pushing cryptocurrency prices down.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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