Important calendar events
The dollar started low last week, with the dollar index barely touching the 101.0 level. The dollar gained strength after the Fed policy meeting, though, and the dollar index was catapulted to the 102 level, finally ending the week near 101.7. US Treasury yields soared after the Fed rate announcement, with the US 10-year bond climbing above 4.00%.
The U.S. Federal Reserve raised interest rates by 25 basis points last week, after holding its interest rate steady at its June policy meeting. Fed officials voted unanimously on Wednesday to raise the central bank’s interest rate to a target range of 5.25% to 5.50%, the highest level in 22 years.
The Fed’s decision to resume economic tightening, however, was widely anticipated and had already been priced in by markets. The dollar dropped sharply after the Fed announcement as markets were trying to interpret the Fed’s future intentions. Markets had time to digest the news on Thursday, which was more hawkish than anticipated, boosting the dollar.
The Fed’s forward guidance remained the same, stressing that future steps would be determined by several parameters, including the cumulative effect of tightening on the economy, the progress of inflation, as well as other financial developments. The Fed’s message was ambiguous, aiming to give the central bank flexibility towards adjusting its future monetary policy and adopting a data-dependent approach.
There is considerable doubt on whether the Fed will continue hiking rates after last week’s rate increase. Cooling US inflation rates have shifted Fed interest rates expectations towards a less hawkish direction putting pressure on the dollar.
Core PCE Price Index data on Friday, enhanced this notion. This is the Fed’s preferred inflation gauge, and signs of cooling inflation may influence the Fed’s next rate decision. Core PCE rose 0.2% every month in July, bringing the annual rate to 4.1%, against expectations of 4.2%.
In addition, US Inflation cooled significantly in June, showing that the Fed’s efforts are paying off. Headline inflation dropped sharply to 3.0% in June from 4.0% in May versus the 3.1% forecast. US monthly inflation rose by 0.2% against the 0.3% forecast, indicating that a weakening trend in inflation is prevailing. Core inflation, which excludes food and energy, dropped to 4.8% on an annual basis in June from 5.3% in May versus the 5.0% forecast. Core inflation had been particularly sticky up till now but finally dropped to the lowest since October of 2021.
Advance US GDP data last week, showed that the US economy expanded by 2.5% in the second quarter of the year, against expectations of 1.8% growth. Unemployment claims data were also upbeat on Thursday, showing a drop to 221K from 228K last week. Advance GDP Price Index data, on the other hand, showed that US inflation is cooling, putting pressure on the dollar. This is a key inflation gauge, and last week’s data showed a drop to 2.2% in Q2 of 2023 from 4.1% in the previous quarter, against expectations of 3.0%.
CB Consumer Confidence rose to 117.0 in July from 110.1 in June, exceeding expectations of 112.1. This is a leading indicator of consumer spending, and its increase indicates improved economic activity. Richmond Manufacturing Index on the other hand dropped further into negative territory, with a -9 print in July from -7 in June. A print further below 0 indicates worsening conditions in the manufacturing sector.
US PMI data were mixed overall. Flash Manufacturing PMI was catapulted to 49.0 in July from 46.3 in June, greatly exceeding expectations of 46.1. July’s print remains below the threshold of 50 which would indicate industry expansion, but it signals a significant improvement in the sector. Conversely, Flash Services PMI dropped to 52.4 in July from 54.4 in June, indicating that the service sector continues to expand, albeit at a reduced pace.
The EUR/USD pair was volatile last week, rising to 1.114 immediately after the Fed rate decision, then plummeting to 1.093, but recovering some of its losses later in the week, closing near 1.101 on Friday. If the EUR/USD pair declines, it may find support at 1.094, while resistance may be encountered near 1.127.
The ECB raised interest rates by 25 bp at last week's policy meeting, bringing its main refinancing rate to 4.25%. The rate hike was highly anticipated, however, and had already been priced in, failing to provide support for the Euro. The ECB’s forward guidance was not as decisively hawkish as anticipated. The central bank hinted that future rate decisions will be data-based.
ECB President Christine Lagarde stated that the central bank’s focus was a timely return of inflation to the 2% medium-term target, leaving the door open for another rate hike in September. Lagarde, however, remained non-committal in her press conference about the possibility of a hike in September. This is a dovish sign given Lagarde’s decisively hawkish stance in the past few months.
On the data front, German IFO Business Climate data last week showed a deterioration of business confidence in Germany. The index dropped to 87.3 in July from 88.6 in June, indicating declining business sentiment in the Eurozone’s largest economy.
Eurozone PMI data showed that both the manufacturing and the service sectors shrank much more than expected in July. EU Flash Manufacturing PMI dropped further into contractionary territory in July with a 42.7 print against June’s 43.4. Germany’s manufacturing sector dropped below 38.8 in July from 40.6 in June. Germany is the largest Eurozone economy and July’s disappointing data brought the overall indicator down. The Service sector fared better, with EU PMI remaining above the threshold of 50 which denotes industry expansion. The service sector PMI, however, dropped to 51.1 in July from 52.0 in June, indicating that the rate of expansion is slowing down.
GDP data for the first quarter of the year showed that the Eurozone is technically entering a recession. Revised GDP showed a contraction of 0.1% for Q1 of 2023. Deteriorating economic conditions in the Eurozone may force the ECB to rethink its hawkish monetary policy.
Euro Area headline inflation fell to 5.5% year-on-year in June from 6.1% in May, against expectations of 5.6%. Final Core CPI, which excludes food and energy, rose to 5.5% on an annual level from 5.3% in May. The latest inflation print is showing that the ECB’s efforts to bring inflation down are paying off, but it will likely not be sufficient to induce the central bank to abandon its hawkish policy just yet.
GBP/USD exhibited high volatility last week, rising to 1.300 mid-week as the dollar tanked, then dropping to 1.274 before paring some losses and closing near 1.284 on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.314, while support may be found near 1.274.
British PMI data last week fell short of expectations, weighing down the pound. The British private sector recorded its weakest rise in 6 months as businesses stagnate in the face of rising interest rates. The manufacturing sector retreated further into contractionary territory in July, with Flash PMI dropping to 45.0 from 46.5 in June. The services sector remained above the threshold of 50 which denotes industry expansion. Service PMI dropped to 51.5 in July from 53.7 in June, indicating that the rate of expansion is slowing down.
The BOE meets this week on August 3rd and markets are leaning towards a 25-bp rate hike, without completely discounting the possibility of another rate increase by 50 basis points. The BOE is expected to continue to increase interest rates as it fights to bring inflation down. The BOE has been following an aggressively hawkish monetary policy, aiming to bring inflation down.
The BOE raised interest rates by 50 basis points at its June meeting, bringing the bank rate to 5.0%. Sticky inflation in the UK is putting pressure on BOE policymakers to increase interest rates. BOE Governor Andrew Bailey has warned that if price pressures remain persistent, further tightening would be required. Bailey vowed last week to "see the job through" by bringing down inflation and providing price stability.
Signs of cooling inflation eased some of the pressure on the BOE to maintain its aggressively hawkish policy. British inflation dropped unexpectedly in June, indicating that the BOE may not have to raise rates as high as expected. Headline inflation in the UK eased to its lowest level over the year, dropping to 7.9% year-on-year from 8.7% in May against expectations of an 8.2% print. Core CPI, which excludes food and energy, also came in at 6.9% for June compared with May's three-decade high of 7.1%, while markets were anticipating a 7.1% print.
Britain’s economy contracted by 0.1% month-on-month in May after an expansion of 0.2% in April. The British economy shrank less than expected, however, as markers were anticipating a 0.3% contraction in May. GDP was stagnant in the 3 months to May.
USD/JPY dropped from 141.5 to 138 mid-week but pared losses on Friday, climbing back to 141.1. If the USD/JPY pair declines, it may find support near 137.2. If the pair climbs, it may find resistance at 142.
The Yen has been weighed down by the BOJ’s persistently dovish policy. Last week, however, the BOJ showed signs of relaxing its ultra-easy policy. The central bank maintained its short-term interest rate target steady at -0.10% as expected.
The BOJ, however, has loosened its yield curve control. The BOJ maintained the band around the 10-year Japanese government bond yields of +- 0.5% with the yield target around 0%. The central bank, however, will offer to purchase 10-year bond yields at 1% through fixed-rate operations. This will maintain the rate ceiling but effectively allow rates to float beyond the cap, allowing for rises by a further 50 basis points. Markets have interpreted this tweak in the BOJ’s monetary policy as a step towards an eventual shift in the bank’s massive stimulus program.
BOJ Governor Kazuo Ueda, however, stated that relaxing the yield curve control policy is not intended as a step toward policy normalization, but rather as a step aimed at enhancing the sustainability of the policy. Markets have been anticipating a hawkish shift in the BOJ’s policy for some time now, but BOJ officials had been unyielding in their dovish stance. Signs of rising inflation, however, are encouraging the BOJ to tighten its monetary policy.
National Core CPI rose to 3.3% in June from 3.2% in May. Inflation in Japan continues to rise contrary to BOJ’s expectations and has exceeded BOJ’s target for more than a year. BOJ Core CPI dropped slightly to 3.0% in July from 3.1% in June. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households.
Final GDP data for the first quarter of the year showed that the Japanese economy expanded by 0.7%, against a preliminary GDP print of 0.4%. The GDP data exceeded expectations, alleviating recession concerns for Japan. Final GDP Price Index showed a 2.0% annual expansion, versus 1.2% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
Gold prices mirrored the dollar’s movement last week, rising to $1,982 per ounce mid-week as the dollar declined. Gold prices plummeted to $1,942 per ounce on Thursday, however, as the dollar started to recover and finally ended the week near $1,959 per ounce. If gold prices increase, resistance may be encountered near $1,987 per ounce, while if gold prices decline, support may be found near $1,942 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 started low last week, with the dollar index barely touching the 101.0 level. The dollar gained strength after the Fed policy meeting, though, and the dollar index was catapulted to the 102 level, finally ending the week near 101.7. US Treasury yields soared after the Fed rate announcement, with the US 10-year bond climbing above 4.00%.
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. The U.S. Federal Reserve raised interest rates by 25 basis points on Wednesday after holding its interest rate steady at its June policy meeting. Fed officials voted unanimously on Wednesday to raise the central bank’s interest rate to a target range of 5.25% to 5.50%, the highest level in 22 years.
The Fed’s decision to resume economic tightening, however, was widely anticipated and had already been priced in by markets. Gold prices fluctuated widely after the announcement of the rate hike, spiking upwards first and then plummeting, but corrected by Friday as markets had time to digest the news.
The Fed’s forward guidance remained the same, stressing that future steps would be determined by several parameters, including the cumulative effect of tightening on the economy, the progress of inflation, as well as other financial developments. The Fed’s message was ambiguous, aiming to give the central bank flexibility towards adjusting its future monetary policy and adopting a data-dependent approach.
There is considerable doubt on whether the Fed will continue hiking rates after last week’s rate increase. Cooling US inflation rates have shifted market expectations towards a less hawkish direction, boosting gold prices.
Oil prices edged higher last week, with WTI price climbing to the $80.7 per barrel level. If the WTI price declines, it may encounter support near $73.8 per barrel, while resistance may be found near $83.4 per barrel.
Deterioration in China’s economic outlook is keeping oil prices down. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and a weaker Chinese oil demand outlook has put pressure on oil prices.
There is, however, speculation that the Chinese government may announce a massive stimulus package later this month to boost its struggling economy. Expectations of Chinese stimulus increased the oil demand outlook last week, boosting oil prices. Chinese officials pledged on Monday to step up policy support for the economy, causing oil prices to spike. It has been reported, however, that China is holding off on major stimulus for now.
The Energy Information Administration data showed that US crude inventories fell less than expected on Wednesday. Preliminary reports estimated that crude inventories would decline by over 2 million barrels in the week to July 21. US crude inventories, however, dropped by only 0.6 million last week.
Global economic concerns have been weighing oil prices, raising concerns about further oil production cuts. OPEC+ members have decided that the current 1 million barrels per day cut would be extended beyond July and into August. Additionally, Russia will reduce its output by 500,000 barrels per day. Supply concerns have been keeping oil prices up.
The U.S. Federal Reserve raised interest rates by 25 basis points last week after holding its interest rate steady at its June policy meeting. Fed officials voted unanimously to raise the central bank’s interest rate to a target range of 5.25% to 5.50%, the highest level in 22 years.
The Fed’s decision to resume economic tightening, however, was widely anticipated and had already been priced in by markets. Oil prices continued to rise despite the announcement of fresh rate hikes. Cooling US inflation rates have shifted Fed interest rates expectations towards a less hawkish direction. The prospect of a lower rate ceiling than previously anticipated increases the oil demand outlook, boosting oil prices.
Crypto markets dropped early last week, weighed down by concerns about Binance. Binance is the largest crypto exchange in the world and was sued by the Securities and Exchange Commission last month. Reports of fresh economic transgressions involving Binance CEO Changpeng Zhao put pressure on cryptocurrencies.
The U.S. Federal Reserve raised interest rates by 25 basis points last week after holding its interest rate steady at its June policy meeting. Fed officials voted unanimously last week to raise the central bank’s interest rate to a target range of 5.25% to 5.50%, the highest level in 22 years. Crypto markets dived after the Fed rate announcement. Increases in central banks’ interest rates sour risk sentiment, driving risk assets down.
The Fed’s decision to resume economic tightening, however, was widely anticipated and had already been priced in by markets. The Fed’s message moving forward was ambiguous, aiming to give the central bank flexibility towards adjusting its future monetary policy and adopting a data-dependent approach. Crypto markets edged higher towards the end of last week but failed to maintain an uptrend.
Bitcoin price tanked last week, dropping below the key $30,000 level and trading near $29,200 over the weekend. If the BTC price declines, support can be found near $29,000, while resistance may be encountered near $30,400.
Ethereum price also declined last week, dropping to the $1,850 level over the weekend. If Ethereum's price declines, it may encounter support near $1,817, while if it increases, resistance may be encountered near $1,930.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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