Important calendar events
The dollar is moving in overbought territory supported by increased rate hike expectations and diminishing risk sentiment. The dollar eased towards the end of last week, with the dollar index settling near 106.2, after rising to the 106.8 level earlier in the week, its highest value since November 2022. US bond yields surged last week, with the US 10-year bond yield climbing above 4.6% for the first time since 2007. US Treasury yields also retreated a little on Friday, with the US 10-year bond yielding 4.58%.
Hawkish Fed speak boosted the dollar last week. Minneapolis Fed Governor Neel Kashkari delivered a hawkish speech on Tuesday, stating that he expects interest rates to go up again this year. FOMC member Michelle Bowman also hinted at another rate hike this year.
In September’s monetary policy meeting, FOMC members voted to keep interest rates unchanged at a target range of 5.25% to 5.50%. The Fed decided to pause rate hikes but that does not necessarily mean it has reached its rate ceiling. Market odds of another rate hike within the year are increasing, although it is clear that the Fed’s future policy direction will be data-driven.
On the data front, the Core PCE Price Index on Friday dropped below expectations. Core PCE Price Index rose 0.1% month-on-month in August against predictions of 0.2% growth and 0.2% in July. Core PCE Price Index dropped to 3.9% year-on-year from 4.3% in July. This is the Fed’s preferred inflation gauge and a lower-than-expected print indicated that price pressures in the US are easing. Market odds favoring a pause in rate hikes in November rose above 80% after the release of the PCE index.
Final GDP data for the second quarter of 2023 were released on Thursday. GDP data showed that the US economy expanded by only 2.1% in Q2 of 2023 against expectations of 2.2% growth. The final GDP price index for the 2nd quarter of the year also came in below expectations at 1.7% versus 2.0% anticipated.
US Unemployment data last week were optimistic. Jobless claims come in at 204k for the week ended September 23 versus 214k anticipated. Pending Home Sales on the other hand slumped in August, shrinking by 7.1% against a 0.5% growth in July.
US Core Durable Goods and Durable Goods orders exceeded expectations last week, boosting the dollar. Durable Goods Orders rose by 0.2% in July against a 5.6% drop in June and expectations of a 0.5% decline. Core Durable Goods Orders, which exclude transportation items, rose by 0.4% in July, the same growth they had registered in June, versus 0.2% anticipated.
The US HPI indicator, which reflects the change in the purchase price of homes, showed that US housing prices continued to rise in July. New home sales, on the other hand, dropped to 675K in August from 739K in July. Consumer confidence also declined, as evidenced by the drop in the CB Consumer Confidence index from 108.7 in August to 103.0 in September.
US inflationary pressures are not easing just yet, despite the Fed’s high-interest rates. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% expected. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US.
The EUR/USD pair was volatile last week, bouncing off the 1.050 level support on Thursday, its lowest level since December 2022. The currency pair gained strength later in the week though, closing near 1.057 on Friday. If the EUR/USD pair declines, it may find further support at 1.022, while resistance may be encountered near 1.073.
Flash CPI data last week were optimistic, boosting the Euro. Headline inflation in the Eurozone fell to its lowest level in two years in September. Flash CPI cooled to 4.3% year-on-year in September from 5.2% in August against expectations of a 4.5% print. Core CPI Flash Estimate, which excludes food and energy, also came in cooler than anticipated. Core CPI eased to 4.5% in September from 5.3% in August versus 4.5% predicted. The ECB’s efforts to curb inflation rates are paying off, even at the cost of decreased economic growth.
German headline inflation also came down to 4.5% year-on-year in September from 6.1% in August. Spanish Flash CPI data, on the other hand, showed that annual inflation rose to 3.5% in September from 2.6% in August.
The GfK Consumer Confidence report released last week showed that Consumer Confidence declined from -25.6 in September to -26.5 in October, putting pressure on the euro. In addition, German IFO Business Climate data on Monday showed that business climate dropped to 85.7 in September from 85.8 in August but came above the 85.2 forecast.
ECB President Christine Lagarde delivered a hawkish speech last week, providing support for the Euro. Testifying before the Committee on Economic and Monetary Affairs in Brussels, Lagarde implied that the ECB will not raise interest rates further but reiterated that borrowing costs will remain elevated for as long as needed to bring inflationary pressures down.
The ECB raised interest rates by 25 bp at its monetary policy meeting last week, bringing its main refinancing rate to 4.50%. The ECB had the difficult task of assessing the risk to the fragile Eurozone economy against high inflation rates. In the end, persistently high inflation induced the central bank to raise interest rates again on Thursday.
The ECB hinted that it had reached its interest rate ceiling, putting pressure on the Euro. ECB President Christine Lagarde signaled an end to rate hikes at the press conference after the conclusion of the meeting but warned that interest rates will remain at sufficiently restrictive levels for as long as necessary.
Final GDP data for the Euro area were disappointing, showing that the Eurozone economy expanded by only 0.1% in the second quarter of the year against expectations of 0.3% growth. The Eurozone economy barely expanded in the second quarter after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening.
GBP/USD dipped mid-week but regained strength towards the end of the week, closing near 1.220 on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.242, while support may be found near 1.210.
The Sterling rose on Friday after British GDP data showed that the British economy expanded at a higher pace than anticipated in the second quarter of 2023. A positive GDP report indicated that the economic outlook for the UK has improved and has alleviated recession fears.
Final GDP data showed that the British economy grew faster than anticipated, expanding by 0.3% in the first three months of this year, up from the 0.1% previously estimated. Final GDP data for the second quarter of the year indicated a 0.2% expansion, as expected. More importantly, the UK's economy has grown by 1.8% since the pandemic started, beating the previous estimate of a 0.2% contraction.
The BOE maintained its official rate at 5.25% at its policy meeting in September against expectations of a 25-bp rate hike. The BOE also signaled that it had reached its peak interest rate.
BOE Governor Andrew Bailey has stated that the central bank would be watching closely to see if further rate hikes are needed. Bailey also emphasized that the BOE will be holding interest rates in restrictive territory long enough to see inflation down to the bank’s 2% target. Bailey’s comments implied that the BOE has likely reached its rate ceiling after a long run of rate hikes.
Inflationary pressures in the UK are finally receding and likely tipped the balance in favor of a pause in rate hikes. British Inflation cooled more than expected in August, demonstrating the effectiveness of the BOE’s consistently hawkish policy. Headline inflation dropped to 6.7% year-on-year in August from 6.8% in July against expectations of 7.0%.
A combination of a struggling economy and high inflation is making the BOE’s task more difficult. Further tightening is needed to bring inflation down at the risk of tipping the British economy into recession. The state of the British economy remains fragile, as prolonged tightening has taken its toll on the labor market and other vital economic sectors.
USD/JPY traded above the key 149 level last week, touching 149.5 on Thursday but easing a little on Friday and closing near 149.3. If the USD/JPY pair declines, it may find support near 147.3. If the pair climbs, it may find further resistance at 150.
The Yen has been weakening, pushed down by the BOJ’s ultra-accommodating monetary policy. The Yen’s weakness has been a subject of concern for Japanese authorities as it undermines the country’s importing potential and causes financial distress in households.
Japanese authorities have been repeatedly warning speculators against excessive short-selling of the Yen. The Yen’s continued weakness is raising market awareness of another intervention by the Japanese government to support the ailing currency. Many market analysts view the USD/JPY 150 level as the line in the sand for another intervention.
Japan’s Finance Minister Shunichi Suzuki stressed last week that no options were off the table alerting traders to the risk of another government intervention. Suzuki reiterated his warning on Thursday, stating that excessive currency moves would be addressed by the Japanese government. The looming threat of government intervention is providing some support for the Yen. As however, Japanese officials are only issuing verbal warnings so far with no attempt at a new intervention the Yen continues to weaken.
The minutes of the Bank of Japan's July meeting were released last week. The minutes indicated that Japan’s policymakers are set to maintain the bank’s ultra-loose monetary settings.
The BOJ has maintained its dovish bias, putting more pressure on the Yen as other major central banks have been moving in a hawkish direction for over a year. The Yen becomes even more vulnerable as other major central banks continue raising interest rates.
At its policy September policy meeting the BOJ maintained its short-term interest rate target steady at -0.10% and showed no signs of relaxing its ultra-easy policy. Nevertheless, market odds of a BOJ rate hike in January have increased above 60%.
BOJ Governor Kazuo Ueda has hinted in the past few weeks that a policy shift may finally be on the horizon. Ueda delivered a hawkish speech last week, stressing that the wage and inflation outlook remains uncertain. Ueda added that inflation would need to remain sustainably above the BOJ’s 2% target before the central bank could consider abandoning its ultra-easy policy.
National Core CPI dropped to 3.1% in July from 3.3% in June. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. BOJ Core CPI climbed to 3.3% on an annual level in August beating expectations of 3.2%.
Final GDP data for the second quarter of the year showed that the Japanese economy expanded by 1.2%, disappointing expectations of 1.4% growth. The final GDP Price Index showed a 3.5% annual expansion, versus 3.4% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
Gold prices plummeted last week, dropping to $1,848 per ounce on Friday. If gold prices increase, resistance may be encountered near $1,950 per ounce, while if gold prices decline, support may be found near $1,830 per ounce.
Hawkish Fed speak this week increased rate hike expectations pushing gold prices down. Minneapolis Fed Governor Neel Kashkari delivered a hawkish speech on Tuesday, stating that he expects interest rates to go up again this year. FOMC member Michelle Bowman also hinted at another rate hike this year.
Gold prices went into free fall last week as the US dollar and treasury yields surged. 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 is moving in overbought territory supported by increased rate hike expectations and diminishing risk sentiment. The dollar eased towards the end of last week, with the dollar index settling near 106.2, after rising to the 106.8 level earlier in the week, its highest value since November 2022. US bond yields surged last week, with the US 10-year bond yield climbing above 4.6% for the first time since 2007. US Treasury yields also retreated a little on Friday, with the US 10-year bond yielding 4.58%.
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. FOMC members voted last week to keep interest rates unchanged at a target range of 5.25% to 5.50%.
The Federal Reserve decided to pause rate hikes at its latest meeting, but that does not necessarily mean it has reached its rate ceiling. The Fed is likely to keep interest rates at high levels for longer to bring inflation down. At the same time, other major central banks are maintaining high-interest rates. Gold prices are tumbling since gold presents a less attractive option than interest-yielding treasury bonds.
Core PCE Price Index, the Fed’s preferred inflation gauge, indicated last week that price pressures in the US are cooling. The core PCE Price Index dropped to 3.9% year-on-year from 4.3% in July, increasing the odds of a pause in rate hikes in November. Headline inflation came in hotter than anticipated though, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Inflationary pressures in the US remain high, despite the Fed’s high interest rates.
Oil prices surged last week with WTI price bouncing off the $95.0 per barrel resistance representing a 14-month high. Oil prices suffered a correction later in the week, with WTI price dropping to $91.0 per barrel on Friday. If WTI price declines, it may encounter support near $88.8 per barrel, while resistance may be found near $95.0 per barrel.
Oil prices were buoyed this week by fears of tight oil supply. The Energy Information Administration released US crude oil inventory data on Wednesday indicating that US crude stocks are declining. The Energy Information Administration reported a crude oil inventory draw of 2.2 million barrels for the week of September 22nd.
Oil prices, however, are kept in check as interest rates remain high. The oil demand outlook has declined as the Fed delivered a hawkish message last week hinting at further tightening. FOMC members unanimously voted to keep interest rates unchanged at a target range of 5.25% to 5.50%. The Fed decided to pause rate hikes but that does not necessarily mean it has reached its rate ceiling. Market odds of another rate hike within the year are increasing. Even if the Fed has reached its interest rate ceiling, rates are likely to stay high for longer to bring inflation down.
Last week Russian authorities decided to restrict diesel and gasoline exports to stabilize domestic fuel prices. Russia, however, decided to relax the fuel ban on Monday, assuaging supply concerns. Russia lifted restrictions on certain fuel types, specifically fuel used as bunkering for some vessels and diesel with high Sulphur content.
Deterioration in China’s economic outlook is keeping oil prices down, however. 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. However, China’s economy showed signs of improving this week, boosting oil prices.
Cryptocurrencies rallied last week as markets started anticipating the emergence of crypto ETFs. Bitcoin and other major cryptocurrencies gained strength last week as a bullish sentiment prevailed, offsetting global economic concerns.
Asset Management Firm VanEck announced on Thursday that they are preparing Ethereum futures ETF. The fund will be called VanEck Ethereum Strategy ETF and will invest in standardized, cash-settled ETH futures contracts.
The Securities and Exchange Commission (SEC) has been hesitating in deciding regarding the future of Bitcoin ETFs, however. BlackRock and other institutions have applied for a Bitcoin ETF, which would bring more institutional and retail money into crypto markets. SEC however has delayed its decision on Bitcoin ETFs putting pressure on Bitcoin price.
Bitcoin price soared mid-week, rising above the key $27,000 level, and rose even higher over the weekend, breaking through the $27,500 level resistance. If BTC price declines, support can be found near $26,000, while resistance may be encountered near $29,000.
Ethereum also gained strength last week, going above the $1,700 resistance level over the weekend. If Ethereum's price declines, it may encounter support near $1,560, while if it increases, resistance may be encountered near $1,800.
Expectations of further economic tightening have dragged risk sentiment down, putting strain on cryptocurrencies. The Fed has kept interest rates stable, but delivered a hawkish message, raising the odds of future rate hikes. The Fed’s projections showed that interest rates may rise even further this year and are likely to stay in restrictive territory for a longer period, hindering economic growth. Increases in central banks’ interest rates sour risk sentiment, driving risk assets down.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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