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Weekly Market Outlook For February 14th to 20th

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Written by:
Myrsini Giannouli

14 February 2022
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Impact of Russia – Ukraine crisis on currencies, commodities

The EU is building a partnership for energy security with the US and other Natural Gas suppliers, in an attempt to mitigate a potential energy crisis and shield the EU from energy shortages.

The world is holding its breath, as diplomatic efforts intensify to prevent an escalation of the Russia - Ukraine crisis. It is reported that Russia has amassed over 120,000 troops on the Ukrainian border, as well as military hardware and medical supplies, and the Pentagon warns that an invasion seems imminent. Russian President Vladimir Putin however, has denied plans to attack Ukraine and accused the US of using Ukraine as a tool to contain Russia. 

There was a flurry of diplomatic activity the past week, with the French President Emmanuel Macron taking a leading role in the negotiations and visiting Moscow and Kyiv, in an attempt to promote peaceful negotiations between the two countries. US President Joe Biden met with the new German chancellor, Olaf Scholz, to discuss the Russian-Ukraine crisis and possible sanctions against Russia. Most importantly, the US President, Joe Biden, had an hour-long discussion with his Russian counterpart Vladimir Putin on Saturday, in what is widely seen as a last-ditch effort to avert a Russian invasion of Ukraine, but it was reported that the call brought “no fundamental change” to the issue.

Even as diplomatic negotiations continue, Russia is preparing to hold military exercises near its border with Ukraine. NATO chief Jens Stoltenberg stated that there is a real risk of a new armed conflict in Eastern Europe and that the alliance would consider maintaining a longer-term presence in Eastern Europe in the coming months. U.S. Secretary of State Anthony Blinken warned that Russia could launch an attack against Ukraine at any time, even during the winter Olympics, and warned US citizens to leave Ukraine. Similarly, the British Foreign Office has advised British citizens in Ukraine to leave the country, while there are still commercial means available. 

The EU threatens Russia with heavy economic and trade sanctions in the event of an attack against Ukraine, which might backfire though, and have a heavy impact on the Eurozone. The EU relies on Russia for key commodities, such as wheat, natural gas, and oil, and the price of these goods is already increasing. A disruption in importing these commodities would likely result in rising prices, creating an energy crisis and further increasing inflation rates in the EU. European Commission President Ursula von der Leyen stated that the EU is attempting to build a partnership for energy security with the US and other Natural Gas suppliers, in an attempt to mitigate a potential energy crisis and shield EU consumers and households from energy shortages. On Friday, she reaffirmed the fact that all options were on the table and that sanctions would concern the financial and energy sectors, as well as exports of high-tech products

Forex 

Important calendar events

  • February 14, EUR: ECB President Lagarde's Speech
  • February 14, USD: FOMC Member Bullard's Speech
  • February 15, USD: Monthly PPI and Core PPI
  • February 16, GBP: Annual CPI and Core CPI
  • February 16, USD: Monthly Retail and Core Retail Sales, FOMC Meeting Minutes
  • February 17, USD: Unemployment sales
  • February 18, USD: FOMC Member speeches, Fed Monetary Policy Report

USD

Financial data seem to be sending mixed signals to the Fed and the US Central Bank will have to balance indicators of economic strength against rising inflation rates to determine its fiscal policy.

US Monthly CPI and Core CPI data released last Thursday showed inflation has reached alarming rates in the US, climbing to a 40-year high. The dollar exhibited high volatility after the release of the CPI data, with the dollar index rising to 95.97 and then plummeting to 95.21. Increased expectations that the Federal Reserve might tighten its monetary policy to tackle inflation boosted the USD. The dollar retreated later against other currencies, especially against the Euro and the pound, amidst expectations that other major central banks would similarly raise their interest rates. US yields spiked after the release of CPI data, with the benchmark 10-year Treasury yield reaching 2% for the first time since 2019. The dollar recovered on Friday and the dollar index climbed above 96.0, fuelled by expectations of an aggressively hawkish monetary policy. 

The Federal Reserve has so far adopted a more cautious approach to changing its monetary policy than anticipated. A more hawkish pivot in its policy was expected in the face of soaring inflation rates in the US. The recent Omicron wave through the US though has set the US economy back, costing jobs and slowing down many business sectors. In the coming months, the Fed will need to assess financial, inflation, and employment conditions, to move towards a more hawkish fiscal policy in a way that will be sustainable for the US economy. Financial data seem to be sending mixed signals to the Fed, as the preliminary February consumer sentiment released on Friday, fell to its lowest level since 2011. The US Central Bank will have to balance indicators of economic strength against rising inflation rates to determine its fiscal policy.

Several inflation and employment indicators for the dollar will be released throughout the week and may cause volatility for the dollar, since economic, inflation, and employment data may influence the Fed’s future monetary policy. Especially important inflation indicators are the PPI data, which is scheduled to be released on February 15th. All eyes are going to be on the Federal Reserve this coming week, as the US Central Bank is scheduled to release several reports that may provide insight into the Fed’s policy. On February 16th the FOMC Meeting Minutes of the Central Bank’s last policy meeting will be released, which will provide detailed information on the economic and financial conditions that influenced FOMC members’ vote. On February 17th and 18th, several FOMC members are due to deliver speeches, which may cause volatility for the dollar.

TRADE USD PAIRS

EUR 

The ECB is caught between a rock and a hard place, as soaring inflation rates in the Eurozone require aggressive tightening of the ECB’s monetary policy, while a new debt crisis is looming in the EU, with Italian and Greek bond yields rising to pre-pandemic heights.

Last week, the European Commission released its Economic Forecasts report, containing economic forecasts for EU member states over the next 2 years, which serve as the European Commission's basis for evaluating the economic performance and trends of EU member states. The EU predicts higher inflation rates in the Eurozone than previously anticipated, based on tensions in Eastern Europe and higher energy prices. Mounting inflationary pressures in the EU seem to be finally catching up with the ECB, which might be forced to tighten its monetary policy within the year.

The crisis between Russia and Ukraine also threatens to send inflation rates in the Eurozone even higher, as the EU relies on Russia for key commodities and especially energy-related commodities. EU trade sanctions against Russia would likely result in an energy crisis and further increase inflation rates in the EU.

ECB president Christine Lagarde discussed the issue in the European Parliament and stated that any move to tackle eurozone inflation would be “gradual”. Lagarde is known as a staunch supporter of a dovish monetary policy to boost the Eurozone economy after the pandemic. The ECB is caught between a rock and a hard place, as soaring inflation rates in the Eurozone require aggressive tightening of the ECB’s monetary policy. The ECB seems hesitant to shift towards a more hawkish policy though, as a new debt crisis is looming in the EU, with Italian and Greek bond yields rising to pre-pandemic heights. Bond yields in the Eurozone have been supported since the start of the pandemic by the ECB’s bond-buying program, but if the ECB cuts off the fiscal stimulus abruptly, several countries may face serious borrowing issues. 

EUR/USD rate was catapulted to 1.149 last Thursday, following the release of the US CPI data, testing the 1.148 level resistance. The currency pair dipped to 1.132 on Friday though, as expectations of a tighter ECB policy dimmed. If the currency pair goes up, it may encounter resistance at 1.148 again and further up at 1.169, while if it falls, support may be found around 1.275 and further down at 1.118. 

EURUSD 1hr chart

TRADE EUR PAIRS

GBP 

Expectations that the BOE might follow an even more aggressively hawkish policy to tackle rising inflation rates have been supporting the pound as inflation hits 10-year highs in the UK.

The sterling rose after the announcement of record inflation in the US ignited expectations that not only the Fed, but other major central banks would adopt more aggressive measures to combat inflation. There is wide speculation that the BOE will follow an even more aggressively hawkish policy to tackle rising inflation rates in the UK. Expectations of more frequent and sharp rate hikes have been boosting the pound as inflation hits 10-year highs. The Bank of England has already performed two back-to-back rate hikes, bringing its interest rate to 0.5%. The current inflation rate, however, is around 5.1%, more than double the BOE’s goal of 2%, and is expected to rise even higher, increasing the probability of additional rate hikes in the coming months. 

The sterling exhibited high volatility last week, with the GBP/USD rate climbing to 1.364 following the release of the US CPI data and then dropping back to the 1.351 level. If the GBP/USD rate goes up again, there may be resistance at the 1.375 level, while if it declines, support may be found at 1.332 and further down at 1.317. 

The uncertain political climate in the UK is putting pressure on the pound, as British PM Boris Johnson is facing opposition even from within his party and is pressured to resign. Following the release of the ‘party gate’ report last week, which pointed to ‘failures in leadership and overall dysfunction in Downing Street, the British PM vowed to address the issues within his administration. He performed a mini re-shuffle on Tuesday, but his actions came into scrutiny once more, as he promoted mainly MPs who have demonstrated their loyalty to him these past few weeks. 

Several financial indicators are due to be released this week for the GBP and may cause some volatility for the currency, as the BOE is pondering its next move in the fight against inflation. The most important indicators due this week are the Annual CPI and Core CPI data on February 16th, which are indicators of inflation and may influence the sterling.

GBPUSD 1hr chart

TRADE GBP PAIRS

JPY 

Low inflation rates in Japan and a weakening economy are steering the BOJ towards an ultra-accommodating monetary policy, creating a gap in interest rates with other major Central Banks and pushing the Yen down.

USD/JPY rose last week breaking through its 115.6 resistance after US CPI data increased expectations of a more aggressive tightening of the Fed’s monetary policy to combat record inflation rates. Low inflation rates in Japan and a weakening economy are steering the BOJ towards maintaining its ultra-accommodating monetary policy. The BOJ’s dovish monetary policy is creating a gap in interest rates with other major Central Banks, especially with the Fed and the BOE. Inflation data in the US, as well as in the UK and the EU have reached record highs, fuelling expectations that most major Central Banks will pivot towards a more hawkish policy to tackle soaring inflation rates. As a result, the Yen compares less favorably as an asset and becomes less appealing to investors, pushing its value down. The Yen remains at its lowest level in decades, creating problems for households, as imported goods, especially food and energy, are becoming increasingly expensive for Japanese households.  

The Yen fell to a three-month low following the release of the CPI data, with USD/JPY climbing above its 115.6 resistance. The Yen recovered on Friday, with the USD/JPY falling back to the 115 level. If the USD/JPY pair climbs further, it may find resistance at the 116 level, while if it declines, support might be found at 114.8 and further down at 113.48.

USDJPY 1hr chart

TRADE JPY PAIRS

Gold

Last week, US Monthly CPI and Core CPI data showed inflation has reached alarming rates in the US, climbing to a 40-year high. US yields spiked after the release of CPI data, with the benchmark 10-year Treasury yield reaching 2% for the first time since 2019. Gold exhibited heavy volatility, as the announcement of the CPI data sent mixed signals to the markets. On one hand, soaring inflation rates boost the price of gold, which is often used as an inflation hedge. On the other, rising treasury yields tend to push the price of gold down, since they are interest-bearing assets and are seen as a more appealing investment. 

On Friday, gold prices spiked upwards, as there were indications that an escalation of the Russia-Ukraine crisis might be imminent. The US State Department has warned that an attack against Ukraine might take place at any time, while many countries, including the US, the UK, and Israel are warning citizens to leave Ukraine and are evacuating personnel in their embassies. An escalation of the Russia-Ukraine crisis might boost the price of gold, as metal is considered a safe-haven asset, and its price rises in times of war. Geopolitical tensions might also drive the price of other commodities up, especially energy-related assets, further increasing inflation. The increase in oil prices in recent months has also been driving inflation up, benefitting gold prices. Diplomatic talks continue though, and if the situation is resolved peacefully, the gold price might drop. Geopolitical tensions in the region might also serve to drive the price of other commodities up, especially energy-related assets, contributing to rising inflation rates. 

Gold price climbed above the $1,853 per ounce resistance level on Friday and closed at $1,859 per ounce. If the price of gold continues rising, it may find further resistance at $1,877 per ounce, while if it decreases, support may be found at 1,782 per ounce. 

XAUUSD 1hr chart TRADE GOLD

Oil

Oil prices jumped to an eight-year high amid growing fears of a Russian invasion of Ukraine, with WTI climbing above $94.7 per barrel on Friday.

Oil prices jumped to an eight-year high last week, amid growing fears of a Russian invasion of Ukraine. The US has warned of an imminent attack against Ukraine and oil prices soared after the announcement, with WTI climbing above $94.7 per barrel on Friday. Diplomatic talks and threats of sanctions against Russia seem to have little effect so far and the likelihood of war breaking out as early as this week is increasing, sending the price of oil closer to a three-digit level. 

The price of oil has been increasing over the past months, as existing international inventories are at their lowest levels in seven years and supply is trying to catch up with rising demand. US Crude Oil Inventories released last week showed a decrease of nearly 5 million barrels. Even though OPEC has agreed to increase its output by 400,000 barrels per day, some of its member countries struggle to meet their output goal, raising doubts on whether the organization will be able to deliver the amount promised. According to a recent OPEC report, the organization has fallen further behind on its quota in January 2022, increasing its output by only 64,000 BPD and OPEC was 800,000 BPD behind its promised output for January. In addition, the OPEC report stated that global oil demand within the year is likely to continue increasing, reaching pre-pandemic levels. 

The US on the other hand is showing determination to boost supply and bring oil prices down. The US government is even considering lifting sanctions against Iran, which would boost the oil supply considerably. In addition, the latest monthly report from the Energy Information Administration, raised its outlook for U.S. crude production to an average of 11.97 million BPD this year and predicted Oil production in the US could reach record highs within 2023. The EU is also attempting to build a partnership for energy security with the US and other Natural Gas suppliers, to mitigate a potential energy crisis and shield EU consumers and households from energy shortages.

WTI closed at $94 per barrel on Friday, having climbed above $94.7 per barrel, its highest level since September 2014, amidst mounting geopolitical tensions. WTI is trading in an uptrend, but in case the uptrend is reversed, support may be found at the $82.4 per barrel level and further down around $78.8 per barrel and $77.8 per barrel.

WTI 1hr chart

TRADE WTI

Bitcoin and major cryptocurrencies

Most major cryptocurrencies dipped at the end of last week, as mounting geopolitical tensions drove risk assets down, with Bitcoin losing this week’s gains. 

Crypto bulls seemed to be winning at the start of last week, with the price of most major cryptos rising. Cryptocurrencies dipped at the end of last week though, as mounting geopolitical tensions drove risk assets down. A Russian attack against Ukraine seems imminent, putting pressure on crypto markets.

Cryptos have been under pressure since the beginning of the year, with Bitcoin losing over 20% of its value, hit by a bout of risk aversion. The bulls have attempted several times to reverse the downtrend, with little success so far. The recent volatility in stock markets, and especially the fall of tech stocks has been affecting crypto markets, which seem to have developed a strong dependency on stock market trends. Expectations that major Central Banks will raise their benchmark interest rates and move towards a more hawkish policy have also been driving the price of cryptos down.

Early last week, Bitcoin climbed above $45,000 for the first time in weeks, breaking through the $44,300 level resistance. BTC's price fell heavily on Friday though and continued retreating during the weekend losing this week’s gains, and is currently trading near $42,200. If its price declines, it may find support at $40,000 and further down at $36,000 and $33,000, while if the price of Bitcoin goes up, it may find resistance near $44,300. 

Ethereum broke through the $3,000 level resistance earlier last week and climbed above $3,200 but its price fell on Friday and is currently trading around the $2,800 level. If its price goes down, it may find support at $2,640 and further support at around $2,150. In case its price goes up, it may find resistance at $3,000 and higher up around $3,400. 

BTC/USD 1h Chart

BTCUSD 1hr chart

 

ETH/USD 1h Chart

ETHUSD 1hr chart

The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

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