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Weekly Market Outlook For May 23rd To May 29th

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Written by:
Myrsini Giannouli

23 May 2022
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Forex

Important calendar events

  • May 23, GBP: BOE Governor Andrew Bailey's Speech
  • May 24, JPY: Flash Manufacturing PMI, Annual BOJ Core CPI
  • May 24, EUR: French, German, and Eurozone Flash Services PMI, French, German, and Eurozone Flash Manufacturing PMI, ECOFIN Meetings
  • May 24, GBP: Flash Services PMI, Flash Manufacturing PMI, Public Sector Net Borrowing
  • May 24, USD: Flash Services PMI, Flash Manufacturing PMI, New Home Sales
  • May 25, USD: Core Durable Goods Orders, Durable Goods Orders, FOMC Meeting Minutes
  • May 26, USD: Preliminary GDP, Prelim GDP Price Index, Unemployment Claims, Pending Home Sales
  • May 27, USD: FOMC Member Bullard Speech, Core PCE Price Index, Goods Trade Balance, Revised UoM Consumer Sentiment

USD

The USD, which has been trading into overbought territory, faced its worst week since January, weakened by unstable market sentiment and a lack of support from Treasury yields.

The dollar retreated from its 20-year high last week facing its worst week since January, with the dollar index falling from 104.6 to 102.7, before closing at the 103 level on Friday. 

Market sentiment was unstable last week, while the dollar’s high price tempted traders to close long positions, realizing their profits. The USD, which has been trading into overbought territory, softened last week, also weakened by the lack of support from Treasury yields. Bond yields declined, with the only exception being the 1-year note, while the US 10-year treasury note yielded below 2.8% at the end of the week.

The dollar has been boosted by hawkish Fed policy and increased risk-aversion sentiment for the past couple of months. Continued Russian hostilities against Ukraine have increased risk-aversion sentiment, providing support for the safe-haven 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. 

Stock markets also exhibited high volatility last week. Retail stocks from Target and Walmart declined heavily, while technology stocks, such as Amazon, Tesla, and Apple were also down. 

US Financial indicators released last week were mixed for the state of the US economy, raising fears of a US recession. Unemployment rates went up, driving the dollar further down. Core Retail Sales and Retail Sales data though, showed that consumer spending is increasing despite the high inflation rates, indicating that economic activity is not stalling in the US as feared. 

Fed rhetoric last week remained hawkish, with Fed Chair Jerome Powell stating that the Fed would keep raising interest rates until inflation comes down. In addition, Fed member John Williams stated on Monday that tackling high inflation rates should be the Fed’s top priority. Even though Fed rhetoric continues to be hawkish, the USD is on the decline as it has been overbought in the past few months and future Fed rate hikes have been largely priced in.

In its latest monetary policy meeting, the US Federal Reserve raised its benchmark interest rate by 50 base points to 1%. This is the first time that the Fed has performed such a steep rate hike since 2000. The Fed has also announced that it would move towards a policy of gradual quantitative tightening. The Fed’s balance sheet has risen to approximately 9 trillion USD during the pandemic and the US Central Bank has decided to start trimming its balance sheet.

Several US financial indicators are scheduled to be released this week and may affect the dollar. Chief among them, are preliminary GDP, as well as PMI and PCE data. Flash Manufacturing and Services PMI are indicators of economic health, while the PCE Price index is a key indicator of inflation. FOMC members’ speeches are also likely to have an impact on the dollar, as well as the release of the FOMC Meeting Minutes on the 25th.

TRADE USD PAIRS

EUR 

Clear indications from the ECB that it would move towards a more hawkish policy have boosted the Euro, with the market pricing in up to 100 base points rate hikes throughout the year.

The Euro gained strength against the dollar last week, with the EUR/USD closing near the 1.056 level on Friday. If the currency pair goes up, it may encounter resistance at 1.064 and further up 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.

Increased risk-aversion sentiment and hawkish Fed policy have been boosting the dollar these past few weeks at the expense of other currencies, with the Euro suffering heavy losses. Last week, however, the dollar slipped and the Euro has taken advantage of its weakness.

Clear indications from the ECB that it would move towards a more hawkish policy this year, have also boosted the Euro. Markets are now pricing in up to 100 base points rate hikes throughout the year. Many of the ECB’s members are in favor of taking aggressive steps toward monetary policy normalization. ECB President Christine Lagarde has been in favor of a more dovish stance but has recently shown signs of wavering, stating that the ECB will likely end its bond-buying program in the third quarter of 2022 and a rate hike might follow just a few weeks later. 

ECB members are starting to agree on a more hawkish policy starting in the third quarter of the year and the consensus between them seems to be that the ECB will perform its first rate hike in decades at its next policy meeting in July. The US Federal Reserve has raised its benchmark interest rate by 50 base points to 1%, highlighting the difference in monetary policy between the EU and the US and has been driving the Euro down. 

Last week, ECB Member Francois Villeroy stated that he is in favor of a decisive June meeting and that an active summer should be expected in terms of the ECB’s monetary policy, further raising expectations of a shift towards a more hawkish policy.

Annual Final CPI and Core CPI data released last week for the Eurozone put pressure on the currency. The CPI data are key indicators of consumer inflation and can have a strong impact on the Euro as they can influence the ECB’s decision to raise its interest rates. Headline inflation in the Eurozone was slightly lower than expected, reaching 7.4% in April, while core CPI was at 3.5% and fell within market expectations. Investors were expecting higher EU inflation rates for April, as increasing energy costs are augmenting inflationary pressures. Markets reacted to the release of the inflation indicators with a fall in the price of the Euro, which had already retreated ahead of the CPI data. Higher than expected Flash GDP data, however, raised hopes that the Eurozone economy is moving in a positive direction, boosting the Euro. 

This week, Flash Manufacturing and Services PMI data are scheduled to be released on the 24th for some of the EU’s leading economies and the Eurozone as a whole. PMI data are indicators of economic health and may have a strong impact on the Euro. Eurogroup and ECOFIN meetings will also take place this week and their outcome may affect the currency.

EURUSD 1hr chart

TRADE EUR PAIRS

GBP

Headline inflation in the UK reached a new 40-year high of 9% in April, highlighting the need for legislative action to tame soaring inflation rates.

The sterling climbed last week, taking advantage of the weakening dollar, with the GBP/USD rate closing near the 1.25 level on Friday. If the GBP/USD rate goes up, it may encounter resistance at the 1.263 level and further up near the 1.308 level, while if it declines, support may be found near the two-year low at 1.206. 

The sterling rallied last week, supported by a weakening dollar and positive UK economic data. The dollar was pushed down from its 20-year highs due to a combination of unstable market sentiment and probable profit-taking on long positions. Other assets have profited from the dollar’s weakness, although the sterling has been under pressure from renewed risk-aversion sentiment.

Several important economic indicators were released last week for the sterling, including Annual CPI and Core CPI, Monthly PPI Input and Output, Annual RPI, and Annual HPI. CPI data are key indicators of consumer inflation and showed headline inflation rose to 9% in April, while core inflation hit 6.2%. Headline inflation reached a new 40-year high, highlighting the need for legislative action to tame soaring inflation rates. 

Markets typically react to news of high inflation in favor of the currency, as high inflation rates may increase the probability of the BOE moving towards a more hawkish direction. Current economic conditions however are fragile, and soaring inflation rates add more pressure to struggling British households, which could lead the BOE to move towards alleviating the cost of living in the UK. After the release of the CPI data, the GBP was crushed.

The UK jobs sector seems to be recovering from the effects of the pandemic, as employment data released last week indicate that the unemployment rate is going down, hitting its lowest level in nearly 50 years. Retail sales data were also positive for the economic health of the UK and were much higher than expected, providing support for the currency.

UK Monetary Policy Report Hearings also took place last week, at which the BOE Governor and several MPC members testified on inflation and the economic outlook before the Parliament's Treasury Committee. BOE Governor Andrew Bailey admitted that the Bank is facing its biggest inflationary test in 25 years and defended the BOE’s policy regarding soaring inflation rates in the UK.

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 contrast, the increasingly hawkish Fed policy is boosting the dollar against the pound.

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%. The BOE stressed once more the dangers of recession, as the economic contraction is battling with inflation rates that are predicted to surge to 40-year highs of 10% in the coming months. 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.

Brexit issues have come once again into the foreground after elections to the Northern Ireland Assembly. Last week, the EU rejected the latest UK proposal regarding the Northern Ireland protocol and the situation could trigger Article 16 of the Brexit deal, adding pressure to the pound. 

UK Flash Manufacturing and Services PMI data are scheduled to be released on the 24th and may impact the sterling, as they are strong indicators of economic health.

GBPUSD 1hr chart

TRADE GBP PAIRS

JPY

The Yen has been oversold over the past few months and has begun gaining some traction, attracting market attention, while the overbought dollar is on the decline. 

The Yen climbed last week, benefitting from the weakening dollar, with the USD/JPY rate falling to the 127.9 level. If USD/JPY rises again, it may find resistance at 131.35 and further up at the 2002 high of 135.3. If the USD/JPY declines, support might be found near the 127 level and further down near the 121.3 level. 

The Yen has been oversold over the past few months and has begun gaining some traction, attracting market attention as a safer investment. The dollar is also a safe-haven currency but has been trading in overbought territory and has been slipping this week. Declining US bond yields also contributed to the dollar’s weakness. 

Annual Preliminary GDP Price Index and Quarterly Preliminary GDP data released last week for Japan exceeded expectations, further boosting the currency. GDP data remained negative but were better than expected. The economy in Japan continues to contract, but at a slower rate than expected, indicating that the economy is moving in a more positive direction. Annual PPI in Japan rose to 10% for April and was higher than expected, showing that inflation rates are rising in Japan, mostly due to the rising costs of imported energy.

The Yen has been retreating for months, with market interest in the currency slowing down, despite global economic risks. The currency, which has been oversold, regained some of its lost ground at the end of last week, but the outlook for the USD/JPY pair remains bullish.

Bond yields have fallen across Japan’s treasury curve due to low demand. Japan’s 10-year government bond yield auction maintained the 0.25% interest rate as 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 nearly 3%, 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.

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. 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.

This week, Flash Manufacturing PMI and Annual BOJ Core CPI data are scheduled to be released on the 24th and may provide insight into the state of the economy and inflation rates in Japan.

USDJPY 1hr chart

TRADE JPY PAIRS

Gold 

Stalling global economic growth and concerns about the state of the economy in China after the extensive Covid lockdowns give rise to fears of recession, boosting the price of gold. 

Gold prices climbed last week reaching $1,846 per ounce on Friday, as risk aversion sentiment grew, while the dollar weakened. If the price of gold decreases, further support may be found at $1,782 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. 

The risk-aversion sentiment was renewed last week, driving stock markets and high-risk assets down. Retail stocks from Target and Walmart declined heavily, while technology stocks, such as Amazon, Tesla, and Apple were also down. Gold prices benefited from the market sell-off, as traders moved towards safe-haven assets. Even though stock markets rallied by the end of the week, gold prices remained high. 

Bond yields also declined across the US Treasury curve, with the only exception being the 1-year note, while the US 10-year treasury note closed near a 2.8% yield on Friday. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold. The USD, which has been moving into overbought territory, softened this week, weakened by the lack of support from Treasury yields. The decline of the USD and US bond yields makes competing assets, such as gold, more appealing as an investment.

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 once again on the rise. Stalling global economic growth also gives rise to fears of recession, boosting the price of gold. Concerns about the state of the economy in China, after the extensive Covid lockdowns in Shanghai and other cities, also support the gold price.

XAUUSD 1hr chart

TRADE GOLD

Oil 

The EU has announced plans for ending its dependency on Russian oil imports within 5 years, although EU members have made little headway in implementing a more immediate ban on Russian oil imports. 

Oil prices were volatile last week, with WTI prices dropping below the $106.4 per barrel support level, before climbing back up above $112 per barrel at the end of the week. If the WTI price drops again, support can be found at the $94.5 per barrel level and further down at the $90 per barrel level, while further resistance can be found near $118.3 per barrel. 

The crisis between Russia and Ukraine has been intensifying concerns of disruptions in oil distribution, supporting oil prices. The US has already banned all oil and gas imports from Russia, with as many as 3 million barrels per day of Russian crude oil potentially removed from the market as a result of sanctions and of boycotting Russian oil. US officials have recently stated, however, that the Biden administration is preparing new sanctions on Russian oil imports that aim to cripple the Russian economy. Reports of a possible new US ban on Russian oil last week pushed oil prices up.

Last week, the EU announced plans for ending its dependency on Russian oil imports within 5 years, boosting oil prices. EU members though have made little headway in deciding on a more immediate ban on Russian oil imports. The EU has drafted a new package of Russian sanctions, including a ban on Russian oil crude imports. Even though the ban, if implemented, will likely throw the Eurozone into an energy crisis, it will likely not take effect for some time. The EU is hesitant to cut off Russian oil imports abruptly, as most EU member states are in favor of gradually weaning off Russian oil imports. If approved, the EU ban will likely result in phasing out Russian oil imports over the next six months to a year. EU’s Russian oil sanctions have stalled though, as some EU member states, such as Hungary, oppose the ban and are vetoing the plan. 

Stalling global economic growth and lockdowns in China have reduced oil demand. China is the largest importer of crude oil and Covid lockdowns have dampened oil demand, pushing prices down. As Covid cases are starting to fall in China, however, fears of prolonged lockdown ease, driving oil prices back up. 

News of reduced Covid cases in Shanghai has fuelled optimism that the large financial center will soon reopen. Health authorities in China have signalled that lockdown restrictions in Shanghai will start easing from May 21st and will end on June 1st. Even though many other cities in China are under strict lockdown, news of the end of the lockdown in Shanghai brought oil prices up. The end of pandemic restrictions in China would increase oil demand once more, driving oil prices further up.

WTI 1hr chart

TRADE WTI

Bitcoin and major Cryptocurrencies

Bulls tried to push cryptocurrency prices higher but failed to overcome strong crypto market bearish tendencies, triggered by stock market uncertainty.

Cryptocurrencies struggled to rebound last week, with Bitcoin and Ethereum testing key psychological support levels. Bulls tried to push cryptocurrency prices higher but failed to overcome strong crypto market bearish tendencies, triggered by stock market uncertainty.

Technology stocks, such as Amazon, Tesla, and Apple have been weakening over the past week, dragging cryptocurrencies down. A sell-off of tech stocks was triggered, pushing cryptocurrency prices down. 

The risk-aversion sentiment was renewed last week, driving stock markets and high-risk assets down, with retail stocks from Target and Walmart declining heavily this week. Stock markets rallied later in the day, however, led by tech stocks, driving cryptocurrency prices back up. Most major cryptocurrencies were affected by stock market volatility during the week, as crypto markets have been following the overall trends of stock markets and especially of tech stocks. 

A strong risk-off sentiment has prevailed over the past few months, driving investors to safer assets and dampening the appeal of cryptocurrencies. In the past six months, the cryptocurrency market has lost almost $2 trillion. 

Bitcoin and Ethereum prices are currently testing their key support levels of $30,000 and $2,000 respectively. If Bitcoin price declines, support may be found near $26,700 and further down at $19,400, while resistance may be found at $40,000 and further up near $48,200. If the Ethereum price declines, further support may be found near $1,700, while resistance may be encountered near $3,174.

In the past couple of weeks, the Fed raised its benchmark interest rate by 50 base points, its highest rate hike in 22 years and the BOE also increased its interest rate by 25 bp. 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 dollar reached a 20-year high last week, but softened this week, further boosting the appeal of high-risk assets such as cryptocurrencies. 

Stablecoin TerraUSD collapsed, losing its dollar peg and trading as low as 5 cents. Luna has also crashed, losing 99% of its value. Stablecoin Tether also lost its $1 peg briefly after suffering $3 billion in withdrawals, falling to 0.95 before regaining its dollar peg. Tether is the largest of the world’s so-called stable coins and its fall has put to question the digital assets’ stability. The downfall of these stablecoins has created fears that sell-off might spread to other cryptocurrencies, leading to market contagion.

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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