Important calendar events
The dollar has been slipping for the past couple of weeks and the currency’s decline continued on Monday, with the dollar index retreating to 101.3. Monday was Memorial Day and a Bank Holiday for the US. Stock market sentiment was upbeat early on Monday, although high volatility was exhibited later in the day. Bond yields have pulled back in the past 2 weeks, with the US 10-year treasury note yielding approximately 2.7%.
The dollar has been retreating for the past couple of weeks, pushed down by a mix of negative US economic data and unstable market sentiment. The USD had been trading in overbought territory and its high price has tempted traders to close long positions, realizing their profits. Fed rhetoric has become more cautious, as inflation woes are balanced out by recession fears.
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.
On Friday, several US economic activity indicators were released and were overall mixed for the US economy. Consumer sentiment was below expectations, putting pressure on the dollar, but the Core PCE Price Index remained unchanged.
On Thursday, preliminary GDP data were lower than expected, indicating that the US economy is still struggling to recover from the effects of the pandemic. Unemployment Claims on the other hand were lower than expected, showing that the jobs sector is moving in a positive direction.
FOMC meeting minutes released on Wednesday were in line with market expectations, reaffirming the Fed’s commitment to tackling soaring inflation in the US. The FOMC meeting minutes indicated that FOMC members are prepared for a series of rate hikes of 50 base points each, confirming that the Fed intends to move with a gradual but steady pace towards monetary policy normalization.
Disappointing economic activity data on Tuesday had pushed the dollar down, with the dollar index plummeting to 101.7. US Flash Manufacturing and Services PMI data released on Tuesday were lower than expected, hitting a four-month low, showing signs that US economic health is not advancing as anticipated.
The dollar has been boosted by hawkish Fed policy for the past couple of months. 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.
This week, FOMC members' speeches are expected to affect the dollar, as the Fed now seems to be moving at a more conservative pace, halting the currency’s rally. Manufacturing and Services PMI data are scheduled to be released this week, which are important indicators of economic health. Employment data are also expected to affect the dollar.
The Euro has been gaining strength over the past couple of weeks, benefitting from the dollar’s weakness. The dollar, which had been moving in overbought territory, has been slipping for the past couple of weeks, as market risk appetite begins to recover. The EUR/USD rate climbed to the 1.080 level on Monday as the dollar slipped. If the currency pair goes up, it may encounter resistance 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.
The Euro has been regaining some of its lost ground against the dollar, as ECB and Fed policies seem to be converging gradually. The ECB has been hinting heavily at a July rate hike, while the Fed grows hesitant about moving forward with a more aggressive monetary policy.
Clear indications from the ECB that it would move towards a more hawkish policy this year, have boosted the Euro. Markets are now pricing in up to 105 base points rate hikes throughout the year. 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.
ECB President Christine Lagarde delivered a speech last week at the World Economic Forum in Davos, emphasizing the need for a rate hike in the ECB’s next monetary policy meeting in July, with other ECB members firmly supporting an increase in the EU Central Bank’s interest rates.
Inflation data last week showed that annual inflation in Germany hit a high of 7.9% in May, with monthly inflation rising by 0.9%, increasing expectations of an ECB rate hike in July. The Eurozone economy, however, is still trying to recover from the pandemic and recession fears are growing in the EU.
Last Wednesday, several financial indicators were released for Germany, which is the Eurozone’s leading economy, and were mostly negative for the state of the economy in Germany, driving the Euro down. The ECB Financial Stability Review was published on Wednesday, putting more pressure on the currency, as the report indicated that economic conditions in the EU have deteriorated, with rising Eurozone and slow post-Covid economic recovery.
Disappointing EU economic data held the Euro down on Tuesday, even as the dollar weakened. Flash Manufacturing and Services PMI data were released on Tuesday for France and Germany, which are among the EU’s leading economies, and for the Eurozone as a whole. PMI data are indicators of economic health and, overall, the data were mixed and mostly fell below expectations, showing that economic activity in the EU is not advancing as anticipated.
On Monday, economic data on German business morale were positive for the Eurozone’s leading economy, boosting the Euro. ECB President Christine Lagarde posted an uncharacteristically hawkish statement on Monday. Lagarde pointed to rate hikes in Q3 of this year, which would bring the ECB’s interest rate at least to zero and possibly to positive territory.
This week, CPI data are scheduled to be released on May 31st, which are leading indicators of consumer inflation. Manufacturing PMI data are scheduled to be released on June 1st and Services PMI on June 3rd, for some of the Eurozone’s leading economies. PMI data, are important indicators of economic health and may have a strong impact on the Euro.
The sterling traded sideways against the dollar on Monday, with the GBP/USD rate fluctuating around the 1.26 level, testing the 1.263 level resistance. If the GBP/USD rate goes up, it may encounter resistance near the 1.308 level, while if it declines, support may be found near the two-year low at 1.206.
The sterling rallied in the past couple of weeks, supported by a weakening dollar. The dollar has been 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 risk-aversion sentiment remains high, checking the sterling’s advance.
UK Flash Manufacturing and Services PMI data last week fell considerably below expectations, weakening the sterling. PMI data are strong indicators of economic health and revealed that economic activity in the UK is not recovering from the pandemic as anticipated.
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%.
Headline inflation in the UK 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. 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.
Last week, the Yen gained a little strength, benefitting from the dollar’s weakness. On Monday however, the Yen plummeted, with the USD/JPY pair climbing above 127.7. If USD/JPY rises, it may find resistance at 129.7 and further up at 131.35. If the USD/JPY declines, support might be found near the 127 level and further down at the 121.3 level.
The Yen has been oversold over the past few months and has begun gaining some traction in the past couple of weeks, 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. On Monday however, increased risk sentiment put pressure on both currencies.
BOJ Governor Haruhiko Kuroda delivered a speech on Wednesday at a conference hosted by the Bank of Japan in Tokyo. Kuroda stressed the challenges created by rising global inflation rates, although he showed no signs of considering a change in the BOJ’s ultra-easy monetary policy.
Flash Manufacturing PMI and Annual BOJ Core CPI data were released on Tuesday and were mixed for the state of the economy in Japan. PMI data were disappointing, showing that the Japanese economy is not recovering as expected. CPI data, on the other hand, exceeded expectations, indicating that inflation rates in Japan are rising, with the annual inflation headline predicted to reach 2% in May.
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.
Gold prices slipped last week, falling as low as $1,841 per ounce as market risk sentiment was renewed. Gold rallied on Monday though, as the dollar retreated. If the price of gold decreases, support may be found at $1,786 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 USD, which had been trading in overbought territory, has been slipping in the past couple of weeks, providing support for the price of gold.
On Monday, the dollar continued to decline, with the dollar index falling to the 101.3 level. The dollar has been the most appealing safe-haven asset to market investors for the past couple of months but has begun to lose its strength, which supports competing assets.
Market risk sentiment was renewed on Monday however, driving stock markets up and reducing the appeal of safe-haven assets, checking gold price’s rally. Increased risk aversion sentiment due to the war in Ukraine has boosted gold prices over the past few months. As however, the crisis drags on, and risk sentiment is slowly returning to markets, undermining gold price.
Bond yields have also pulled back in the past 2 weeks, with the US 10-year treasury note yielding approximately 2.7%. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold. As the dollar and US bond yields rise, competing assets, such as gold, become less 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.
Oil prices rallied last week and continued to rise on Monday, with WTI climbing above $118 per barrel for the first time in over two months. Currently, WTI is testing the $118.3 per barrel level resistance. 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 resistance can be found near $130.4 per barrel.
The oil demand outlook has increased, as the extended Covid lockdown in Shanghai is about to end. 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, oil prices are climbing back up. Lockdown restrictions in Shanghai will end on June 1st and the large commercial hub will resume its operations.
Global recession fears are rising, however, checking oil price rallies. The economy in China has taken a bit hit from the prolonged Covid lockdowns. Last week, IMF director Kristalina Georgieva warned that recession is possible, even for major economies.
Last week, the Biden administration stated that they do not rule out restricting US oil exports to combat tight supply, driving oil prices up. US officials have stated that the Biden administration is preparing new sanctions on Russian oil imports that aim to cripple the Russian economy. If implemented, such bans have the potential to drive oil prices further up.
Last week, the EU announced plans for ending its dependency on Russian oil imports within 5 years, boosting oil prices. In addition, EU leaders intend to reach an agreement this week on an embargo on Russian oil imports. Negotiations between EU members have been stalling, as many EU countries depend heavily on Russian oil imports. Some EU member states, such as Hungary, oppose the ban and are vetoing the plan.
In addition, Energy Information Administration data released last Wednesday showed that crude oil inventories fell by about 1 million barrels, further boosting oil prices.
This week, OPEC-JMMC Meetings are scheduled for June 2nd. OPEC+ is going to meet to set production quotas for July. High volatility in oil prices leading up to the meeting is expected, as well as after the announcement of the meeting outcome. It is reported that OPEC+ production fell short of its output goals last month, limiting supply and pushing prices up.
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.
On Monday however, major cryptocurrency prices rallied, as global stock markets moved higher. Crypto markets have been known to follow the overall trends of stock markets and especially of tech stocks. Renewed market risk sentiment boosted stock markets on Monday and supported cryptocurrency prices.
Bitcoin climbed above the $30,000 key level on Monday, trading near 31,500. If Bitcoin price declines, support may be found at $30,000 and further down near $26,700, while resistance may be found at $40,000 and further up near $48,200.
Ethereum climbed just above its $2,000 level support on Monday. If the Ethereum price declines, further support may be found near $1,700, while resistance may be encountered near $2.960 and higher up at $3,174.
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 Fed has raised its benchmark interest rate by 50 base points and the BOE also increased its interest rate by 25 bp. The ECB has also indicated that it will move towards a more hawkish policy, increasing market expectations that it will raise its interest rates in July.
In addition, 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.
BTC/USD 1h Chart
ETH/USD 1h Chart
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