Important calendar events
The dollar soared last week, propelled upwards by positive US economic activity data. The dollar index climbed above 104.5 but retreated towards the end of the week, closing at 103.8 on Friday. US Treasury yields also moved upwards on renewed Fed rate hike expectations, with the US 10-year bond touching 3.9%.
Last week US inflation data had a significant impact on dollar price. CPI data on Tuesday showed that price pressures in the US remain high and are not easing at the pace anticipated. US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. This represents a marginal cooling from December’s 6.5% print. Core CPI, which excludes food and energy, was at 5.6% against predictions of a 5.5% print.
Producer price (PPI) data on Thursday also surprised markets to the upside. The monthly PPI for January rose by 0.7% against expectations of a 0.4% raise and a 0.2% drop in December. Core PPI, which excludes food and energy, also climbed by 0.5% in January versus the 0.3% expected.
January’s CPI and PPI inflation prints illustrate the danger of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot. The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%.
Rate hikes have become less aggressive and may continue at their current pace, but the Fed might raise interest rates for longer than previously expected. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%.
Fedspeak over the past week has been hawkish, emphasizing that further rate rises should be expected and that interest rates will need to remain high for a long period. On Tuesday, Fed’s Williams emphasized that rates still have higher to go and they will have to be kept high for some time. Fed's Bowman stated on Monday that the UC central bank aims to continue raising interest rates to bring inflation down below 2%.
Fed Chair Jerome Powell has stated that the disinflation process has begun but warned that it still has a long way to go. The Fed’s stance appears to be cautious, reinforcing the notion that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy.
US Retail Sales data last week exceeded expectations, rising by 3.0% in January versus the 1.9% predicted. Core Retail Sales in January, which exclude automobiles, rose by 2.3%, against projections of a 0.9% growth.
The US economy is expanding at a higher rate than anticipated, as US GDP for Q4 of 2022 grew by 2.9% against expectations of a 2.6% growth. The US is likely headed for an economic ‘soft landing’ and recession concerns ease.
This week, Flash Manufacturing and Services PMI data on the 21st may cause volatility in dollar prices. FOMC Meeting Minutes are scheduled to be released on the 22nd and may provide additional information on the Fed’s future policy direction. Preliminary Quarterly GDP on the 23rd may also affect dollar price and also the Core PCE Price Index on the 24th. This is the Fed’s primary inflation gauge and may have a considerable impact on the dollar in light of last week’s inflation data.
The Euro was volatile last week, weighed down by pessimistic EU economic data mid-week but rallying towards the end of the week. EUR/USD was mostly driven by the dollar’s movement, fluctuating between 1.080 and 1.061 and closing near 1.069 on Friday. If the currency pair goes up, it may encounter resistance near 1.080. If the EUR/USD pair declines, it may find support at 1.065.
The European Commission released EU Economic Forecasts for the next two years last week. The EU economic outlook appears to be improving, with an upgraded growth forecast for 2023 and downgraded inflation expectations. The EC’s report was more optimistic than expected, concluding that the EU area would narrowly avoid entering a recession. The EC lifted their growth outlook for 2023 to 0.9%, indicating that economic recovery in the EU is starting and the economy is slowly expanding. Inflation expectations were also downgraded, with headline inflation now expected to fall to 5.6% in 2023. Flash EU GDP data for the final quarter of 2022 fell in line with expectations last week, confirming the EC’s forecast. Eurozone economy expanded by 0.1%, against the growth of 0.3% in Q3 of 2022.
ECB rhetoric following the release of the report was also optimistic, with members Centeno and de Guindos highlighting the importance of declining EU inflation. ECB members also emphasized that rate hikes beyond March will be data-dependent. The conclusions of the EC report were ambiguous for the Euro. On one hand, improving economic conditions support the Euro, but on the other, cooling price pressures may induce the ECB to pause rate hikes after March.
The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.
EU inflation rates are decreasing, but they are still far from the ECB’s 2% goal. Final EU headline inflation dropped to 8.5% year-on-year in January from a 9.2% print in December, indicating that Eurozone inflation is cooling. The continued drop in inflation signals that the ECB’s efforts to tame inflation are bearing fruit. Price pressures in the Eurozone remain high though, and interest rates need to rise to combat inflation.
Several economic activity data are scheduled to be released this week for the Eurozone. Eurozone Flash Manufacturing and Services PMI on the 21st are important indicators of economic health. The final Annual CPI on the 23rd may also affect the Euro price.
GBP/USD reached 1.227 early last week, then dropped to 1.191, before closing near 1.204 on Friday. If the GBP/USD rate goes up, it may encounter resistance at 1.227, while support may be found near 1.196.
The Sterling plummeted last week after CPI data showed that UK headline inflation cooled at a higher pace than anticipated in January. British CPI fell to 10.1% year-on-year in January from 10.5% in December. Core CPI, which excludes food and energy, dropped to 5.8% on an annual basis from 6.3% in December.
After last week’s optimistic inflation print, market odds are leaning towards a 25-bp rate hike at the BOE's next monetary policy meeting in March. Cooling inflation rates remove some of the pressure on the BOE to continue its economic tightening. The BOE raised interest rates by 50 bp at its February meeting, bringing the official bank rate to 4.0%. Markets are currently pricing a 25-bp rate at the next BOE policy meeting. Several market participants though believe that the British central bank will pause rate hikes completely.
British labor data last week showed that unemployment rates remain steady. Unemployment rates remain low, but businesses cite economic pressures for not hiring more workers. Wages in the UK increased by 5.9% in October through December over the same month in the previous year, against estimates of a 6.4% rise. Wage growth in the UK remains slow, lagging behind inflation.
Recent GDP data showed that the British economy is slowing down. The British economy contracted by 0.5% in December, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.
The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.
This week, UK Flash Manufacturing and Services PMI on the 21st are important indicators of economic health and may affect the Sterling price.
The Yen extended losses last week, dropping to its lowest level in two months. USD/JPY soared as the dollar gained strength, climbing above 134.8 mid-week, before retreating a little and closing near 134.1 on Friday. If the USD/JPY pair declines, it may find support near 129.8. If the pair climbs, it may find resistance at 134.8.
The Yen was pushed down last week by expectations of the continued dovish policy after the announcement of the Japanese Government’s nomination for the post of BOJ Governor on Tuesday. Incumbent BOJ Governor Haruhiko Kuroda is a staunch supporter of an ultra-loose monetary policy and his term in office expires in April.
Japanese Prime Minister Fumio Kishida nominated former BOJ member Kazuo Ueda for the post of BOJ governor on Tuesday. Ueda is an academic economist and is also a firm supporter of the central bank’s ultra-loose monetary policy, warning repeatedly against prematurely unwinding Japan’s ultra-loose stance. A change in leadership with Ueda at the helm would probably make little difference in BOJ policy. Ueda will likely not be in a hurry to unwind the BOJ’s ultra-easy policy. Market reaction reflected this eventuality, and the Yen has been declining over the past few days.
Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%.
Preliminary GDP data for Tuesday's final quarter of 2022 showed minimal economic expansion by 0.2%, falling short of expectations of 0.5% growth. The preliminary GDP Price Index on an annual basis printed 1.1% for 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.
BOJ Core CPI rose to 3.1% year-on-year, exceeding expectations of a 2.9% print. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. National Core CPI for December was at 4.0%, rising above November’s 3.7% print. In addition, wages in Japan increased for the first time in nine months by 4.8% year-on-year in December. Increased price pressures and wages raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.
Gold prices dipped last week on increased Fed rate hike expectations, reaching $1,842 per ounce at the end of the week. If gold prices increase, resistance may be encountered near $1,890 per ounce, while if gold prices decline, support may be found near $1,825 per ounce. Gold prices have been following a downtrend this month, pushed down by the rising dollar and strengthening US treasury yields.
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 soared last week, propelled upwards by positive US economic activity data. The dollar index climbed above 104.5 but retreated towards the end of the week, closing at 103.8 on Friday. US Treasury yields also moved upwards on renewed Fed rate hike expectations, with the US 10-year bond touching 3.9%.
US CPI data last week showed that price pressures remain high and are not easing at the pace anticipated. US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. This represents a marginal cooling from December’s 6.5% print. PPI data also surprised markets to the upside last week. The monthly PPI for January rose by 0.7% against expectations of a 0.4% raise and a 0.2% drop in December.
January’s CPI and PPI inflation prints illustrate the danger of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot. The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%.
Rate hikes have become less aggressive and may continue at their current pace, but the Fed might raise interest rates for longer than previously expected. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%. 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.
Fedspeak over the past week has been hawkish, emphasizing that further rate rises should be expected and that interest rates will need to remain high for a long period. On Tuesday, Fed’s Williams emphasized that rates still have higher to go and they will have to be kept high for some time. Fed's Bowman stated on Monday that the UC central bank aims to continue raising interest rates to bring inflation down below 2%.
Fed Chair Jerome Powell has stated that the disinflation process has begun but warned that it still has a long way to go. The Fed’s stance appears to be cautiously optimistic, reinforcing the notion that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy.
This week, important US fundamentals are also expected to affect gold prices. FOMC Meeting Minutes on the 22nd may provide additional information on the Fed’s future policy direction. Core PCE Price Index on the 24th, which is the Fed’s primary inflation gauge may also have a considerable impact on gold prices.
Oil prices retreated last week, with WTI dropping to $76.3 per barrel on Friday. If the WTI price declines, it may encounter support near $72.4 per barrel, while resistance may be found near $82.3 per barrel.
Oil prices dropped last week on signs of increased supply. US crude oil inventories rose unexpectedly by 16.3M against a 1.5M growth prediction. The US Government announced on Monday the release of another 26 million barrels from its strategic stockpiles. The US strategic stockpiles are becoming depleted, threatening to drop to multi-decade lows, after the Biden administration sold a record 180 million barrels last year. This more recent release from the US reserves will help to ease supply concerns, driving fuel prices down.
On the other hand, the oil demand outlook is also increasing, boosting oil prices. OPEC+ upgraded its 2023 forecast based on expectations of China’s economic recovery. The organization released its updated projections for 2023, raising its demand forecast by 100,000 bpd. Most of the increased demand is expected to come from China, with an increase of 590,000bpd. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. The Chinese government has eased some of its strident Covid regulations, abandoning its zero-Covid policy. China has re-opened its borders after almost three years, fuelling hopes of economic recovery.
Last week, US inflation data showed that price pressures remain high and are not easing at the anticipated pace. US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected, illustrating the danger of inflation becoming entrenched, which may force the Fed to rethink its recent dovish pivot. The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%.
Recession concerns still run high and aggressive rate hikes stifle economic activity, limiting the oil demand outlook. As inflation starts to cool though, central banks are starting to lower the pace of rate hikes, which may raise future oil demand expectations.
A price cap on Russian oil exports was set on February 5th. G7 leaders set the price cap of Russian oil exports at $100 per barrel on diesel and other products that trade at a premium to crude and $45 per barrel for products that trade at a discount. Meanwhile, Russia announced plans to reduce oil production next month. Russia threatened to cut oil output by 500,000 barrels per day as a retaliation for the price cap on the country's oil exports.
Cryptocurrency prices soared last week as a bullish trend prevailed in crypto markets. Risk sentiment was renewed last week, driving cryptocurrency prices upwards. Bitcoin price climbed to a six-month high, rising by over 2% in 24 hours on Wednesday, testing the 25,000-level resistance.
Last week, US inflation data showed that price pressures remain high and are not easing at the anticipated pace. US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected, illustrating the danger of inflation becoming entrenched, which may force the Fed to rethink its recent dovish pivot.
The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%. Nevertheless, cryptocurrencies rallied as risk sentiment was renewed.
Prolonged rate hikes fuel global recession concerns, driving risk assets down. As inflation starts to cool though, central banks are starting to lower the pace of rate hikes, which may revive risk sentiment.
Bitcoin price surged last week, rising above the $24,000 level, testing the $25,000 level resistance during the weekend, but gradually falling below $24,500. If the BTC price declines, support can be found near $20,450, while resistance may be encountered near $25,000.
Ethereum price also rose last week, touching $1,720 but dropping to $1,680 during the weekend. If Ethereum's price declines, it may encounter support near $1,462, while if it increases, resistance may be encountered near $1,715.
BTC/USD 1h Chart
ETH/USD 1h Chart
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