Important calendar events
The dollar ended last week with heavy losses, with the dollar index sinking to 106.5 on Friday from 108 on Monday. US Bond yields also slipped last week, with the US 10-year treasury note yielding below 2.8% for the first time in almost two months.
Last week the dollar was pulled back from the previous week’s 20-year highs, as it had been trading in overbought territory.
The Euro rise at the end of the week, after the ECB’s unexpectedly high rate hike, pushed the dollar down. US Economic data released last week were mostly disappointing, contributing to the dollar’s decline.
Market participants are becoming more moderate in their expectations of a Fed interest raise this week. US economic activity seems to be slowing down, indicating that the US economy is still fragile and may not be able to withstand aggressive tightening. Signs that US inflation may be starting to ease also contribute to reducing Fed rate hike expectations.
US Flash Services PMI data on Friday fell to 47.0. compared to 52.7 last month. Flash Manufacturing PMI also fell to 52.3 from 52.7 last month. These key data indicate that US economic activity contracted this month, reducing expectations of a more hawkish fiscal policy.
Philly Fed Manufacturing Index released on Thursday fell far below expectations plummeting to -12.3 from -3.3 last month, indicating that conditions are worsening and the manufacturing sector is underperforming. US Unemployment claims rose on Thursday, showing that unemployment rates in the US are on the rise.
Contracting economic activity, declining consumer confidence, rising unemployment, and high inflation rates paint a grim picture of the economic outlook in the US, pushing the dollar down.
The Federal Reserve has so far prioritized bringing down inflation rates by sharply raising interest rates. Markets were pricing in an ultra-high rate hike of 75 to 100 bps for July in the past few weeks. Fed rhetoric has been more cautious, however, these past couple of weeks. Markets are now trimming rate hike bets following less hawkish Fed rhetoric, with odds in favor of a 75-bps rate hike or less at the next Fed policy meeting this week.
The much-anticipated Fed monetary policy meeting is scheduled for the 27th and its outcome is expected to considerably affect the dollar price. The Fed is faced with the difficult task of battling soaring inflation without the benefit of a strong economic background. The Fed is expected to raise its interest rate sufficiently to rein in inflation, without crippling the economy. On Wednesday, traders will be poised to react not only to the announcement of the Fed interest rate but also to the FOMC statement and press conference. These may provide hints into the Fed’s future policy direction and outlook.
Also coming up this week, are economic indicators that may affect the dollar. The CB Consumer Confidence index is scheduled to be released on the 26th, ahead of the Fed meeting. Other important economic data this week, include the Advance GDP on the 28th and the Core PCE Price Index on the 29th.
The Euro gained strength this week, supported by the weakening dollar and the ECB’s unexpectedly high-interest rate hike. Euro price spiked on Thursday following the ECB monetary policy meeting, with the EUR/USD rate climbing to 1.027. Euro price couldn’t sustain its upward momentum though, and suffered a correction later in the week, with EUR/USD closing at 1.021 on Friday. If the currency pair goes up, it may encounter resistance at 1.050 and further up at 1.061. If the EUR/USD withdraws, it may find support at the parity level of 1.000, and further down near the 20-year low of 0.985.
The EUR/USD pair briefly breached the parity level a couple of weeks ago for the first time in 20 years, as the dollar climbed to a 20-year high and the euro retreated. Last week though, the Euro was boosted by the ECB’s decision to raise interest rates by 50 base points. The announcement was unexpected, as a 25-bps rate hike was priced in by markets. Reports that a 50-bps rate hike was been considered, started surfacing a few days before the ECB meeting, but odds remained in favor of a 25-bps rate hike until the announcement.
Thursday’s rate hike was the ECB’s first interest rate rise since 2011, bringing the ECB rate from -0.50% to 0%. A Fed rate hike of 75 bps this month is priced in by markets, emphasizing the gap between ECB and Fed policies, and putting pressure on the Euro.
The ECB also announced details of its plan to deal with fragmentation in the Eurozone at Thursday’s meeting. The Transmission Protection Instrument (TPI), as the anti-fragmentation tool is called, aims to balance out economic differences caused by the wide range of lending rates across Eurozone states. This tool will be a new bond-purchasing program, designed to help member states with higher borrowing costs.
The new anti-fragmentation tool may come into play sooner than expected, as political turmoil mounts in Italy. Last week, the ruling coalition fell apart and Prime Minister Mario Draghi offered his resignation. Italian President Sergio Mattarella did not accept Draghi’s resignation at first but was forced to call for early elections after Draghi failed to bring the coalition back together. Italian bond yields jumped and the gap between German and Italian borrowing costs widened. So far, however, the EU seems unprepared to deal with the looming debt crisis in Italy.
Struggling Eurozone economies, rampant inflation, and a looming energy crisis in the EU create a toxic combination. Last week, Eurozone economic data were disappointing, indicating that the economic outlook of the EU remains poor.
Economic activity data released on Friday for some of the Eurozone’s leading economies showed that the EU economy is contracting. French and German Flash Manufacturing and Services PMI data decreased considerably compared to last month’s readings. Unsurprisingly, corresponding Eurozone data followed suit and were lower than expected, with Flash Manufacturing PMI dropping to 49.6 from 52.1 last month and Flash Services PMI falling to 50.6 from 53.0.
EU Current Account and consumer Confidence data released on Wednesday also fell below expectations, indicating that the economic outlook in the Eurozone is not improving. Eurozone inflation remained at record high levels in June, as CPI data released on Tuesday. Inflation in June remained at 8.6% on an annual basis, which was unchanged from last month’s data, driven primarily by rising food and energy costs.
Concerns of an imminent energy crisis in the Eurozone keep the Euro down, as Russia is limiting its natural gas exports to certain EU countries. Nord Stream 1, Germany’s biggest gas pipeline, was shut off for routine maintenance, which was delayed under various pretexts. Gas supply via this pipeline was finally resumed late last week, even though the pipeline runs at under 40% of its capacity. Moreover, Gazprom, the main shareholder company owning Nord Stream 1, has recently announced that it could not guarantee gas supplies to certain countries, due to ‘extraordinary’ circumstances, further exasperating the EU’s energy crisis.
This week, markets will have had time to adjust to last week’s ECB rate hike and we expect to see the Euro price becoming steadier. In addition, several economic activity indicators are scheduled to be released this week for the Eurozone. These are expected to have a significant impact on the Euro as they will provide information on the EU economic outlook and may influence the ECB’s future direction. Especially important are the GDP and CPI data scheduled to be released on the 29th, which may provide insight into the economic health and inflation in the Eurozone respectively.
The Sterling was volatile last week, with the GBP/USD rate fluctuating around the 1.198 level. If the GBP/USD rate goes up, it may encounter resistance near the 1.219 level, while if it declines, support may be found near 1.140. The Sterling benefitted from the dollar’s retreat last week, regaining some of its lost ground, but was still unable to gain upward momentum.
Political instability after British PM Boris Johnson’s resignation is keeping the Sterling down. As the matter of his succession will have to be decided soon, there is renewed political uncertainty adding pressure on the Sterling. The Tory Leadership race continues, with polls showing Foreign Secretary Liz Truss firmly in the lead against Rishi Sunak. In case Truss wins the party leadership, the Sterling may retreat further. Although Truss is known to hold a hawkish stance on issues such as tax cuts, Brexit, etc., she has also cited BOJ policy as a model for future BOE fiscal policy.
Slightly upbeat indicators of economic activity and high UK inflation data last week provided support for the Sterling amid a gloomy political climate. On Friday, Flash Services PMI data exceeded expectations, although both Manufacturing and Services PMI were lower than last month’s data, showing that activity in both these key sectors is slowing down. Retail sales data on Friday were also higher than expected and were improved compared to last month’s readings.
UK CPI data on Wednesday showed that inflation in June reached a 40-year high. UK CPI skyrocketed to 9.4% on an annual basis in June from 9.1% in May. Other indicators of inflation released on Wednesday also exceeded expectations, showing that inflation in the UK is still on the rise. Inflation data support growing expectations of a steep rate hike at the BOE’s next monetary policy meeting.
Economic data released on Tuesday for the UK were overall disappointing. Britain’s unemployment rate was unchanged from last month, holding at 3.8%, and unemployment claims show that the number of unemployed is decreasing in the UK. The Average Earnings Index however dropped to 6.2% from 6.8% last trimester, emphasizing the cost-of-living squeeze in the UK.
Bank of England Governor Andrew Bailey, however, delivered a speech on Tuesday, which was more hawkish than expected. Bailey stated that the Bank of England is considering the biggest increase in interest rates for almost 30 years to bring inflation down from a 40-year high. The next BOE monetary meeting is scheduled for August, and markets have been pricing in a modest 25 base points rate hike. Bailey, however, hinted that the BOE is open to a 50-bps rate hike in August.
Britain’s uncertain economic outlook limits the BOE’s ability to shift towards a more aggressively hawkish policy. Stagflation is a risk for the UK economy, as soaring inflation rates add more pressure to the BOE to continue increasing its interest rates. UK inflation has risen to 40-year highs in June touching 9.1% on an annual basis, driven primarily by the high cost of energy imports, putting pressure on UK households.
The BOE has so far been adopting a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. On the other hand, the Fed is moving at an aggressively hawkish pace, spurred by soaring US inflation rates. A Fed rate hike of at least 75 bps this month is priced in by markets, highlighting the divergence in monetary policy between the Fed and the BOE and putting pressure on the Sterling.
Several minor indicators of economic activity are scheduled to be released for the UK this week, which are not expected to affect the Sterling considerably. The pound is more likely to be driven this week by the outcome of the Fed meeting on the 27th and by the latest developments on the political front.
The Yen benefitted from the weakening dollar last week and even climbed following the BOJ policy meeting on Thursday. The USD/JPY pair fell sharply to the 136 level at the end of the week, after rising to the 139-level the week before. If the USD/JPY declines, support might be found near the 134.2 level and further down at 131.7. If the pair climbs it may find resistance near 139.4 and further up at the 1998 high of 147.7.
The BOJ policy meeting last week held a few surprises. The BOJ kept its main refinancing rate at -0.10%, maintaining its ultra-easy monetary policy. BOJ Governor Haruhiko Kuroda stated that he had no plan to raise interest rates. The BOJ also kept its 0.25% yield cap on 10-year Japanese government bonds. US 10-year bonds yield over a magnitude more than corresponding Japanese bonds, presenting a more lucrative option to investors.
Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The Fed is expected to raise its interest rates again considerably this week to tackle skyrocketing US inflation, with a 75 bps Fed rate hike being priced in by markets. Other major Central Banks are also tightening their monetary policy, with the ECB raising its interest rate unexpectedly by 50 bps last week. The difference in interest rates with other major Central Banks puts the Yen at a disadvantage, driving its price down.
The Yen has been so undervalued in the past few months though, falling to a 24-year low, that markets reacted favorably to the BOJ outcome and the Yen rose following the BOJ meeting. The BOJ also upgraded its inflation forecast to 2.3%, up from 1.9% in April, providing some support for the currency. Inflation in Japan remains above the BOJ’s 2% target, reaching 2.2% on an annual basis, according to National Core CPI data for Japan released on Friday.
The BOJ also trimmed this year’s growth forecast to 2.4% from 2.9%, highlighting Japan’s poor economic outlook, with wages showing their biggest decline in two years. The combination of a weak currency, low wages, and rising inflation is burdening Japanese households.
This week, Monetary Policy Meeting Minutes are due to be released on the 26th and are expected to provide insight into the BOJ’s policy direction and may cause some volatility in the Yen price. Several economic activities and inflation data are scheduled to be released on the 29th and may also affect the currency. These include Tokyo Core CPI, Unemployment Rate, BOJ Summary of Opinions, Prelim Industrial Production, Retail Sales, Consumer Confidence, and Housing Starts. Yen price this week though, is expected to be affected primarily by the outcome of the much-anticipated Fed meeting on the 27th.
Gold prices were volatile last week, slipping at the beginning of the week below the $1,700 per ounce key level, moving close to a yearly low. Gold rebounded at the end of the week though, closing near $1,727 per ounce on Friday. If gold prices decline, support may be found at $1,675 per ounce, while resistance may be found at around 1,813 per ounce and higher up at $1,870 per ounce.
Gold prices last week benefitted from the dollar’s decline. The dollar ended last week with heavy losses, with the dollar index sinking to 106.5 on Friday from 108 on Monday. US Bond yields also slipped last week, with the US 10-year treasury note yielding below 2.8% for the first time in almost two months. Real yields compete directly with gold, which is a non-interest-bearing asset, and their decline benefits gold prices.
Global recession fears have sparked a risk-aversion sentiment, boosting safe-haven assets in the past few weeks. Even though recession fears traditionally provide support for safe-haven assets, the gold price has been retreating, as interest rate assets become a comparatively more appealing choice. Last week, disappointing EU and US economic data rekindled recession fears. With the dollar weakened, investors turned once more towards the safe-haven gold, bolstering its price.
An increasing number of major Central Banks are moving towards a tighter fiscal policy. The Bank of Canada hiked its interest rate by 100 base points and the ECB unexpectedly raised interest rates by 50 bps last week, dampening the appeal of gold. The BOE is also moving in a more hawkish direction, reportedly considering a rate hike of up to 50 bps in August.
The primary driver of gold price this week is expected to be the much-anticipated Fed meeting on the 27th. A Fed rate hike of at least 75 bps had been priced in by markets the past few weeks, putting pressure on the gold price. Market participants are becoming more moderate in their expectations of a Fed interest raise this week though, giving gold prices a boost.
Oil prices edged lower last week, with WTI retreating below the $100 per barrel level, closing near $97.5 per barrel on Friday. At the start of this week, WTI is expected to test the $98 per barrel support. If the WTI price declines further, it may encounter support at $90 per barrel, while resistance can be found near the $105 per barrel level and higher up at $112 per barrel.
Heightened global recession fears have recently reduced the oil demand outlook, putting pressure on oil prices. Concerns that interest rate hikes could slow global economic growth reducing energy demand have pushed oil prices down. Stalling economic growth combined with fiscal tightening and soaring inflation gives rise to fears of recession, halting the ascend of oil prices.
An increasing number of major Central Banks are moving towards a tighter fiscal policy. The Bank of Canada hiked its interest rate by 100 base points and the ECB unexpectedly raised interest rates by 50 bps last week. The BOE is also moving in a more hawkish direction, reportedly considering a rate hike of up to 50 bps in August.
The Fed is expected to raise its interest rates again considerably this week to tackle skyrocketing US inflation. The outcome of the much-anticipated Fed meeting on the 27th is expected to affect oil prices, with the odds in favor of a 75 bps Fed rate hike.
Oil prices dropped on Friday after the EU announced it would modify sanctions against Russia. Under the new sanctions, Russian companies will be allowed to ship oil to third countries, mitigating the risks of a global energy crisis.
Energy pressures in Europe are providing support to oil prices, as Russia is limiting its natural gas exports to certain EU countries. Nord Stream 1, Germany’s biggest gas pipeline, was shut off for routine maintenance, which was delayed under various pretexts. Gas supply via this pipeline was finally resumed late last week, even though the pipeline runs at under 40% of its capacity. Moreover, Gazprom, the main shareholder company owning Nord Stream 1, has recently announced that it could not guarantee gas supplies to certain countries, due to ‘extraordinary’ circumstances, further exasperating the EU’s energy crisis.
US Crude Oil Inventories released last week were unexpectedly low though, decreasing by 0.4 million barrels from the previous week. Oil supplies remain tight, supporting oil prices, with the bans on Russian oil keeping oil prices high. In its latest meeting, OPEC+ maintained its output policy, raising its output by approximately 648,000 barrels a day. Many OPEC members continue to underperform though, raising doubts on whether the organization can maintain its output goal.
Uncertainty over China’s oil demand is causing fluctuations in oil prices. China is the largest importer of crude oil and Covid lockdowns have dampened oil demand, pushing prices down. Reports of massive Covid testing in China and renewed restrictions have reignited fears of extensive lockdowns, pushing oil prices down.
Cryptocurrency prices were volatile last week, overall extending gains as competing assets weakened. Stock markets were also volatile last week, affecting cryptocurrency prices, as crypto markets have been following stock market trends.
Cryptocurrency bulls are fighting to regain some of the lost ground, with many traders optimistic that the bear market may be finally over. The total cryptocurrency market capitalization has reclaimed the $1 trillion level, after remaining below this key level for approximately a month.
Global recession fears are promoting a risk-aversion sentiment pushing cryptocurrency prices down, however. An increasing number of major Central Banks are moving towards a tighter fiscal policy, fuelling concerns of a shrinking economic outlook. The Bank of Canada recently hiked its interest rate by 100 base points and the ECB unexpectedly raised interest rates by 50 bps last week. The BOE is also moving in a more hawkish direction, reportedly considering a rate hike of up to 50 bps in August.
The Fed is expected to raise its interest rates again considerably this week to tackle skyrocketing US inflation. The outcome of the much-anticipated Fed meeting on the 27th is expected to affect cryptocurrency prices, with the odds in favor of a 75 bps Fed rate hike.
Bitcoin price traded above the $23,000 resistance level on Wednesday, but retreated later in the week and is currently testing this resistance. If Bitcoin price declines, support may be found at the $19,200 level and further down at the psychological level of $15,000, while further resistance may be found near $31,500.
Ethereum continued its ascend during the week, climbing above the $1,600 level during the weekend. If Ethereum's price declines, it may encounter support at the $1000 level, representing its lowest price since January 2021, and further down at the psychological level of $500, while resistance may be encountered at $2.000.
Ethereum price skyrocketed last week, following an announcement from the Ethereum Foundation that the much-anticipated ‘merge’ was set to launch on September 19th. The Merge from the Proof-of-Work to the Proof-of-Stake method will be a significant network upgrade that is expected to lead to an increase in demand for Ethereum, boosting its price.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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