The Fed Kicks Off Rate Hikes Finally

The Wait Is Over

After much anticipation, the Federal Reserve announced a quarter-point interest rate hike on Wednesday in an effort to curb the rising inflation. This marks its first interest rate increase since 2018.

The central bank predicted six more rate hikes in 2022 and three more next year, beating the market forecast of three hikes per year. Dollar fell and gold steadied on the announcement.

Key Takeaways From FOMC

Fed policymakers voted 8-1 to raise the federal fund rate from 0.25% to between 0.25% and 0.5%. Fed Chair Jerome Powell said that the central bank could kick off reducing its nearly $9 trillion balance sheet at its next FOMC meeting in May. Stay tuned to the latest financial news.

The rising inflation continues to be the Fed’s main concern, and the Fed is not too optimistic about ending inflation any sooner. Notably, the consumer price index, a key inflation gauge, showed that food and energy costs hit a 40-year high in February. Considering this, Powell expected the US inflation only to cool down slightly this year. He projected a 4.1% inflation by the end of this year and 2.6% in 2023.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labour market to remain strong,” the Fed said in a statement.

Additionally, Fed cited the invasion of Ukraine by Russia as a potential hurdle to the US economy.

“The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity,” the Fed stated.

The only comforting news for the Fed is that the labour market in the country has generally improved, as there were more jobs and the unemployment rate slipped substantially.

Looking forward, the central bank said it will continue monitoring key statistics, including readings on public health, labour market conditions, inflation pressures and inflation expectations, and financial and international developments.

“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the Fed concluded.

Market Reaction

Fed’s speech was less hawkish as expected, weakening the US dollar. The dollar index retreated to 98.36. As new data showed that Australia’s employment has improved, AUD/USD gained 98 pips to 0.7294. Receive latest updates on the popular FX pairs

Spot gold dipped as much as 1.2% but later regained its ground and ended the day with a 0.4% increase to $1,925 an ounce.

For a look at all of today’s economic events, check out our economic calendar.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Oil Prices Cool Down As An OPEC Member Supports Output Hike

A Sign Of Relief

Oil prices have been skyrocketing since the war in Ukraine. When the Biden administration imposed a ban on Russian oil as part of the US sanctions on Russia for the war, investors have been anxious that oil prices could go up even higher.

On Wednesday, a statement made by an OPEC member spurred the oil prices to cool down a bit. WTI crude oil plummeted more than 12% to settle at around $109 per barrel. Meanwhile, Brent oil prices dropped 13% to $111, the biggest day drop since April 2020. Check the latest oil price

The UAE Supports Oil Supply Boost

The United Arab Emirates made a statement on Thursday indicating that it supports increasing oil supply and will convince OPEC to boost its supply. Read the latest financial news

“We favour production increases and will be encouraging OPEC to consider higher production levels. The UAE has been a reliable and responsible supplier of energy to global markets for more than 50 years and believes that stability in energy markets is critical to the global economy,” Al Otaiba, the current UAE Ambassador to the US, stated.

The oil cartel OPEC member’s announcement is a relief to many investors. Russia, the producer of about 7% of global supplies and the second largest exporter of crude oil, can no longer export crude and oil products to the US, as announced by the Biden Administration on March 8. In the meantime, the UK announced on the same day that the country will phase out the imports by the end of 2022. Oil prices settled about 4% higher on the announcement.

Investors were nervous that the supply loss would push oil prices higher in the future. Hence, if the UAE ambassador does convince the OPEC to increase oil production to fill the Russian supply gap, that could potentially ease the overheated oil prices further.

Upcoming Events to Watch:

  • Mar 16 – IEA report
  • March 31 – the 27th OPEC Meeting

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Interest Rate Hike In March Is Certain

How likely are these factors going to impact the tightening pace? Find out in our latest analysis.

Powell’s Takes on the Russia–Ukraine Crisis and Rate Hike

Fed Chair Powell affirmed in testimony to Congress on Wednesday that the Fed will begin interest rate hike at March’s FOMC meeting. He cited the recent Russian–Ukraine crisis as a key factor to the future tightening pace, in addition to inflation. He highlighted that there are still too many uncertainties ahead so the Fed will be cautious before making any big decision. Receive the latest news here

“There are events yet to come and we don’t know what the real effect on the U.S. economy will be. The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely. The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Powell said.

In light of the current situation, Powell is eyeing to increase short-term interest rates by 0.25%. If inflation does not ease as quickly as expected, the Fed might tighten more aggressively. Powell did not rule out the possibility of increasing rates by 0.5%. Notably, the last time the Fed opted for a 0.5% rate increase was in 2000.

Nonfarm Payroll Preview

The US Labor Department is releasing the nonfarm payrolls results for February this Friday. The market consensus is 400K added jobs, fewer than January’s 467K added jobs.

While some analysts still cited Omicron as a factor that might adversely affect Friday release, the impact of Omicron on the US job market might be less severe as expected. There was a surprise for January’s nonfarm payrolls as the actual data exceeded expectations. The US economy added 467K jobs in January, versus the expected 150K. Looking into other data, both the labour force participation rate and average hourly earnings are better than expected.

Market Reaction

In light of Russia’s invasion, US crude oil surged to its highest since 2011 and Brent oil ended on Wednesday at its highest close in nearly eight years.

The US dollar index was not much impacted by Powell’s speech and hovered around 97.35. Meanwhile, as the consumer prices in the Eurozone increased 5.8%, EUR/USD dropped slightly to 1.1121. Receive the latest price updates on the hottest FX pairs

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

 

Gold – Time to Shine?

Gold is traditionally considered a hedge against political risks and inflation. This week, as the conflict between Russia and Ukraine mounts and US inflation continues to soar, investors turned their attention to the safe-haven asset. Gold prices jumped to the highest level since June 2022 on Tuesday, and on Thursday, Gold prices surged to a 15-month peak. In February alone, gold prices have climbed by five percent.

Escalating Geopolitical Tensions

The most recent Russia–Ukraine conflict began in November 2021 when satellite images showed that Russian troops have been amassing on the border with Ukraine. Things have escalated further this week. Stay tuned to the latest financial news

Russian President Putin made a speech on Monday saying that Russia would recognize the independence of two territories in Ukraine which was currently under the control of the Moscow-backed separatists. This could potentially pave the ways for an invasion as those separatist regions could seek military support from Russia. Gold climbed 7 dollars to $1,905 an ounce.

Ukraine declared a nationwide state of emergency, which will last for 30 days on Wednesday. Gold retreated $1,898 an ounce. Check the latest gold price

On Thursday, Putin announced that he would carry out a “special military operation” in Ukraine on live. Prior to this, he has been denying any potential attack on Ukraine. The US believed a full-scale invasion of Ukraine is imminent. Gold prices hit the highest level in over a year.

A Mixed Outlook

Despite the surging inflation and the geopolitical situation, analysts at UBS considered the gold surge is short-lived because of the upcoming interest rate hikes.

“We keep a negative view on gold and silver, which we think are likely to face downward price pressure amid higher US interest rates and a stronger USD,” UBS wrote in a statement.

On the other hand, Goldman Sachs analysts said gold could hit above $2,000 this year.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Will the Recent Inflation Signal a Rate Hike?

Fed’s Tightening Agenda Remains Vague

Federal Reserve officials reinforced in January’s FOMC meeting that they would start raising rates in March, according to the minutes released on Wednesday. The central bank is open to the idea of a faster interest rate hike but they would still rely on future economic data to determine whether a faster pace of tightening is justified. Receive the latest news update here

“Most participants noted that, if inflation does not move down as they expect, it would be appropriate for the committee to remove policy accommodation at a faster pace than they currently anticipate,” the minutes say.

The Fed is hesitant and less hawkish than expected. Even when the economic data released before the January meeting is encouraging, there is no explicit mention of the exact date to begin the process or the possibility of a 50 basis point hike.

A month after the meeting, both the producer price index and consumer price index results revealed that inflation continues to soar, suggesting a need for steeper tightening. Will the Fed announce the first interest rate rise in the next scheduled meeting?

Inflation Is Getting Higher

According to the data released on Tuesday, the producer price index was up 1% in January, the biggest increase in eight months. The PPI jumped 9.7% over the past 12 months ending in January 2022. The results are much worse than anticipated. The Wall Street forecasted the monthly increase and the 12-month PPI to be 0.5% and 9.1%.

The prices for final demand goods rebounded by 1.3% in January, compared to a 0.1% decline in December. According to the press release, over 40% of the broad-based increase can be traced to a 0.8% rise in the index for final demand goods less foods and energy.

A similar situation happened to retail inflation. Driven by a surge in the cost of shelter, food and energy, the consumer price index climbed 0.6 in January and 7.5% over the past 12 months. The 7.5% increase marked the biggest increase since 1982. Stripping out the price volatility of food and energy costs, the CPI rose 6%, still above the market estimate of 5.9%.

The Fed previously indicated in December 2021 that inflation would fall sharply this year. Considering the current situation, market expects the Fed to act more swiftly and aggressively to tame inflation. Market does not rule out the possibility of the Fed raising hike before the next FOMC meeting.

Upcoming events to watch:

  • Feb 17 (Thurs) 8:30 (GMT-5) – Initial Jobless Claims
  • Feb 24 (Thurs) 8:30 (GMT-5) – US GDP
  • Mar 4 (Fri) 8:30 (GMT-5) – Nonfarm Payrolls
  • Mar 4 (Fri) 8:30 (GMT-5) – Unemployment Rate
  • Mar 9 (Wed) 8:30 (GMT-5) – JOLTs Job Opening

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Euro and the Pound Moved Higher

ECB’s Hawkish Shift and BoE’s Tightening Stance

Last week, the European Central Bank (ECB) had decided to keep its key interest rates unchanged despite rising inflation. The announcement meets market expectations. The central bank projected higher inflation will cease eventually later this year. That said, President Lagarde adopted a more hawkish tone than before as she no longer cited an interest rate hike in 2022 as very unlikely.

“Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher,” Lagarde said.

Elsewhere, the Bank of England (BoE) raised its key interest rate from 0.25% to 0.5% in an effort to contain inflation. If we look at the data more closely, we will find out that four of the nine policy makers voted for a bigger hike to 0.75%. That said, BoE Governor Bailey reassured that the BoE is not planning for a long series of rate hikes.

Long-awaited NFP Surprises

Many investors predicted a bleak outlook towards US January nonfarm payrolls results due to the rapid rise of the Omicron variant. A White House official even warned that the result could look “strange”.

The actual figure turns out to be strange indeed but in a positive manner. The US economy added 467K jobs in January, tripling the Wall Street estimate of 150K added jobs. The leisure and hospitality sector led the gains, followed by professional and business services and retail sectors. The jobless rate rose to 4% and the labor force participate rate increased to 62%, suggesting a sign of recovery in the private sector.

Not only that, the Labor Department revised November and December 2021’s results much higher. December surged from the initially reported 199K to 510K jobs, while November increased from 249K to 647K jobs.

These data suggest that the US job market is stronger than expected in the face of the ricocheting pandemic, or the country seems to have digested the caution about the Omicron variant. While the Fed has already fixed its eyes on interest rate hike, an upbeat job report definitely does more good than harm.

Market Reaction

The Euro strengthened on Lagarde’s hawkish remark. EUR/USD rose 133 pips to 1.1438 last Friday, and the pair had remained above 1.1400 so far. The pound also rose on the BoE interest rate decision. GBP/USD increased 23 pips to 1.3600 but later slid on the NPF announcement. As for US Dollar, it strengthened from two-week lows on Friday’s NPF announcement. Receive latest price updates on the popular FX pairs

Upcoming Events to Watch:

  • January Consumer Price Index
  • February Michigan Consumer Sentiment Index (preliminary)

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

2022’s First Fed Meeting Is Coming Soon, Will We Get Rate Hike Cues?

The US dollar strengthened on Tuesday after US Treasury yields surged to two-year highs. The dollar index climbed 0.5% to 95.749, the biggest daily increase in two weeks.

Earlier in the month, the greenback was held back due to persistent inflation and the US-China trade conflict.

Market awaits Hawkish Fed

The first Fed meeting of the year will be held next week. Consensus expect that the Fed will announce its first interest rate hike in March and there will be four rate hikes in total this year. Stay alert and watch the news closely

And there might be Hawkish surprises. Fed official Patrick Harker said earlier that he is open to more than three rate hikes this year to combat inflation. Powell also signaled a tighter monetary policy would be needed to make sure that inflation would not become “entrenched”.

Strengthening USD against major currencies

On Tuesday’s meeting, The Bank of Japan announced revising up its inflation forecasts but reassured not to raise interest rate or modify its loose monetary policy. USD/JPY rose to ¥115 overnight and slowly fell back and hovered around ¥114. Follow all the latest forex news here

Elsewhere, driven by the drop in the US stock market, the Euro slipped 0.7%, the biggest day decline in a month on Tuesday, and returned to its 50-day moving average. Even though Germany’s ZEW survey indicated a positive outlook for the country and exceeded expectations, it failed to halt the Euro’s slide.

AUD/USD and NZD/USD slid.

Upcoming events that may affect the trend of USD:

  • Jan 21 — US Existing Home Sales (Dec)
  • Jan 25-26 — FOMC meeting

2022 – More Tapering Has Been Undertaken, The US Inflation Rate Is No Longer Considered Transitory

Global Environment:

Omicron, however, has the potential to magnify the downward risks facing the economy. The Personal Consumption Expenditures (PCE) Prices Index and the core PCE Prices Index both registered new highs in October. During the FOMC meeting in December, it was decided to double the pace of monthly bond purchases to USD 30 billion in advance of the end of the asset purchase program in March 2022, which leaves room for a modest interest rate hike 2022.

When discussing inflation, the Fed retired the term transitory. As a result of the dot plot revisions, there will be three increases in 2022 and 2023 and two increases in 2024. At the beginning of 2024, interest rates are still projected to be lower than the long-term equilibrium rate, suggesting that the pace of rate increases will be moderate. In the absence of continued inflationary pressure, the Fed will likely raise interest rates for the first time around mid-2022 and then implement two 0.25 percent rate hikes throughout this year.

As a result of the Omicron variant, the Eurozone has experienced a significant hindrance to its recovery, and therefore restrictive measures have been implemented across many countries to prevent epidemics. As a result of these actions, the economy is expected to exhibit a short-term slowdown.

However, after the pandemic has been brought under control, it is expected to resume its growth momentum. The annualized growth of the Eurozone’s GDP in Q2 and Q3 of 2021 has reached a record high for the past two decades. The reason for this is a low base in 2020 and the Pandemic Emergency Purchase Program (PEPP) enacted by the European Central Bank.

The central bank estimated that the annualized inflation rate would reach a record high in November 2021. Since the European Central Bank has reiterated its stance of maintaining monetary easing, the pace of purchases of assets is likely to slow, but it is not expected that interest rates will rise anytime soon. There remains sufficient liquidity, and the economy is supported to some extent. The Eurozone’s growth will slow down, however, as the low-base effects diminish as inflation undermines the economy.

Growth of the British economy in October slowed to 0.1 percent, the lowest in three months, suggesting a slowdown in economic expansion. In the U.K., economic performance is expected to be dominated by the Omicron variant over the next two to three quarters. Economic activities, in particular those in the service sector, will suffer adverse effects as a result of the activation of Plan B for epidemic prevention and control.

Based on preliminary analysis, the U.K. economic situation is likely to worsen. There is a certain amount of inflationary pressure resulting from the Omicron variant. The Bank of England expects that the price index will peak at 6% this spring.

Chinese economic data released in November 2021 showed both positive and negative signs. It is noteworthy that the value added to industrial activities grew by 3.8% on a year-over-year basis and by 0.37% on a month-over-month basis; however, the growth rate remains below the historical average. The consumer data was weakening due to the pandemic recurrence.

As evidenced by the growth rate of fixed-asset investment in November 2021, the decline in real estate investment has narrowed considerably, whereas the decline in infrastructure investment has widened. At the same time, trade data remained solid. During November, the CPI rose by 2.3% year-over-year and 0.4% month-over-month, primarily driven by increases in food and energy prices. In the next stage, it will be necessary to pay attention to upward price movements.

PPI has slowed to some degree as a result of the implementation of policies for ensuring supply and stabilizing prices, and it is expected to continue to decline year-over-year. It was reported in November that China’s outstanding total social financing (TSF) increased by 10.11% year-over-year to RMB 2.61 trillion. TSF’s growth can be attributed to the policies of ensuring supply, stabilizing prices, and easing real estate financing procedures showing signs of accelerated recovery. Considering the implications of the global health crisis pandemic, it is important to consider whether or not the current unstable level of economic equilibrium is already a new equilibrium.

According to the Central Economic Work Conference report, China’s economic growth is being challenged by four factors: shrinking demand, supply shock, weakening expectations, and overheating. Policymakers emphasized once again during the conference the need to center the policy discussion around economic development, and it is expected that the subsequent policies will provide more support to stabilizing growth. Our projections indicate that the macroeconomic situation will stabilize before a rebound occurs.

Commodities

On precious metals, U.S. President Joe Biden announced that he would nominate Jerome Powell as chairman of the Federal Reserve in November 2021. Powell has since disassociated the term transitory from inflation and has emphasized hawkish signals that exceeded expectations. During the month, expectations of monetary tightening returned to the foreground while gold and silver prices declined from high levels of the range of oscillations. We believe the central conflict in the next stage will remain between market expectations for an increase in interest rates in 2022 and the Federal Reserve’s laggard position in the policy of monetary tightening.

It is expected that U.S. interest rates will gradually move towards market expectations within the next two quarters. Before the first rate hike, the precious metal market was under pressure, and there may only be a rebound after experiencing a bearish trend. As regards the crude oil market, it is anticipated to reach highs in January 2022. As a result of the significant oil-consuming countries continuing to utilize their strategic reserves, the crude supply is likely to increase in the near term, therefore placing pressure on oil prices.

Meanwhile, the market widely expects the negative impact of the Omicron variant to be limited, and the steady recovery of demand is expected to support oil prices. However, following a significant decline in crude oil prices in December 2021, the current price level is moving towards equilibrium and is expected to maintain an oscillating pattern of fluctuation. Receive latest price updates

Crude Oil: A bullish and a bearish trend coexist in crude oil prices, suggesting a high price trend is likely to persist

As we look back to the crude oil market in December 2021, prices showed an upward trend amid oscillations following sharp drops in November. Oil prices significantly declined due to the release of strategic reserves and the market’s concerns about the Omicron variant. These factors are still being factored into the market through the month of December. In December 2021, OPEC + forecasted that global average daily oil demand would reach 99.13 million barrels in Q1 2022. This prediction had been revised upwards by 1.11 million barrels from November.

This report shows that Omicron will only have a mild impact in the short term, which supports oil prices. January 2022 is predicted to be characterized by high crude oil prices amid oscillations. As a result of the heavy consumption of crude oil, major oil-consuming nations are increasingly tapping their reserves, which in turn will increase supply and put pressure on oil prices. On the other hand, the impact imposed by the A stable recovery of oil demand and a limited outbreak of the Micron virus should support oil prices.

However, with the significant declines of crude oil prices in December 2021, the current oil prices tend to reach a level of equilibrium and are expected to maintain a trend of consolidation at highs amid oscillations.

US Dollar: Although technical resistance exists in the short term, the USD remains unchanged relative to its mid-line pattern

Since the middle of 2021, the USD has gained strength. On the horizon for 2022, this year’s research will be focused on whether the trend at the end of 2021 will be reversed or repositioned due to the increase in market liquidity at the outset of the year. The market trend is often subject to transition or modification from time to time after the market expectations have been fully accounted for. In the present situation, the U.S. Dollar Index is technically showing a certain resistance level close to 97. It should be noted that the FOMC determined to accelerate tapering at its December meeting and will not raise interest rates until tapering has been completed.

The FOMC dot plot revisions also point towards three rate increases in 2022, whereas the date initially planned for the completion of the tapering in mid-2022 is likely to become the start of interest rate hikes. Early and accelerated rate hikes are expected to remain supportive of the two-year treasury yield, even though accelerating the pace of interest rate hikes will contribute to controlling inflation and inhibiting long-term U.S. treasury yield increases.

Because the USD has always been closely linked to the yield on two-year treasuries, it is likely to maintain its advantage over other currencies. The market is also expecting that the strengthening of the dollar will last until the formal rate hikes and when the market has fully priced in the expectations.

EUR/USD: EUR suffers from a delay in tightening of ECB policy

Throughout the year, EUR’s performance has been below par. As the ECB maintained a dovish policy stance, this, coupled with the Fed’s hawkish policy shift, caused EUR to gradually decline throughout the year, reaching as low as 1.1186. In the year 2022, like USD, it remains unclear whether EUR will experience technical adjustment to the exchange rate due to the transition or changes in liquidity and expectations.

Furthermore, as the Fed has announced plans to intensify its tapering scheme, the ECB, at its final policy meeting at the end of 2021, has also announced that it will increase the volume of its original Asset Purchase Program following the end of the Pandemic Emergency Purchase Program (PEPP), to inject liquidity to the market to an extent. Market concerns have been eased by this news release, which has proven to be positive for the rebound of the euro. The market expects central banks to tighten monetary policy and increase interest rates shortly, and investors should pay attention to the rising global inflation rate.

Moreover, the European Central Bank expects inflation to reach 3.2% in 2022 before declining to 1.8% in 2023 and 2024. It is worth noting, however, that although data inform ECB’s assessment, it also suggests that it is unlikely that rates will be raised in Europe in 2022. Euro’s position as a funding currency remains unchanged, and the probability of the EUR declining after the rebound is anticipated to be higher.

GBP/USD: The GBP is supported by the BoE’s unexpected interest rate hike, but its economic impact upon the Omicron variant needs attention.

The Monetary Policy Committee (MPC) of the Bank of England raised interest rates by 15 basis points in December 2021, exceeding market expectations. According to the BoE’s latest monetary policy statement, it appears that the rate hike is centered on the concern of inflation surging at a rapid pace.

Approximately 5% is expected to be the inflation rate throughout the winter and will comfortably exceed 5% in April 2022. Enhanced inflation is mainly due to the lag in wholesale gas prices in the United Kingdom on utility bills. Regarding the U.K.’s economic outlook, the BoE’s policy statement has been neutral, focusing on the recent employment recovery towards a rosy outlook while explaining the impact of the Omicron variant on economic activity in the near term. Future challenges are on the horizon for the British economy.

The uneven nature of recovery is displayed because consumption, investment, and exports remain well below pre-pandemic levels. The GBP is expected to benefit from a faster tightening of monetary policy in the short term than the market anticipated. In the medium term, investors will pay attention to the impact of the Omicron variant on the economy.

AUD/USD: following stabilization, the AUD tends to rebound

The current exchange rate reflects the stabilization of the AUD before a rebound. Economic data showed that Australia was performing well despite imposing regional lockdown measures in October, which eased market concerns about the country’s fundamentals. The statement made by the RBA Governor on “no interest rate hike in 2022” has, however, been interpreted as reflecting a dovish monetary policy stance to a certain extent, thereby leaving the AUD without constant support.

From a technical perspective, AUD/USD has shifted from unilateral strength at the beginning of 2021 to relative equilibrium. A rebound has been experienced at the support zone near the level of 0.70 since the FOMC meeting, while the growth momentum is still being accumulated in the short term. We believe that AUD tends to rebound following stabilization if the RBA maintains a neutral monetary policy. Stay alert and watch the news closely

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

2022 – A Challenging Year For Gold?

Gold prices rose ahead of Fed minutes last Wednesday but slipped quickly after the Fed signalled an earlier interest rate hike.

As US Treasury yields rose nearly three basis points on the news, gold prices were spiralling quickly downwards. Gold futures slipped 1.25% at $1,802.91 per ounce. Receive latest price updates

Hawkish Fed Minutes

The minutes of the December FOMC meeting released last week confirm that the Fed will raise interest rate sooner than expected. Previously, the market speculated that the first interest rate hike would begin in June or July. Now, it could come as early as March. Stay alert and watch the news closely

“Given their (the participants’) individual outlooks for the economy, the labour market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the Fed wrote in the minutes.

The central bank expected three rate hikes in 2022, another three in 2023 and two increases in 2024.

While the general consensus is that interest rate hikes are bearish for gold due to the increased competition from other higher-yielding investments, previous data suggests that there is no absolute correlation between the two.

Supply and demand, on the other hand, have a bigger impact on gold in the long run.

The Menacing Omicron And The Unstoppable Inflation

The world has been in the grip of the Omicron variant in recent months, which had pushed investors turn to gold for its safe-haven appeal. Additionally, surging inflation lifted gold prices. In November, gold prices climbed to a five-month high.

While the pandemic remains rampant till this day, the Fed did not cite the Omicron variant as a risk in the recent minutes, suggesting that the officials did not see it as a major roadblock for the US economic recovery.

Mixed Views On Gold Futures

Analysts at JP Morgan are bearish on gold according to its recently published 2022 outlook report. They predict that the yellow metal will fall to pre-pandemic levels by the end of this year due to the Fed’s policy tightening move.

Meanwhile, analysts at Goldman Sachs cite the asset as significantly undervalued, as they assume that the inflation rate will prevail. They predict the gold prices to go up by around 38% in 2022.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Gold Set for Growth on Inflation Surge

Inflation Surge Whips Up Gold Prices

Gold prices surged nearly to a five-month high last week after official figures revealed that inflation in the US remained rampant.

According to the US consumer price index (CPI) released last week, the country’s consumer prices grew 6.2% year-on-year in October, the biggest inflation surge since December 1990. It also exceeded market expectations of 5.9%.

Core CPI, excluding food and energy, rose 4.6% annually, the fastest gain in more than 30 years.

The escalating inflation successfully drove the price of the yellow metal higher. On Nov. 10, gold prices rose as much as 2% to peak at $1,863.9 per ounce, hitting its highest level since June.

Gold prices edged higher to $1871.3 on Friday and later closed at $1,868.5 an ounce, meaning gold rates have been surging for two weeks straight. Receive latest price updates on gold and other precious metals

Fed Signals that Interest Rate Hike Is Off the Table Until 2022

While tapering often signals the beginning of an interest rate hike, Fed Chair Powell assured that the Fed is holding the benchmark interest rates at near zero. Stay alert and watch the news closely

He cited “maximum employment” as the major mandate for any interest hike, and the Fed is getting closer to meeting its goals on inflation and employment.

He said the first rate hike might occur in 2022 at the earliest, which is uplifting news for gold.

Gold Price Forecasts by Wall Street Analysts

Analysts expect gold to maintain its bullish momentum until mid-2022. Precisely, Goldman Sachs is looking for $2,000 for gold, while Soc Gen predicts gold prices to linger near $1,950 an ounce early next year.

Conversely, Morgan Stanley is less optimistic, saying that gold could experience a challenging environment next year. Its base case for gold is $1,675 per ounce for the first quarter of next year.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Will the September Jobs Report Meet the Fed’s Expectations?

With the Fed on the verge of tapering, September’s result could be critical. How likely is September’s NFP going to meet the Fed’s expectations? Find out in our latest market analysis.

Fed Signals Tapering Could Come As Soon As November

August’s non-farm payrolls report was a huge disappointment to the market. The US economy added only 235,000 jobs in August, roughly three times fewer than market forecast of 750,000 jobs.

Despite the sorely missed expectations, the Federal Reserve (Fed) mentioned at its September FOMC press conference that the economy is not far from achieving its goals on inflation and employment, and that the tapering announcement could come as early as November. Stay alert and watch the news closely

“Reasonably Good” Is Good Enough

Considering what the Fed said, the upcoming NFP could be a determining factor in kickstarting Fed’s plans to reduce its $120-billion-a-month asset purchases.

Interestingly, the Fed is not looking for a phenomenal report.

“It wouldn’t take a knockout, great, super strong employment report. It would take a reasonably good employment report for me to feel like that test is met,” said Fed Chair Powell at the September FOMC press conference.

All Eyes on Friday

With the upcoming report being the last nonfarm payrolls before the next FOMC meeting in November, the market is anxiously waiting for the data to foresee the Fed’s decision on tapering.

Economists predict that the US economy would add 488,000 jobs in September, more than double August’s disappointing result.

The optimism is not groundless. Recent data from ADP and ISM Manufacturing Employment Index has shown that job growth picked up in September.

Private payrolls increased 568,000 last month, exceeding market expectations of 428,000 jobs.

On the other hand, the ISM U.S. manufacturing index climbed from 59.9% to 61.1% in September. The reading was also the highest in four months.

This is how the market reacts prior to the event:

  • Gold: The precious metal edged higher and broke above $1,760 despite the broad US dollar strength.
  • US Dollar: The US Dollar Index (DXY) reached new 2021 highs above 94 last week. The greenback maintains its uptrend momentum on investors’ predictions that the Fed would begin rolling back its bond purchases programmes as early as November.

Are Gold Prices in a Tug of War?

After surging to a 2-month high of $1,834 on the disappointing September nonfarm payrolls last week, gold plunged below the $1,800 psychological mark on dollar strength and rising US treasury bond yields on Tuesday. Are the bears back in town, or are the bulls just waiting for their next opportunity ?

A Recap of Gold’s Recent Trend

Looking back, the bright metal tested the key resistance at $1,834 for three times in the past few months but has failed to break above it. Not only did gold fail to go past this level, it even retreated to below $1,800 this week. Follow gold price movement here 

The rise in the US treasury bond yields is attributed to the massive plunge in gold. The yield on the benchmark 10-year treasury rose nearly 5 basis points from 1.322% to 1.369%, despite last Friday’s nonfarm payrolls missing market expectations by a great extent.

Does it mean gold bulls are not coming back?

Fed’s Dovish Remarks Give a Glimmer of Hope

At the Jackson Hole Symposium held last month, Fed Chair Powell mentioned if job growth continued, the Fed could begin cutting asset purchases this year. Ironically, the news was followed by a big miss in September’s nonfarm payrolls figures. Receive latest market updates on gold 

Strategists now believe the Fed would defer its tapering announcement to late 2021 or even early 2022. A weaker USD could push gold higher.

Other Upcoming Events in Focus

  • US Core Consumer Price Index on Sep 14 at 22:30 (GMT+10)
  • US Core Retail Sales (Aug) and Initial Jobless Claims on Sep 16 at 22:30 (GMT +10)

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

 

Trading Currencies: Jackson Hole Approaches, Will We See Taper?

Don’t Hold Your Breath for Friday

The most anticipated Jackson Hole Symposium is upon us. However, we question if the ‘anticipation’ is warranted, as consensus now has the probability of Powell announcing taper timeframes below 50%.

This step back from analysts can partly explain the easing in the USD this week. But we should point out that next week there will be another month of non-farm payrolls which are likely to be in the 750- to 800,000 range and CPI data that should remain elevated.

This suggests that the September Federal Open Markets Committee (FOMC) is a much more likely time for Powell to announce something. It is also the first time a 2024 dot plot will be added to the Fed’s dot plots release.

Lots to be mindful of going forward.

This Week’s Market News Highlights

Three major reports released this week have shaken the USD pairs:

  • New home sales rose 1.0 per cent in July, a big miss on estimates of 3.4 per cent. But the annualised rate was 708,000 which beat estimates at 697,000. Growth is slowing that is clear, but overall new homes sales are at a historically strong level. Despite the better-than-expected result, the US dollar slid against most major currencies.
  • Existing home sales are showing signs of continued strength. The medium price range remained on the high side to historical values and that was despite the fact inventories rose. Existing home sales hit an annual pace of 5.99 million homes sold, the median price is now US$359,000 up 17 per cent year on year.
  • Manufacturing PMIs slipped slightly to 61.2 from 63.4. While the Services PMI fell to 55.2 from 59.9. Both however are still above pre-COVID 5-year averages. What caught our eye was the Service PMI continued to note difficulty in finding suitable staff.

Some Gain Ground Against US Dollar

Interesting to see that material exposed currencies have done well against the USD. Learn more about the US dollar’s ups and downs here

AUD/USD has moved off its $0.7134 low to be trading right back inside $0.72. At $0.7255 it is back at neutral on its RSIs.

NZD/USD jumped 0.9% to $0.695 on the RBNZ’s outlook. USD/CAD has fallen from $1.28 back to $1.261 as crude surges.

But against European and other G10 currencies, the USD is holding the line and remains overall in the ascendency.

EUR/USD is holding the $1.17 levels well, GBP/USD also is holding the new $1.37 handle. USD/JPY is hovering at the upper end of ¥109.

Thus, all eyes remain on Powell and the Board and possible new positive breakouts for the USD. Follow all the latest forex news here

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: ‘All Talk No Action’

Back to Core

Very mixed week for FX. So, in times like these we say go back to basics and base currencies, with the king of them all being the USD.

The basics are following the Federal Reserve and the US Data – let’s examine that with the release of the Fed’s Minutes from the July meeting. Read the latest news updates.

Key Takeaways from the Fed’s Minutes

The minutes, released on Wednesday (Aug 18), indicate that tapering might begin before the end of 2021. Other than that, Fed officials have not reached any consensus over the exact timeline or the economic outlook.

  • Tapering discussed, no decisions made, we note these lines: “Participants agreed that their discussion at this meeting would be helpful background for the Committee’s future decisions…No decisions regarding future adjustments to asset purchases were made at this meeting.”
  • On the structure of the QE program, “most” saw benefits of trimming the pace “proportionally in order to end both sets of purchases at the same time” (by this it means treasures and mortgage-back securities). But “several” suggested tapering is more appropriate next year due to “prevailing conditions in the labour market”.
  • The economic view: “All participants” agree the economy had made progress. “Most” believe that the Committee’s “substantial further progress” of maximum-employment had not yet been met. That very wordy statement basically means that the US is not at pre-COVID levels.
  • Inflation mandate, this is where the highest level of debate is taking place. It is clear that some believe the inflation goal had been met and is becoming structural. However, the main view around inflation is the “transitory nature of this year’s rise in inflation, as well as the recent declines in longer-term yields and in market-based measures of inflation compensation” i.e., it will ease due to transitory effects.

Fed’s Hawkish Comments

St. Louis President James Bullard continues his hawkish stance stated last week he would “prefer tapering to end by Q1 2022”. His reasoning for going this hard is it “would give the Fed more flexibility to deal with inflation” as he fears there is “more inflation than we care to admit.” He followed this up with his thought on rate hikes stating: “Q4 2022 was a logical time.”

Mixed Market Reaction

The base conclusion from the market over the week is the USD still holds the ascendency, but it is mixed.

EUR/USD hit $1.1694 last week, which is its first sub-$1.17 since November. It has recouped this level but RSI and momentum in the pair is to the downside.

GBP/USD too was weaker through the week. It was volatile around the Minutes but at $1.375 it’s a long way from the strength it had in the early part of the year, and it too has technical suggesting further weakness.

USD/JPY is one of the only pairs the USD is flat in as risk-off trading sees investors moving to the JPY. The pair got to ¥110.00 but is back in the ¥109s at ¥109.75 and is stuck in a range.

AUD/USD fell to $0.7229 last week, which is a nine-month low – it has recouped slightly but it is fighting two issues, USD positive news and negative AUD news. Iron ore is now in a bear market and falling fast. Over 12 million Australian are in lockdown and the economic recovery of last year is quickly evaporating. Get the latest update here.

Upcoming event that may affect the trend of USD:

  • Aug 27 (Fri) 9:00am CDT – Speech by Fed Chair Jerome Powell at the Jackson Hole Economic Policy Symposium

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Greenback is Back

A Sign of US Dollar Comeback

Non-Farm Payrolls (NFP) have led an incredible resurgence in the USD over the past two weeks. We had eased our positions in the USD over the past three weeks on momentum and technical indicators suggesting it was overbought. The rapid rise of the Delta variant has further exacerbated the pressure.

But the data has put the USD back on top.

US Added More Jobs Than Expected

July was a strong month for the US. NFP saw an astonishing 943,000 jobs created in July. Analyst expectations were for 870,000 while the June read was revised to 938,000 from 850,000.

A major reason for the surprise was mainly due to a government hiring surge. Private payrolls met consensus, which was 703,000. The leisure and hospitality sector led job creation, followed by education and professional and business services sector.

Lower Unemployment Rate and Higher Salary

The unemployment rate hit 5.4 per cent from 5.9 per cent. Average hourly earnings rose 0.4 per cent meaning the year-on-year pace is now for a 4.0 per cent. Participation rose to 61.7 per cent. The conclusion – this was very strong labour report.

The non-farm productivity rose 2.3 per cent in Q2. Despite the fact that the data missed expectations, it still highlights the continuing productivity acceleration from the economic rebound. The dive in productivity has been created by a sustained exit of low-wage employment and increasing hours-worked by the remaining employment market. This has translated into a 1 per cent rise in labour costs – wage growth. Read the latest market news.

The Greenback is Back

After the news, EUR/USD has fallen from $1.185 to $1.1710 in four days, a four-month low.

USD/JPY hit ¥110.55 a four-week high and up from ¥108.70 in just five days again. Interesting that this hasn’t been driven more by the fall in gold.

AUD/USD bounced off a three-week low of $0.7316 to be back at $0.7350 but since the NFP the pair has lost 1.2 per cent or $0.90 and momentum suggests the year-to-date low of $0.7289 could be under threat. Receive the latest price updates on your favourite USD pairs.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Delta Blues?

The emergence of the Delta Variant Brings New Uncertainty

We had started to turn neutral on the USD over the last few weeks. Our reasoning for this was that the unbroken run in the USD was showing signs of fatigue.

What is now adding to this fatigue is signs the Delta variant is impacting US data. The Delta variant has quickly risen to become the dominant strain in the country since late June. With events cancellations, delayed office returns, and dwindling consumer confidence, concerns remain over this highly contagious Delta variant and how it might derail the country’s economic recovery.

Upbeat Job Market Results Hint at an Economic Recovery

In early August, we saw US private sector payrolls (ADP) disappoint, rising 330,000 in July. The expectation was for 690,000 jobs to be created.

Now if we think about this 330,000, it’s still very impressive and data elsewhere is still strong. Just have a look at the ISM service read for July rising from 60.1 to 64.1 – this is a record high and was led by the “exports” and “prices paid” sectors of the survey.

Another positive sign for the market came last week as the US’s non-farm payrolls in July beat expectations. Official data showed that US employers added 943,000 jobs, and the unemployment rate dropped to 5.4%, a stark contrast to analysts’ estimation of 845,000 new job openings and a jobless rate of 5.7%. What’s more, the payroll increase is the highest since August 2020. Stay tuned to the latest market news.

The Fed’s Hawkish Remarks

But we keep hearing that “Delta is becoming an issue” and that forward indicators are showing signs of slowing.

Let’s look at the comments from Federal Reserve Vice-Chair Richard Clarida, who is a known neutral-hawk. In his remarks on Wednesday, he stated that:

  • “Policy normalisation in 2023 would be ‘entirely consistent’ with the new policy framework”
  • “That conditions for raising rates could be met by the end of 2022, with a tapering announcement possible later this year.”
  • The US will see a “healthy job gains in the third quarter”.
  • He sees inflation risk to the upside but clarified that he supports the official view that the current overshoot is transitory.
  • He is surprised by the fall in treasury yields and believes this reflects virus risks that are building.

That last line we think is poignant – it took some of the heat out of his comments and added to the volatility in the USD.

Currencies Against the US Dollar Stay Volatile

EUR/USD traded $1.1833 to $1.1902, a 3-week high. However, it has since slipped back. GBP/USD has also slipped back to $1.389 since writing but was as high as $1.395.

USD/JPY fell to a 2-month low of ¥108.72 before tracing the moves in the treasuries to move back up to ¥109.45.

AUD/USD moved back into $0.74 with a read of $0.7427. It did slide on the ISM data to $0.7370, but as we write it’s pushing $0.74 again being $0.7390. Receive the latest price updates on your favourite USD pairs.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: The USD/JPY ‘Bond’ Remains so Attractive

In the world of trading, the saying ‘the trend is your friend’ has always been a good base for a trade. However, what is even more beneficial to a trade is a fundamental correlation such as that between USD/JPY and US bond yield. Adding to this is the trader’s mantra of staying with one product and it makes for a strong case to hold the course.

Over the last few weeks, we have continuously highlighted the correlation between USD/JPY and US bonds and that is unlikely to change any time soon as we stick to the descriptions in the opening paragraphs for trading with trends, correlations and single products.

US Yields Hit New Highs

US treasury yields climbed to new highs this week before quickly giving back all gains. This has been attributed to investors preparing for the announcement on President Biden’s new $4trn spending package – but whatever the package is, the conclusion is likely to be the same: medium-term inflation, which will push long-dated yield higher and higher still. Ten-year yields hit 1.77% on Tuesday before falling back down to 1.70% – but the trend suggests 2% is only a matter of time now, as reflected from the rising breakeven inflation rate which is at the 2.36% level.

Source: YCharts

USD continues to make broad-based gains. EUR/USD which was chasing $1.22 in a mere 14 days ago is now at $1.1712 – a five-month low. The AUD/USD is struggling to hold the $0.76 handle and is back below at $0.759 and looking weak.

But it’s USD/JPY that needs the most attention having now pierced through ¥110.00 for the first time since March 2020. After its several attempts, we see a new set of targets being created. The breakdown of a clear resistance line at ¥110 will have the technical analysts excited and they will be looking for confirmation that it will break for real over the coming days. The pair topping out at ¥110.43 before the 7-basis-point slide back to 1.70% in the 10-year took some of the heat out.

But with the forecast of 2% in US long-dated bonds and a likely pop from the Biden announcement, USD/JPY’s correlation trend suggests further upside is likely over the coming period.

Coming events/holidays to watch out

  • 2 April: Nonfarm Payrolls (March) – The Market expects the payrolls to rise for the third consecutive month to 647K (previous was 376K).
  • 5 April: Easter Monday bank holiday in Australia, New Zealand, and Europe; Ching Ming Festival holiday in China.
  • 8 April: The FOMC Minutes will be released.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: A Bit of Pop in the Pop-Gun Policy from the RBA

For the first time in years the RBA caught the market slightly off guard. Not around what it did, but more around when it did it.

The Board’s decision to extend its quantitative easing program by a further $100 billion, is something most had expected it to do. The second tranche program will roll out at the close of the first tranche which could be as early as April 9. The issue was that it has announced the second tranche now, which certainly wasn’t expected, as the market has been conditioned to believe the RBA would foreshadow this move at the April board meeting and ‘confirm’ this was the case and start immediately.

This wrong-footing announcement saw Australian bond yields plummeting with the Australian 10-year falling like a stone down over 8 basis points. The AUD went from $0.7660 to $0.7615 and eased further – it is battling to hold onto the $0.76 handle and with the pressure of a falling iron ore price, it is unlikely to hold this level in our opinion.

At the time of writing, over 75% of traders are going short on the pair:

Source: Data at 14:15 on Feb 4 (GMT + 11) on Mitrade

Cash rate for 2021 & beyond

What the RBA also signalled was that Australia’s cash rate is now ‘set’ until 2024. In fact, the statement suggests it could be longer than this noting that inflation would need to be ‘materially higher’ before rates could rise. Considering the RBA’s mandate for core inflation is 2% to 3% and it hasn’t been in this band since the third quarter of 2015 – 2024, maybe it is too short of a time frame.

It also puts a ruler through any idea that short-term inflation bursts will cause the RBA to raise rate prematurely. As nations come out of the COVID crisis with inflation rates that are coming from very low bases, inflation could ‘pop’ over a quarter or so. But the RBA is signalling it needs structural change – aka what the Federal Reserve is suggesting.

So, the RBA has shown it has some ‘pop’ in the RBA’s pop-gun policy arsenal, the caught is that it’s still too small for it to be sustained, and the Fed or ECB will run it over with similar packages of their own, which is something to watch out for.

Key Events to Watch in the Coming Week

  • BoE’s Interest Rate Decision – February 4, 2021 (GMT +11)
  • RBA’s Monetary Policy Statement – February 5, 2021 (GMT + 11)
  • Nonfarm Payrolls (Jan) – February 6, 2021 (GMT +11)

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: The Return of Janet Yellen

The return of the former Fed Chair Janet Yellen to the forefront of US policy; this time on the fiscal side it’s one that the FX market will probably meet with glee.

A solid communicator and an advocator for ‘strong’ policy accommodation, Janet Yellen’s upcoming appointment to Treasury Secretary will likely mean that Joe Biden’s fiscal stimulus package will be one of mammoth proportions – and a potential short-term negative for the USD.

To highlight this point, here are some extracts from her speech that she gave about her upcoming appointment.

“We lawmakers need to ‘act big’ on the next coronavirus relief package,” she complimented by adding that the benefits of the package will well and truly outweigh the costs of a higher debt burden.

“As Treasury chief my role will be to assist in the rebuilding of economy so that it creates more prosperity for more people and ensures that American workers can compete in an increasingly competitive global economy.”

“Right now, short term, I feel that we can afford what it takes to get the economy back on its feet, to get us through the pandemic.” As rates are historically low and that debt-servicing payments as a share of the economy are lower today than before the 2008 financial crisis.

These are big statements and the ones that support the trade we have seen throughout 2020. A tidal wave of USD is likely to hit the markets in the foreseeable future.

Future of the USD trend

Her comments also back what the Federal Reserve has stated – that it will back the economy with quantitative easing and record low rates until inflation averages 2% – something that is at least 2 years off. Having US fiscal and monetary policy aligned will create some form of inflation in the future that is the intended goal and that the rates will therefore rise.

Ms Yellen’s statement coupled with last week’s statements from Fed officials show that rates for the foreseeable future will remain incredibly low.

This was seen in the movement of US treasury with US 10-year yield falling from 1.12% to 1.09% on Yellen’s remarks and have continued to fall.

Time to go ‘risk-on’?

The flip side of this is the acceleration of the risk trade with textbook moves in CHF, JPY and USD easing while the like of EUR, GBP and AUD shifting higher.

EUR/USD is now back above $1.21 at $1.2145, the GBP/USD is back above $1.36 at $1.3630 while AUD/USD is now above $0.77.

Key Events to Watch in the Coming Week

  • Fed’s Monetary Policy Statement – January 28, 2021 (GMT +11)
  • USA’s Gross Domestic Product Annualized (Q4) – January 29, 2021 (GMT + 11)

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: With a New Year Comes a Review

Happy New Year – A time of renewal, a time of new thinking and a time of excitement for change as we look to the future (even in the time of COVID).

We like to use the New Year to ‘review’ and see if we need to ‘renew’ or ‘rethink’ our FX strategy, which is what we shall do for this week’ piece.

Differences in the Global Trading Environment between 2020 & 2021

What’s changed from 2020 to 2021?

  • New administration in Washington
  • Brexit is finally complete
  • US rates have shifted

What hasn’t?

  • COVID-19
  • Unconventional policy the world over
  • Geo-political tensions – particularly in the Pacific

2021 Forex Trend Forecast

We will be watching for reactions to these points from both the fiscal and monetary sides of policy this year but what this means for FX based on the current setting is:

USD: New administration will mean increased US fiscal stimulus, and President-elect Joe Biden has already announced that he is assembling a multitrillion-dollar relief plan that would boost stimulus payments for Americans to $2,000. The discussions of the stimulus had triggered bearishness in the currency for most of 2020, but what will happen as it becomes a real event in 2021? It probably risks creating a US ‘exception’ narrative and may lead to a rise in market discussions of the Fed tapering. Either way the USD is near ‘rock-bottom’ pricing and in the short term a snap back may be seen.

EUR: Real yields and equity sentiment remain the key drivers of the EUR, ECB remains sidelined and fiscal support is piecemeal and country specific. Over 2021 it’s likely to rise naturally. Economists at Nordea expect EUR/USD to peak to the 1.25-1.27 level during the first 6 months of 2021.

GBP: Brexit is over and the oversold GBP had snapped back with gusto to end 2020. However, post-Brexit reality is COVID, as the country is now under its third lockdown, which could cause a probable double-dip recession and a likely BoE rate cut in Feb. Bearish here.

JPY: It remains a solid defensive play. USD/JPY had weakened due to the USD’s slide, however if as expected the USD finds support, the pair will struggle to fall further, much to the relief of the BoJ, which is extended until September 2021.

AUD: RBA is out of ammo in the medium term and Asia’s thrust for copper and iron ore is driving the AUD hard. However, AUD/USD is vulnerable to a short-term pullback on a pausing USD and profit taking – medium-term outlook is bullish and short-term outlook is bearish.

Key Events to Watch in the Coming Week

  • President-elect Biden’s speech – January 15, 2021
  • Fed’s Chair Powell’s speech – January 15, 2021
  • Inauguration of Joe Biden – January 20, 2021

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.