Mid-week Technical Outlook: FX Minors & Crosses In Focus

Global equities were tugged and pulled by inflation fears, rate hike expectations, and ongoing geopolitical risks. In the currency space, king dollar loosened its grip on the FX space allowing G10 majors to bounce while lingering below its 200-day Simple Moving Average.

Over the past few weeks our attention has been on king dollar but this afternoon the spotlight shines on minor and cross currency pairs. The minors are normally referring to non-USD forex currency pairs while crosses are pairs that do not contain the dollar as either the base or quote currency.

Although minors and crosses are slightly less popular than the majors and often experience more wild swings due to less liquidity in the markets, they still present trading opportunities. So, if you have had enough of the dollar and would like something different, check out the setups below!

GBPJPY wobbles above 160.00

After rallying the previous session, the GBPJPY looks tired and may be running on empty fumes. Prices remain bearish on the daily timeframe with the candlesticks trading within a negative channel. A breakdown below 160.00 could result in a steeper decline towards 157.50 and lower. Should 160.00 prove to be reliable support, an incline back towards 162.00 could be on the cards.

GBP/JPY Daily chart

EUR/JPY ready to resume selloff?

The technical bounce on the EURJPY could be over if prices fail to push above 137.00. Bears still remain in some control with prices respecting a bearish channel on the daily charts. A decline back under the 50-day Simple Moving Average could trigger a selloff towards 134.50 and 133.00, respectively. If prices are able to break above 137.00, then a move towards 138.00 could become reality.

EUR/JPY Daily chart

EUR/GBP choppy as ever

There is a lot going on with the EURGBP as bulls and bears battle it out. Prices remain as choppy as ever but the trend could turn negative if prices close below 0.8420. Sustained weakness below this level could result in a further decline towards 0.8380. If prices are able to bounce from 0.8420, the next key level of interest can be found at 0.8500.

EUR/GBP Daily chart

EUR/AUD breakdown or bounce?

As the subtitle says, the EURAUD can either experience a technical bounce from 1.4900 or breakdown below this point to hit 1.4600. The trend looks bullish on the daily charts but prices are trading below the 100 and 200-day Simple Moving Average. Should 1.4900 prove to be reliable support, a move back towards 1.5300 could on the cards.

EUR/AUD Daily chart

AUD/NZD higher highs and higher lows…

This currency pair remains firmly bullish on the daily timeframe. There have been consistently higher highs and higher lows while the MACD trades to the upside. A solid breakout and daily close above 1.1100 could encourage a move higher towards 1.1200. A daily close below 1.0750 could trigger a selloff towards 1.08200.

AUD/NZD Daily chart

For more information, please visit: FXTM

Can the UK Data Splurge Save Sterling?

Written on 17/05/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Sterling should come with some sort of health warning. This morning, it is the turn of the bears to take a bruising after sellers were looking to push GBP/USD down to another round number and 1.20. This morning’s strong set of UK employment data has helped propel the pound higher and we get the all-important inflation figures out early tomorrow.

Red-hot labour market

It’s the middle of the month so that means a UK data deluge. First up were today’s jobs numbers which saw unemployment fall to its lowest level in nearly half a century in the first quarter of 2022. The jobless rate stood at 3.7% with fewer people out of work than there were job openings for the first time on record. Hiring demand remains solid and a lack of workers means wage growth is running a little faster than it was before the pandemic.

Amid all the headlines, the scorching labour market may start to cool as the squeeze on household incomes deepens. It is also important to note that the Bank of England recently forecast that the unemployment rate could rise above 5% in the next two years. So, upcoming employment reports will be important as they inform on increasing recession risks to the economy.

CPI on a tear to 9%+

We may get even bigger headlines tomorrow with the release of inflation data for April. Consensus sees a huge jump in the headline figure to 9.1% y/y from 7% in March. It is going some when a miss on the data could still print at 9% for headline CPI. The main culprit for the surge is the massive 54% energy price hike by the UK energy regulator (Ofgem). This is really a symptom of the energy crisis in Europe due to surging wholesale market prices surpassing the caps and driving several suppliers to the wall.

Key for markets will be the size of the relative price shock to household’s energy bills. The BoE has already warned of 10% inflation into autumn later this year. This is expected to dampen discretionary household spending and crowd out some pricing power in other part so the economy. Indeed, this could show up in the retail sales numbers that are released on Friday.

Sterling bounces hard

Governor Bailey added to the more positive sentiment around the pound by sounding more combative yesterday on fighting inflation. This was in contrast to the recent BoE meeting and the focus on the grim growth outlook. His emphasis was clearly more on runaway inflation and the tight labour market at his testimony. This has helped solidify rate hike hopes for a 2% policy rate by the end of the year. Cable needs to close above 1.25 to fend off more selling. Any consolidation would then need to advance beyond the month-to-date top at 1.2638.

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

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Week Ahead: Sterling to Sink to Greater Depths?

The selloff across bonds, stocks, and even cryptos has taken a steeper dive so far this month, amid worries that central bank rate hikes could choke the global economy.

Economic Calendar for Next Week

Investors and traders worldwide will be scouring the following economic data and events in the coming week, looking for reasons as to whether the selloff should be extended or perhaps take a breather:

Monday, May 16

JPY: Japan April PPI
CNH: China April industrial production, retail sales, property sales, and unemployment rate
EUR: EU Commission releases Spring economic forecasts
USD: New York Fed President John Williams speech

Tuesday, May 17

AUD: RBA releases May policy meeting minutes
GBP: UK March unemployment and April jobless claims
EUR: Eurozone 1Q GDP and employment
USD: US April retail sales and industrial production
USD: Fed speak
Fed Chair Jerome Powell
Chicago Fed President Charles Evans
Cleveland Fed President Loretta Mester
Philadelphia Fed President Patrick Harker
St. Louis Fed President James Bullard
Q1 earnings: Walmart, Home Depot, Vodafone, JD.com

Wednesday, May 18

JPY: Japan 1Q GDP
GBP: UK April CPI and PPI, BOE MPC member Catherine Mann speech
US crude: EIA weekly US crude inventories
CAD: Canada April CPI
USD: Philadelphia Fed President Patrick Harker speech
Q1 earnings: Tencent, Target

Thursday, May 19

JPY: Japan April external trade
AUD: Australia April unemployment
ZAR: South Africa Reserve Bank rate decision
EUR: ECB publishes April meeting accounts
USD: US weekly initial jobless claims
Xiaomi Q1 earnings

Friday, May 20

JPY: Japan April CPI
GBP: UK April retail sales, May consumer confidence
EUR: Eurozone May consumer confidence

British Pound Latest Moves and Fundamentals

The GBP index, which measures Sterling’s performance against six of its G10 peers in equal weights, is trading around its lowest levels since December 2020.

GBP/USD Daily chart

This index could return to recent lows if the coming week’s data on jobs, inflation, retail sales, and consumer confidence point to more economic woes.

After all, the Bank of England recently highlighted the risk of a recession by year-end.

Darker clouds over the UK economic outlook should keep the GBP index firmly entrenched in the downtrend that has persisted since February, potentially sending this index back towards the 1.47 mark.

The growing downside risks to the UK economy, which are expected to narrow the window of opportunity for further BOE rate hikes, have allowed most of Sterling’s G10 peers to maintain a year-to-date advance against the Pound.

Even the beleaguered euro has seized the opportunity to break out of its downtrend against GBP that had been in place since September 2020.

Last week, EURGBP secured a weekly close above its 50-week simple moving average for the first time since January 2021.

EUR/GBP Weekly chart

And with King Dollar reigning supreme across the FX universe, GBPUSD has been sent to its weakest levels since November 2020.

GBP/USD Daily chart

GBP/USD Price Forecast

We may see even more US dollar strength in the coming week if the scheduled Fed speak does little to douse the prospects of a 75-basis point US rate hike over the summer months.

Such perceived signals for an ultra-hawkish Fed, coupled with dismal data out of the other side of the Atlantic, should heap more downward pressure on GBPUSD and potentially drag ‘cable’ closer to the psychologically-important 1.20 line.

Although GBPUSD’s 14-day relative strength index has broken below the 30 threshold that denotes oversold conditions, any recovery should prove fleeting, as long as the UK economic data suggests that a recession is inevitable and binds the BOE’s hawkish hands, all while the Fed presses ahead with rate hikes galore.

By Lukman Otunuga Senior Research Analyst

S&P 500 Set for ‘bear market’ – How Much Further Can US Stocks Fall?

This blue-chip index is down almost 18% from its record high set on January 3rd this year, almost meeting the threshold for a ‘bear market’.

S&P 500 Daily chart

What is a ‘bear market’?

A ‘bear market’ occurs when the price of an asset has fallen by at least 20% from its recent high.

Although it’s a seemingly arbitrary number (it doesn’t mean that US stocks will only fall by 20%), this traditional definition of a ‘bear market’ can be used as a sign that the US economy is headed for trouble (though not always a recession).

What is the S&P 500?

The S&P 500 is an index which measures the overall performance of US stock markets.

This index comprises 500 large companies that are leaders in their respective sectors such as IT, banks, healthcare, industrials, and real estate.

Hence, the S&P 500 is often used as a barometer for the US economy.

And in recent months, the S&P 500 has been pointing south.

Why are US stocks falling?

The primary reason for the sheer drop in stocks is because the US Federal Reserve (and other central banks around the world) is raising interest rates and reducing their balance sheet.

The Fed is doing this because US inflation is staying stubbornly elevated, around its highest levels in 40 years!

Last month, the US consumer price index, which is used to measure the changes in prices that consumers pay for goods and services, rose by 8.3% compared to April 2021. Back in March, the CPI grew by 8.5% compared to the same month last year (year-on-year).

In order to help bring these consumer prices down, the Fed is trying to “destroy” some of the demand in the economy.

When interest rates rise …

= more money is sucked out of the economy
(e.g. a borrower needs more money to pay higher interest on existing loans. The money used for those higher interest payments could’ve been spent on other goods or services).

= businesses earn less income (due to less spending in the economy)

= businesses may eventually be forced to lower its prices to meet the lower demand for its goods and services

= lower inflation (consumer prices still rise, but no longer at such as steep pace)

Also, in order for a business to survive, sometime it has to lower costs by paying less for workers’ salaries, or even reduce the number of staff employed. This can translate into either folks having less in disposable incomes, or even fewer people with incomes to spend.

Hence, the so-called “demand-destruction” that can help ease inflation back lower.

However, this task of slowing down inflation is far from straightforward, and can have massively negative consequences

The Federal Reserve thinks it can lower demand gently enough without causing a recession (a recession = when the economy shrinks).

Markets however are highly sceptical and are growing more fearful about the possibility of a recession, or at least a stagflation (when inflation remains high but the economy barely grows).

  • Investors become less optimistic about the ability of US companies to generate profits over the near-term, if the economy were to become smaller by way of a recession.
  • Hence, investors sell the shares in these companies, preferring to invest in something safer or set aside the cash to help weather the possible recession ahead.

How low can the S&P 500 go?

According to Bank of America analysts, there have been:

  • 19 bear markets over the past 140 years
  • each time, the S&P 500 averaged a drop of 37.3% from its peak
  • the full drop happened over the course of 289 days

According to data from the S&P and Bloomberg, there have been

  • 12 bear markets for the S&P 500 since World War 2
  • average drop: 33.8% per bear market
  • duration lasted anything from a month (during the pandemic) to 3 years (May 1946 – June 1949, after World War 2).

Using such measurements, that suggests that the S&P 500 could ultimately fall down to the 3,000 mark by October.

Such a drop would bring the S&P 500 back to levels not seen since June 2020!

Perhaps at this juncture, it’s apt to quote Bon Jovi in saying (or singing) “we’re halfway there”, and (US stocks are) “livin’ on a prayer.”

The good news is that US stocks tend to recover faster than the time it takes to see its full drop.

Still, between now and then, there could be a lot more pain in store for stock markets not just in the US, but also worldwide.

By Han Tan Chief Market Analyst at Exinity Group.

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

Trade Of The Week: Will Gold Prices See More Pain?

After almost kissing the psychological $2000 level back in mid-April, bulls ran out of steam – allowing bears to drag the precious metal to prices not seen since February 2022!

Last Friday’s strong US report compounded gold‘s woes as expectations intensified over the Federal Reserve maintaining an aggressive approach towards monetary policy. This report comes after the Fed raised interest rates by 0.50 bps points for the first time since 2000.

Federal Funds target rate

With the dollar climbing to its highest level in two decades and treasury yields rising amid expectations the Fed may continue hiking rates to tame inflation, gold could be in trouble.

The week ahead promises to be eventful for the precious metal thanks to key US economic data, speeches by Fed officials, and ongoing geopolitical risks.

Gold Technical Analysis

On the technical front, the path of least resistance points south with prices wobbling above the $1855 support as of writing. Although the balance of power currently swings in favour of bears, bulls could still strike in the right conditions.

Before we cover what to expect from gold over the next few days, it is worth keeping in mind that the precious metal has dropped roughly 6% since the 18th of April when prices almost hit $2000.

Since the start of May, gold is down almost 2% and has extended its longest run of weekly losses this year.

With the 10-year Treasury yield rising to its highest level since November 2018, gold may struggle to shine. It’s worth keeping in mind that the precious metal offers no yield, making it less attractive for investors to own in an environment of rising Treasury yields.

US Inflation data & Fed speeches in focus

The major risk event for gold may be the pending US CPI report.

Given how markets remain highly sensitive to inflation fears, the report could spark explosive levels of volatility in gold. The key question is whether the report will send the precious metal tumbling or provide a lifeline. According to an economist’s poll by Bloomberg, US inflation is expected to rise 8.1% year-on-year in April compared with 8.5% in March. A figure that exceeds market expectations could send the dollar higher, enforcing downside pressures on gold prices. Expect the gold to also feel the burn if speeches from Fed officials over the next few days revive expectations around a 75 basis-point rate hike in June.

Geopolitical risks could provide cushion

The heightened levels of uncertainty and volatility caused by geopolitical risks could direct investors towards gold’s safe embrace.

As the Russia-Ukraine conflict continues, global sentiment is likely to remain shaky with investors adopting a guarded approach toward riskier assets. Inflationary worries and increasing concerns relating to China could fuel the risk-off sentiment – lending some support to gold. Will this support be enough to counter the pressure created by an appreciating dollar, rising treasury yields, and Fed rate hike bets? Time will tell.

Gold ETFs Favour Bears

According to an automated report from Bloomberg, gold ETFs cut 66,718 troy ounces of golf from their holdings last Friday, bringing this year’s net purchases to 8.42 million ounces.

The outflows could be the product of the strong US jobs report which boosted Fed rate hike bets and an appreciating dollar. A gold ETF provides investors exposure to gold without owning it physically. In this instance, outflows from ETFs are seen as bearish for the underlying asset.

Gold breakdown on the horizon?

The subtitle says it all.

Gold remains under pressure on the daily charts with prices wobbling above the $1855 support as of writing. Over the past few weeks, the precious metal has been battered by a stronger dollar, rising treasury yields, and Fed rate hike bets. Prices are bearish with a breakdown below $1855 opening a path towards $1820 and $1780. Should $1855 prove to be reliable support, prices may rebound back towards $1900 and $1920.

Zooming out on the monthly charts, prices remain in a wide range with support around $1700 and resistance at $2000. A major directional catalyst may be needed for gold to secure a monthly close above or below these key levels.

By Lukman Otunuga Senior Research Analyst

How Far Is the Fed Prepared to Take Policy Tightening?

Written on 03/05/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Inflation, Labour Market and the FOMC

This aggressive step is just the first of three half point moves anticipated by markets at its next meetings in June and July. Policymakers are focused on the historic pace of inflation at 40-year highs and the associated risks.

Markets have been left in no doubt that the FOMC intends to speed up rate hikes to get the Fed Funds target rate quickly back to neutral. The March FOMC minutes revealed that a 50bp hike could have been on the table had it not been for the Ukraine conflict. That is a rare event when the Fed even considers delivering something that was not pre-discounted by the market (even if often pushed there by the Fed in the first place).

Chair Powell himself has said it was appropriate to “be moving a little more quickly” to tighten policy. indeed, he guided that “there’s something to the idea of front-loading” rate hikes. The latest inflation print hit 8.5% and Fed officials have warned of upside risks to price growth due to war in Ukraine and Chinese lockdowns.

The tight labour market should also be confirmed with another healthy non-farm payrolls report on Friday, which should trump the surprise first quarter GDP contraction. Wages are rising amid a lack of workers with most economists seeing US consumer price growth remaining elevated above 4% during 2022.

Fed Funds Rate Forecasts for the Rest of the Year

Markets are betting that the Fed funds rate, currently between 0.25% and 0.5%, will be lifted to 2.7% by the end of December, pushing potentially up to 3% next year. Financial conditions have begun to tighten, in anticipation of quantitative tightening that should be formally announced on Wednesday. We also note that sentiment figures have been edging lower recently. This could point to a cyclical slowdown in the second half of the year.

But monetary policy remains highly accommodative with the US 10-year “real” rate only just turning positive. That means it is still below neutral which signifies that policy remains very easy. Many economists see risks may be skewed towards faster rate moves and an even stronger dollar. A half point rate rise is baked in so it will be down to Chair Powell and a repeat of an “expeditious” normalisation of policy to keep the buck bid. The key question is how fast the Fed can raise rates without slowing growth and causing a US recession.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Trade Of The Week: Is The Pound In Trouble?

Sterling hijacked our attention last Friday after collapsing like a house of cards!

GBP/USD Daily chart

It has stumbled into the new week under renewed pressure, struggling to nurse deep wounds inflicted by the dismal retail sales and consumer confidence data. Mounting concerns over the cost-of-living crisis dragging the UK economy into a recession continue to hammer the pound, which is currently trading at levels not seen since September 2020.

Disappointing economic data may fuel speculation over the BoE slowing interest rate rises while political noise from Westminster regarding the post-Brexit trade deal is likely to compound the currency’s woes. Since the start of April, sterling has weakened against most G10 currencies, shedding over 3% versus the dollar of writing.

Taking a quick peek at the technicals, prices look heavily bearish on the weekly timeframe with support at 1.2750. A solid breakdown below this point could drag the GBPUSD to levels not seen since mid-2020 around 1.2500.

GBP/USD Weekly chart

More pain on the horizon for sterling?

Since the start of 2022, the pound has weakened against almost every single G10 currency. It’s is down over 6% versus the dollar and more than 5% against the Canadian dollar.

GBP Year to Date

The pound has the potential to weaken further if weak economic data forces the Bank of England to adopt a cautious approach towards rate hikes. In fact, Andrew Bailey, BoE governor recently hinted that the UK interest rates may be increased less aggressively amid recession fears.

Indeed, retail sales fell by an unexpected 1.4% in March as the rising cost of living hit consumer spending. Consumer confidence plunged to its lowest level since the 2008 recession while PMIs decline in April, signalling that the economy is slowing considerably. But with inflation hitting a 30 year high of 7% which is more than triple the target of 2%, the BoE is certainly in a tricky position.

The central bank is widely expected to raise interest rates by 0.25bp in May, with a total of 6 hikes expected by the end of 2022.

However, repeatedly weak economic data and post-Brexit related uncertainty could throw a spanner in the works for BoE hawks – resulting in a weaker pound. This weakness is likely to be intensified by an increasingly aggressive and hawkish U.S Federal Reserve.

The week ahead…

It’s a relatively quiet week on the UK economic calendar. However, this does not mean it will be a quiet week for the British pound.

GBP/USD 1 hour chart

The GBPUSD has already dropped over 100 pips this morning, with weakness being seeing across the board.

GBP/USD 4 hour chart

There is a lot going on with the dollar with key economic data likely to inject the currency with renewed vigour. Over the next few days, US consumer confidence data, Q1 GDP, consumer sentiment and the PCE deflator among other key reports will be published. Should they reinforce market expectations over the Federal Reserve aggressively raising interest rates, the dollar is set to appreciate further – dragging the GBPUSD lower.

GBP/USD bears step into higher gear

The GBPUSD is heavily bearish on the daily timeframe as there have been consistently lower lows and lower highs. Prices are trading well below the 50, 100 and 200-day Simple Moving Average while the MACD trades below zero. Interestingly, the RSI has fallen below 30 which suggests that the GBPUSD could be oversold.

GBP/USD Daily chart

A solid daily close below the 1.2750 support level could see the currency pair sink towards 1.2600 before experiencing a technical bounce. Alternatively, should 1.2750 prove to be reliable support, the GBPUSD could rebound back towards 1.2900 before resuming the downtrend.

GBP/USD Daily chart

On the monthly timeframe, the GBPUSD is respecting a monthly bearish trend. A solid monthly close below 1.2750 could open the doors towards 1.2500 and 1.2300. If bears run out of steam, a move towards 1.3000 and 1.3150, respectively.

GBP/USD Monthly chart

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Week Ahead: Can USD/JPY Hit Fresh 20-Year High Above 130?

Major Data Releases and Events in the Week Ahead

Shifting expectations for the next policy moves by major central banks remain a key theme across global financial markets, as investors and traders digest these major data releases and events in the week ahead:

Monday, April 25

EUR: Euro to react to Sunday’s French presidential election results
EUR: Germany April IFO business climate

Tuesday, April 26

JPY: Japan March unemployment
USD: US April consumer confidence
Alphabet Q1 earnings

Wednesday, April 27

AUD: Australia weekly consumer confidence, 1Q CPI
CNH: China March industrial profits
US crude: EIA weekly US crude inventories
Meta Platforms Q1 earnings

Thursday, April 28

JPY: Bank of Japan policy decision, March retail sales and industrial production
EUR: Germany April CPI, Eurozone April economic confidence, ECB economic bulletin
USD: US weekly initial jobless claims, 1Q GDP
Nasdaq 100: Amazon, Apple, Twitter Q1 earnings

Friday, April 29

EUR: Eurozone April CPI, 1Q GDP
USD: US March personal income and spending, PCE deflator, April consumer sentiment
Exxon Q1 earnings
Chevron Q1 earnings

US Dollar vs Japanese Yen fundamental analysis

The Bank of Japan is set to go into action, or rather the lack thereof, as the central bank is widely expected to stick to its ultra-loose monetary policy stance.

The BOJ has kept its policy rate floored at negative 0.1% and buying up even more bonds, which is in stark contrast to what other major central banks are doing (bar China). Most central banks around the world are already raising interest rates and starting to curb their bond purchases in an apparent race to quell skyrocketing inflation.

This policy divergence between the Fed and the BOJ in particular has sent USDJPY racing towards a 20-year high, closing in on the psychologically-important 130 mark.

Still, it’s ascent is on a breather at this point in time, with the 14-day relative strength index suggesting that the currency pair is trying to clear some of the froth and attempting to recover from overbought conditions.

USD/JPY Daily chart

Markets will be closely monitoring if BOJ Governor Haruhiko Kuroda will make any adjustments to policymakers’ stance on keeping bond yields capped at 0.25% and tolerating a weaker yen.

If the BOJ chief stays staunchly dovish, that could well pave the way for USDPJY to run towards its 2002 peak around 135. This climb could be further accentuated if the incoming GDP and PCE deflator data out of the US shows that the world’s largest economy could do with more Fed rate hikes – widening the policy divergence between the Fed and the BOJ.

However, any hints that a change in tack is forthcoming could translate into the unwinding of gains for USDJPY, potentially moving it closer to the previous cycle’s peak of 125.10.

French presidential election: Macron win could aid EUR/USD recovery

The euro recently resurfaced back above the 1.08 mark against the US dollar as markets return to their bets that the European Central will be forced to lean harder into its hawkish pivot.

Still, the recovery in the bloc currency proved fleeting, with EURUSD‘s downside bias still evident at the time of writing.

While the ECB policy outlook remains a major influence over the euro’s performance, traders and investors will also be digesting the results out of the presidential elections between incumbent Emmanuel Macron and nationalist challenger Marine Le Pen when markets reopen for the new trading week.

A win for Macron, which should ensure policy continuity amid a trying time for the Eurozone, could result in further relief for the euro.

However, a surprise Le Pen victory, which injects policy ambiguity into an already uncertain economic outlook in light of the still-raging war in the Ukraine, may drag EURUSD further below 1.08 as a knee-jerk risk-off reaction.

Big Tech earnings boost needed to stem losses for Nasdaq 100

Surging US Treasury yields in recent months have earned the scorn of tech stocks, with the Nasdaq 100 dragged further below 14,000 this week.

The prospects of higher US interest rates and the accompanying rise in borrowing costs have soured the outlook for growth companies.

NASDAQ 100 daily chart

Having a year-to-date drop of almost 16% (before US markets open on Friday, 22 April), it’s up to illustrious names such as Amazon, Apple, Alphabet, Meta and Twitter to provide an earnings beat to shore up the declines in the Nasdaq 100 (though Twitter’s earnings call will likely be dominated by the latest developments surrounding the much-hyped takeover bid by Elon Musk).

Note that the 5 companies mentioned above have a combined market cap of more than US$6.4 trillion, which is almost 40% of the entire market cap of the Nasdaq 100.

In other words, those 5 companies carry a lot of heft that could move the entire index.

These Big Tech companies are expected to see decelerating growth last quarter, given the heightened competition and the tough comparisons with a stellar Q1 2021.

Still, any positive surprises out of these earnings calls (barring another shock move by Mr. Musk) could offer some relief for the Nasdaq 100, though the index is expected to remain capped by its 50-day simple moving average as the prospects of more incoming Fed rate hikes loom closer.

By Han Tan Chief Market Analyst at Exinity Group

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Why Is the Yen So Weak?

By Han Tan Chief Market Analyst at Exinity Group

Last Tuesday, USDJPY posted its biggest single-day climb since November 2020, only to then take a breather for the time being.

(Note: weaker Yen versus the US dollar = USDJPY climbs higher).

USD/JPY Daily chart

The last time USDJPY traded at these levels just below 130, Eminem had just released his hit 2002 track, “Without Me”.

In fact, JPY is the worst performer against the US dollar amongst all G10 currencies … by far.

And the Yen’s woes aren’t just limited to its performance against the US dollar alone.

Consider how the JPY Index has weakened by almost 9% so far this year.

JPY Index daily chart

This index comprises a basket of currency pairs measuring the Yen against its G10 peers, all in equal weights:

NZDJPY
GBPJPY
CHFJPY
EURJPY
AUDJPY
USDJPY

The Yen also has a year-to-date decline against all its major Asian counterparts as well.

So why is the Yen so weak?

The main reason is because of monetary policy divergence.

Let’s break it down.

Firstly, monetary policy is the way a central bank achieves its goals for the economy (e.g. maximum employment, stable prices, etc.), using tools like interest rates, money supply, and even currency levels.

And where’s the divergence?

The Bank of Japan is still using its monetary policy to support its economy.

This is in stark contrast to what most other central banks around the world are doing = pulling back that support. They do this by raising interest rates/easing back on bond purchases.

The goal of such policy-tightening (not what the BOJ is doing) is to reduce money supply and demand levels in an economy = less money chasing after scarce goods = to lower consumer prices/inflation.

Monetary policy: Comfort food vs. a regular diet

Consider when a child is feeling down, his/her parents may have no qualms treating the child to some ice cream, candy, or chocolate bars.

Such sweet indulgences are meant to make the child feel better in a jiffy, but is (hopefully) just a short-term fix and also (again, hopefully) far different from the regular diet the child consumes as part of the daily routine.

Similarly, when the economy was suffering during the pandemic, central banks rolled out record-low interest rates and printed money out of thin air to keep financial markets supported.

Low interest rates = cheaper for households/businesses to borrow money = they have money to spend in the economy = the economy gets better

But now that economies are recovering and even posting red-hot inflation numbers, it no longer needs record-low interest rates and unlimited bond purchases

Hence, central banks are returning to their economy’s “regular diet” by tightening policy = paring down bond purchases/reducing the supply of money in the economy/raising interest rates.

Who’s already hiking rates?

Within the G10 space alone:

  • Bank of New Zealand – raised its benchmark rate by 125 basis points (1.25%) since Q3 2021
  • Bank of Canada – raised its benchmark rate by 75 basis points so far this year
  • Bank of England – raised its benchmark rate by 65 basis points since December
  • US Federal Reserve – raised rates by 25 basis points in March, perhaps another 50-basis point hike in May

But not so the Bank of Japan.

It’s keeping Japan’s benchmark interest rate at a record low of negative 0.1%, while buying up even more bonds.

Hence, the divergence in monetary policy.

How is policy divergence playing out in markets?

This divergence is evident in the widening gap in yields between Japanese bonds and its global counterparts.

Firstly, what are yields?

Yields are a way to measure how much money you could earn on an investment over a set period of time.

In the case for bonds, it’s calculated in terms of how much interest one would get paid if they held on to that bond till it matures/reaches the end of its tenure.

For context, bond yields have been climbing around the world.

This is because investors are selling off bonds in tandem with central banks that are reducing their balance sheets.

And when bond prices drop, their yields rise.

Here are the benchmark 10-year yields for these other countries (at the time of writing):

US = 2.88%
Canada = 2.87%
China = 2.82%
UK = 1.95%
Germany = 0.89%

Contrast the numbers above with Japan’s 10-year yields, which are capped at 0.25%.

As a policy, the Bank of Japan is buying even more bonds to keep bond prices elevated and limit its benchmark 10-year yields to no higher than 0.25% (this process is also known as “yield curve control”).

The goal for capping those yields is to keep borrowing costs low in Japan so that households/businesses can still borrow to stimulate the economy.

Government bond yields are often used as the benchmark by which other banks/financial institutions calculate the interest to charge the customers who borrow money.

Here are two charts that show how the widening gap/spread between US benchmark yields vs. Japan’s benchmark yields (10-year government bonds) correspond with the USDJPY’s performance:

US vs JPY yields spread and USD/JPY

See how those two lines are moving in sync with one another?

In essence, the wider the gap between US and Japan’s yields, the higher USDJPY goes (the weaker the Japanese Yen against the US dollar).

How are Japan’s capped yields affecting the yen?

The lower yields on offer in Japan suggests that investors would get more bang for their buck by buying bonds in other countries that are now posting higher yields (again, yields in this case are a measure of how much one could earn from investing in that particular bond).

At risk of oversimplifying matters:

Less demand for Japanese assets = less demand for the Japanese yen.

And when there’s lower demand = prices fall (all else equal).

Hence, the Yen has been falling as investors shun Japanese bonds.

From a fundamental perspective, markets are getting the sense that the Japanese economy is still too fragile – or at least the Bank of Japan thinks so of its own economy – and is nowhere near strong enough to be able to do without the ‘comfort food’ from the central bank.

But of course all that could change, as the BOJ faces increasing pressure to follow suit with other central banks in tightening policy … or perhaps even just to stem the Yen’s weakness.

Which brings us to the final question to ponder upon for this article …

Will the Yen eventually rebound?

As a market cliche goes … nothing lasts forever.

So yes, theoretically the Yen could eventually rebound.

But one of two things may need to happen first:

1) The Bank of Japan has to signal that its willing to abandon its ultra-loose monetary policies.

Policymakers need to be convicted that Japan’s economic recovery is sustainable, and that inflation is being fuelled by robust demand (a.k.a. demand-pull inflation) as opposed to cost-push inflation.

To be clear, this seems unlikely for a while more, at least through the end of 2022.

Still, look out for the Bank of Japan policy meeting next week (April 28th).

The slightest clue that the BOJ is ready to tweak its policy stance could trigger a big move in the Yen.

2) Policymakers intervene to curb Yen weakness

This has been done before, but not for quite some time.

The last time the Japanse government propped up the yen was back in 1998, when USDJPY traded above 140 and peaked at 147.66 in September 1998.

However, back in 2002 even when USDJPY surpassed 135, the government sat on its hands and didn’t intervene.

So it remains to be seen at what level Japanese policymakers will tolerate before trying to stop the Yen from weakening further.

Keep in mind that a drastically-weaker Yen causes its own problems for the economy.

Japan is a net importer of energy, which are widely denominated in US dollars. The weaker Yen forces Japan to spend more of its currency to buy the same amount of fuel, not to mention the other imported goods (e.g. food) and services that it now has to spend more money on. If the imported costs become too great and weigh on businesses/households, then the Japanese government may be forced to pay for subsidies to ease the pain.

That’s money out of the Japanese government’s pocket that could be spent on other things.

So until either of the above scenarios happen, shorting the Yen has remained a popular bet.

Last week, asset managers raised their short bets on the Yen to the most ever on record, according to CFTC data.

Overall, as long as this policy and yields divergence continues to play out between Japan and other major economies, that’s likely to keep the Yen on its weakening path for longer.

That is, unless the BOJ or Japan’s Finance Ministry switches tact and, in intervening to halt the Yen’s weakness, might do so while singing lines from Eminem’s monster hit from 2002 …

“Now this looks like a job for me
So everybody, just follow me
‘Cause we need a little, controversy
‘Cause it feels so empty, without me”

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Yen Bashing Continues as USD/JPY Closes in on 130

Written on 20/04/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Japanese Yen Fundamental Analysis

The Japanese currency has dropped over five per cent this month alone and more than 10 per cent this year. This puts it outpacing even the Russian ruble and Argentinian peso as the worst performer among 31 major currencies, with it chalking up its worst losing streak against the dollar in more than half a century.

In recent weeks, after prices broke to the upside above the March high at 125.10, it has seemed inevitable that traders would test the Y130 marker as a potential line in the sand for Japanese authorities. But the market reaction to recent comments from both the Bank of Japan and the Ministry of Finance has been fairly dismissive as traders have appeared to take little notice of remarks aimed at calming the yen’s descent.

Japan’s Finance Minister Suzuki was the most recent official to hit the wires, adopting a marginally stronger one than in previous days, declaring the speed and abruptness of the currency’s move as “undesirable”.

But as loud as this jawboning has become, once again the Bank of Japan overnight offered to buy unlimited amounts of 10-year Japanese Government Bonds at 0.25% in a move that indicated an unchanged, very dovish policy. It is this increasing divergence between the BoJ and other major central bank policies that continues to weigh on the yen.

US 10-year Treasury yields have notched a new cycle peak and are threatening the hugely significant 3% level. The 30-year US Treasury yield has already breached this mark, for the first time since March 2019. There are around 225 basis points of Fed rate hikes priced in by the markets for this year, while the BoJ continues to stick with its yield curve control policy that caps 10-year Japanese Government bond yields at 0.25%.

Yen Impact on Economy

The pressure to intervene will undoubtedly increase as the yen continues its desperate slide. Of course, for all the authority’s rhetoric, JPY weakness is good news for the economy and exports, as well as a factor to spur imported inflationary pressures. This is key when we see that core inflation remains in negative territory and growth is still below pre-pandemic levels.

Above 130, the government may start to worry about consumer’s purchasing power ahead of this summer’s Upper house elections. Clothing and textile industries too, are being hurt substantially by the weaker yen. But the market will do what markets do and test the authorities as much as they can. There is no easy fix and intervention, and jawboning will only be a temporary solution while underlying policy and market dynamics stay as they are.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

A Volatile Week Ahead for Financial Markets?

European markets opened lower this morning due to the deepening crisis in Ukraine, with the caution likely to find its way back to US markets this afternoon. In the currency space, the mighty dollar rose to a fresh two-year high during early trade, supported by rising treasury yields and Fed hike bets. Gold slipped after almost kissing $2000 in the previous session, while oil benchmarks steadied after jumping on Monday.

Despite the public holiday in most of Europe yesterday, this is shaping up to be another volatile and eventful week for global markets. The latest comments from the World Bank have added to the cocktail of caution that will most likely influence sentiment over the next few sessions.

The bank cut its global growth forecast for 2022 by nearly a full percentage point to 3.2% from its previous estimate of 4.1%, thanks to the war in Ukraine, soaring inflation, and the lingering effects of Covid-19. Later today, the International Monetary Fund (IMF) will release its updated global economic outlook with markets expecting a downgrade for growth this year. Such a development may hit investor confidence, sweetening appetite for safe-haven assets.

On the earnings front, Johnson & Johnson and insurance company, Travelers will report their latest results before the opening bell. Streaming giant Netflix will release its earnings after the market close. Traders will also focus on speeches from financial heavyweights Fed Chair Jerome Powell and ECB President Christine Lagarde later this week.

Dollar Flexes Muscles Across the FX space

The dollar tightened its grip on its throne this morning by rising to a fresh two-year high as investors braced for more aggressive U.S rate hikes. Markets have fully priced in a 50bp rate hike at the Fed’s May meeting, with the odds of another half-point rate hike in June very high. Given how the dollar has appreciated against every single G10 currency this month, bulls are certainly in a position of power to drive prices higher.

When considering how the week ahead will be filled with more speeches from Fed officials, this could fuel upside gains if they all sing a hawkish tune. Indeed, we heard from arch-hawk Bullard overnight who signaled an openness to a 75bp hike. The dollar index (DXY) has the potential to challenge 103.00 if a solid daily close above 101.00 is secured.

Commodity Spotlight: Gold

After rallying within a hair’s length of $2000 in the previous session, gold is trading back around $1974 as of writing. With numerous competing themes likely to influence market sentiment this week, gold may find itself pulled and tugged by conflicting forces. Heightened geopolitical risks and global growth concerns could trigger risk aversion, sending investors rushing towards gold’s safe embrace. However, an appreciating dollar, rising Treasury yields, and Fed hike expectations may create multiple obstacles down the road.

Looking at the technical picture, gold has the potential to trend higher, but prices seem to be forming another range. Support can be found at around $1960 and resistance at $2000. A move back below $1960 could trigger a selloff towards $1920. Alternatively, a solid breakout above $2000 may open the doors towards $2009, $2015, and $2050, respectively.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Week Ahead: Gold May Climb Higher on Darkening Global Outlook

By Han Tan Chief Market Analyst at Exinity Group

More Fed speak …

more US earnings …

and the freshest updates to the global economic outlook (via the latest IMF projection and GDP figure for China, the world’s second largest economy) …

Data Releases and Event for Next Week

Investors and traders can feast on these major data releases and events scheduled for the week ahead:

Monday, April 18

CNH: China Q1 GDP, March industrial production and retail sales
Bank of America 1Q earnings
USD: St. Louis Fed President James Bullard speech
UK, European, Hong Kong markets closed

Tuesday, April 19

JPY: Japan February industrial production (final)
Gold: IMF releases updated world economic outlook
Netflix 1Q earnings
USD: Chicago Fed President Charles Evans speech

Wednesday, April 20

JPY: Japan March external trade
CNH: China loan prime rates
EUR: Eurozone February industrial production
CAD: Canada March CPI
US crude: EIA weekly US crude inventories
Tesla 1Q earnings
USD: Fed releases Beige Book, speeches by San Francisco Fed President Mary Daly and Chicago Fed President Charles Evans

Thursday, April 21

NZD: New Zealand Q1 CPI
EUR: Eurozone March CPI (final), April consumer confidence (advance)
USD: US weekly initial jobless claims
EURUSD: Fed Chair Jerome Powell and ECB President Christine Lagarde take part in IMF discussion

Friday, April 22

American Express 1Q earnings
EUR: Eurozone April PMIs
GBP: UK March retail sales, April consumer confidence and PMIs, BOE Governor Andrew Bailey speech
CAD: Canada retail sales

Monday’s data dump out of the China should give investors a better idea of what 2022 has in store for the world.

Here’s what economists are forecasting:

  • Q1 GDP = 4.2% growth compared to Q1 2021 (year-on-year); faster than the 4.0% y/y posted in Q4 2021
  • March industrial production = 4.0% y/y, lower than December’s 4.3% and the 7.5% posted for the January-February 2022 period.
  • March retail sales = -3%, compared to 1.7% y/y growth in February

The contraction in March retail sales is particularly telling, considering that the tail-end of the month saw lockdowns imposed in Shenzhen and Shanghai, China’s financial hub.

Given that China is the world’s second largest economy and also the largest trading partner for many countries, any slowdown in growth there will reverberate around the world.

The International Monetary Fund (IMF) is also set to lower its forecast for 2022’s global growth, with the Russia-Ukraine war raising the risk of a recession.

If investors are given more cause for alarm out of these economic data or the IMF’s outlook, that could spur more demand for safe havens such as gold.

Gold Price Forecast

Such a fear-ridden narrative may push spot gold closer to the psychologically-important $2000 mark. However, gold bulls must first overcome and secure a daily close above the immediate resistance line at a key Fibonacci retracement level from gold’s August through March ascent.

Gold daily chart

However, this precious metal could be met with a moment of reckoning should real Treasury yields cross over into positive territory in the coming week. Note that real-yields are now just 9 basis points away from crossing that crucial threshold, and have come a long way from the negative 1.25% mark seen back in November.

Further gains in Treasury yields, both nominal and real, could ultimately weaken the resolve of gold bulls, given that bullion offers zero yield.

Powell vs. Lagarde Divergence Could Heap More Pain on Euro

We saw this week how the euro was dragged lower by a dovish European Central Bank, which appeared to be needing more time before it wants to join other central banks in raising interest rates.

EURUSD fell to its lowest since April 2020 (remember the early days of the Covid-19 pandemic?) before paring some of its losses at the time of writing.

With Fed Chair Jerome Powell and ECB President Christine Lagarde set to both feature on the same panel discussion on Thursday, hosted by the IMF, the gap between the Fed and the ECB could be made more evident in this debate on the global economy.

To be clear, both central banks are battling red-hot inflation; but the Fed is perceived to be doing more about it than their European counterparts at present.

The Fed already raised interest rates by 25 basis points in March, with a 50-basis point hike widely expected in May.

Meanwhile, the ECB may only hike sometime in the third quarter.

Should markets perceive an even-wider gap between those two influential central banks, in terms of how quickly they’re reacting to subdue skyrocketing consumer prices, that could ensure a weekly close below 1.08 for EURUSD in the coming week.

Such price action could all but pave the way towards 1.06 for EURUSD by the middle of the year, with perhaps a pit stop at the April 2020 low of 1.07269.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

3 Words that Sank the Euro Today

By Han Tan Chief Market Analyst at Exinity Group

The ECB’s Governing Council, in describing its plans for removing support measures for the economy this year, stuck with using these 3 key words:

“optionality, gradualism, flexibility”.

And if re-arranged, those words offer the acronym: F.O.G. (look out for this again later in the article).

Upon seeing those three words, EURUSD promptly reversed earlier gains and fell back below the 1.090 mark.

Even the words of ECB President Christine Lagarde, who held a press conference after the ECB meeting concluded, couldn’t offer any solace to euro bulls.

EURUSD then fell further to reach its lowest levels since April 2020!.

EUR/USD 1 hour chart

What are those 3 words even about?

The ECB was talking about its plans about removing support measures for the economy. The reason for doing that is to try and bring down record-high inflation.

Recall that markets had expected the ECB to stick with its plans of buying fewer bonds by next quarter and raising interest rates before 2022 is over.

To be fair, the ECB did say as much.

But the fact that the ECB stuck with those 3 words – optionality, gradualism and flexibility – suggests that the ECB is buying more wiggle room before it raises interest rates that are currently at a record low of negative 0.5%.

In fewer words, the ECB sounded less hawkish than markets had expected.

(To be “hawkish” = to sound aggressive about doing something. In the case for most central banks at present, to be “hawkish” = to want to raise interest rates).

Why does the ECB need to remove those support measures?

The ECB is trying to bring down record-high inflation.

The idea is as follows:

  • Higher interest rates = less money supply/lower demand
  • Lower demand = companies have to lower their prices to attract customers
  • Ideally, this results in lower consumer prices = lower inflation.

How bad is inflation in Europe?

Last month, inflation rose by 7.5% compared to March 2021. That is the sharpest-ever rise in the consumer price index (CPI).

Furthermore, that 7.5% figure is already almost four times more than where the ECB would like the CPI to be – at 2%. And that CPI headline number is set to go even higher over the coming months.

Note that the ECB’s main job is to “keep prices stable in the euro-area”.

But that’s a lot easier said (or written) than done.

Why is inflation soaring?

A big part of it is due to the Russia-Ukraine war.

Oil prices have surged as the world shuns Russian oil, which translates to a shortage of oil around the world.

And as basic economics teaches us, when supply is lower than demand, prices rise.

Brent daily chart

Note that fuel prices play a massive role in determining the final prices paid by consumers (think about the fuel needed to ship a tiny computer chip from Asia to Europe).

And given how reliant Europe is on Russia for fuel (for example, Germany gets a third of its oil and about half of its natural gas from Russia), further sanctions could mean even scarcer commodities and even higher prices.

Why does the ECB need more time?

The central bank may not rush to tighten policy/remove support because the Russia-Ukraine war is still raging east of the ECB building in Frankfurt.

Lagarde in her press conference today stated that the ECB remains “very attentive” to uncertainty.

And it’s this uncertainty stemming from the EU’s security crisis that’s F.O.G.-ging up (see what I did there) the economic outlook and making it a lot harder to decide when to raise rates.

But what could go wrong if the ECB raises rates?

The fear is that, if the ECB raises rates too high too soon, it could actually weaken the economy.

And if inflation stays high while economic growth is weak, that leads to “stagflation”.

Already, consumer and investor sentiment in the EU has weakened, while retail sales are losing momentum.

So what if the ECB needs more time?

The greater uncertainty facing the ECB in its quest to return its policy settings back to pre-pandemic levels is putting the ECB further behind other central banks.

Note that these other G10 central banks are already racing forward with their rate hikes:

  • Bank of New Zealand – raised its benchmark rate by 125 basis points (1.25%) since Q3 2021
  • Bank of Canada – raised its benchmark rate by 75 basis points so far this year
  • Bank of England – raised its benchmark rate by 65 basis points since December
  • US Federal Reserve – raised rates by 25 basis points in March, perhaps another 50-basis point hike in May

More than 30 central banks around the world have already raised interest rates by 50 basis points in one go so far in 2022.

It’s almost like a race between central banks around the world in the battle against inflation. And the ECB risks getting left behind.

Why is the Euro reacting to a lagging ECB?

Generally, the higher interest rates (and yields) go, the stronger its currency.

The idea is that if an economy is strong enough to withstand higher interest rates (as in, the economy can keep growing despite it becoming more expensive to borrow money), then such conditions could promise healthy returns for overseas investors (as opposed to investing in a relatively weaker economy).

The higher the demand, the stronger the currency of a country with higher interest rates and yields.

Hence, conversely, the further behind the ECB lags its global peers in tightening policy, the weaker the euro.

Yesterday, markets had aggressively priced in a better-than-even chance (54%) that the ECB might even hike rates as early as June.

After today’s meeting, those odds have now fallen to less than 12% = unlikely.

What’s next for the euro?

EURUSD is set to test the immediate support level around the low-1.08 region, having witnessed this double-bottom around 1.0806-09 in recent weeks.

EUR/USD Daily chart

If at its next policy meeting in June, the ECB is still found to be dilly-dallying in the quest to raise interest rates, that could see EURUSD testing the pandemic low around 1.06.

Because by then, the Fed may have already raised its rates by another 50 basis points in May, resulting in a stronger US dollar.

(Remember, stronger US dollar = lower EURUSD).

Overall, the more time the ECB needs to jump on the rate-hike bandwagon, the longer the euro will struggle to recover, keeping the path of least resistance to the downside.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Mid-Week Technical Outlook: Dollar Bulls Dominate The Scene

By Lukman Otunuga Senior Research Analyst

It looks like everyone wants a juicy piece of the world’s most liquid currency. The greenback has appreciated against every single G10 currency since the start of the week.

USD Weekly chart

Dollar bulls were injected with fresh inspiration yesterday thanks to hawkish comments from Federal Reserve Governor Lael Brainard. Appetite towards the greenback was sweetened further by geopolitical risks which sent investors rushing towards safe-haven destinations. With the dollar index (DXY) hitting a fresh 2-year high at 100.50, the path of least resistance certainly points north.

DXY Daily chart

Interestingly, bulls were unable to draw strength from the latest US inflation report which showed prices rising at their fastest pace in more than 40 years. Although CPI jumped 8.5% in March, the core CPI that excludes food and energy prices climbed 6.5%. The weaker than expected core print gave investors hope that inflation could be peaking. Nevertheless, dollar strength is likely to remain an ongoing theme this week.

Looking back at the technical picture, the DXY remains firmly bullish on the daily charts, and as highlighted earlier in the week, a strong close above 100 could open the doors toward 101.00 and 102.25.

DXY Daily chart

There is a similar theme on the equally-weighted USD Index as bulls shift their weight. Prices are approaching the resistance 1.1260. A solid breakout above this point could open the doors towards 1.1350.

US Dollar Index Daily chart

EUR/USD breaches 1.0850

In our trade of the week, we discussed the possibility of a breakdown happening in the EURUSD. Fast forward to today, prices are trading below the 1.0850 support level. The currency pair remains bearish on the daily charts with the next key levels of interest at 1.0780 and 1.0700. Although the current trend points to further downside, it may be wise to keep a close eye on the European Central Bank announcement on Thursday afternoon.

EUR/USD Daily chart

GBP/USD Wobbles Above 1.3000

A breakdown could be on the horizon for the GBPUSD. The currency pair is struggling to keep above the 1.3000 support level while the lagging indicators favour bears. There have been consistently lower lows and lower highs while the MACD trades below zero. A strong daily close below 1.3000 could trigger a decline towards 1.2900 and 1.2750, respectively.

Should 1.3000 prove to be reliable support, a rebound back towards 1.3170 could be on the cards.

GBP/USD Daily chart

Is Gold in the process of a breakout?

After being trapped within a range for an extended period, gold could be experiencing a breakout.

Prices are trading above the $1965 resistance as of writing but bulls need a solid daily close above this level encourages further upside. While lagging indicators like the 50, 100, and 200 day-SMA point to higher gold prices, fundamentals could impact the current trajectory. A solid close above $1965 could trigger an incline towards $2000 and $2020. If prices slip back under $1965, the precious metal may test $1940 and $1900, respectively.

Gold daily chart

USD/JPY up up and away…

The USDJPY has jumped to its highest level in two decades. Prices broke through the 2015 high of 125.86 to hit the 126.30 level. Prices are heavily bullish with a daily close above 126.00 potentially opening the doors towards 126.70 and 128.00. Although the trend is bullish, there could be a technical throwback before prices push higher. It may be worth keeping an eye on how prices behave around 125.00.

USD/JPY Daily chart

AUD/USD under pressure…

After failing to close above the 0.7550 resistance last week, the AUDUSD has been under pressure. It looks like the downside is gaining momentum on the weekly charts with 0.7300 acting as a major level of interest.

AUD/USD Weekly chart

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

The Era of Low Interest Rates Is Over

Much will no doubt be written about the past decade and longer, when interest rates were cut and remained at levels previously seen decades and even centuries ago.

But now, markets are looking warily at major central banks, and certainly the world’s most powerful one, which is set to front-load interest rate hikes in order to tame the inflation genie that has been let out of the bottle to try and get rates quickly back to neutral.

The widely watched US 10-year Treasury yield has hit new cycle highs above 2.83% this morning. Interestingly, the move was still more or less equally driven by higher real yields and inflation expectations. The latter suggests that the market still sees room for the Fed to further step up the pace of tightening.

Red hot US inflation incoming

Today’s March US CPI release takes centre stage.

The headline print is expected to accelerate to 1.2% m/m and 8.4% y/y. The core measure, which excludes the volatile food and energy sectors, is also set to rise to 0.5% m/m and 6.6% y/y. All these readings will be new multi-decade highs with the persistent high pace in the monthly price rises justifying the Fed’s red alert inflation mode.

This means a major correction in the current uptrend in yields is not expected any time soon. Even European bonds have cratered with yields breaking key levels recently ahead of the ECB meeting on Thursday. The major German government bond hit its highest yield since 2015 yesterday with the 10-year at 0.78%. This was still negative as of early March which shows the seismic recent moves in bond markets.

USD in pole position, stocks suffering

The sharp rise in rates, combined with ongoing geopolitical tensions and rising doubts on growth triggered more risk-off in equity markets.

The tech-heavy Nasdaq lost over 2% and futures are pointing to further losses today.

NASDAQ 100 Daily chart

The US earnings season kicks off in earnest this week with several major US banks reporting. Analysts are forecasting overall revenues at the banks to fall around 10% with a 26% drop in investment banking fees.

Meanwhile, King Dollar is enjoying its safe haven status amid rising rates. The DXY has topped the 100 barrier earlier today, with the euro failing to maintain its gains after the first round of voting in the French presidential election.

EUR/USD Daily chart

But the FX pair most affected by the long-end adjustment in bonds has been USD/JPY. Even rare jawboning from the Japanese authorities this morning has not stopped the enduring bids in this major.

Most seasoned traders don’t expect any proper intervention to start before 130, with the June 2015 peak at 125.85 the next resistance level to be toppled.

USD/JPY Daily chart

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Trade Of The Week: Breakdown On The Horizon For EUR/USD?

Watch this space as this could be an explosively volatile week for the EURUSD!

EUR/USD 1 hour chart

The currency pair seems to be gearing up for a major move with prices hovering above the key 1.0850 support level as of writing. While a solid breakdown below this level could signal further downside, such may require a strong fundamental catalyst. This may come in the form of the US inflation report on Tuesday or the European Central Bank (ECB) meeting on Thursday.

Before we take a deep dive into what to expect from the latest US CPI report and ECB, it is worth keeping in mind that the EURUSD has dropped over 4% year-to-date. The combination of geopolitical risks, surging energy prices and growth concerns continue to weigh on the Euro despite the ECB joining the hawkish bandwagon. Since the start of 2022, the euro has weakened against every single G10 currency excluding the Japanese Yen and Swedish Krona.

Taking a quick look at the technicals, things are looking noisy on the daily charts with resistance around 1.1120 and support at 1.0850. However, the trend remains firmly bearish on the weekly timeframe. Interestingly, the last time the currency pair secured a weekly close below 1.0850 was back in May 2020 – almost two years ago.

EUR/USD Weekly chart

All eyes on the US CPI report…

US inflation is expected to have hit another 40-year high in March.

Consumer prices are forecast to have risen by 8.4% year-over-year, compared to the 7.9% in February. If expectations become reality, this will be the fastest pace since 1981! This could encourage Investors to pile bets on the Federal Reserve adopting a more aggressive pace of rate increases over the next few months – raising speculation around a 50-basis point hike in May (as opposed to the customary 25-basis point moves). Buying sentiment towards the dollar could also receive a boost, which may result in the EURUSD trading lower.

Speaking of the dollar, it has appreciated against most G10 currencies since the start of 2022.

USD Year to Date

The benchmark dollar index (DXY) is up over 4.4% year-to-date with prices trading marginally below 100.00 as of writing. A solid daily close above 100.00 could open a path towards 101.00 and 102.25.

DXY Daily chart

What to expect from the ECB?

The European Central Bank is widely expected to leave interest rates unchanged when it meets on Thursday. However, it may be unwise to label this as a non-event.

At its last meeting in March, the central bank stated it would accelerate the winding down of its bond-buying stimulus, with the possibility of the scheme ending in Q3 depending on economic data. Minutes from the March meeting were also hawkish, but members of the governing council had split opinions over how to tackle soaring inflation.

Euro area annual inflation surged to an all-time high of 7.5% in March, compared to the 5.9% in February. The recent surge in inflation was the product of geopolitical risks pushing fuel and natural gas prices to record high levels. With inflation now more than 3 times above the ECB target level of 2%, the central bank may be pressured to act. However, the fresh economic uncertainty caused by the war in Ukraine has placed the ECB in a tricky position.

Investors will be paying very close attention to ECB President Christine Lagarde’s speech which could offer fresh clues on the ending of the Asset Purchase Programme (APP) and rate hike timeline. If she strikes a hawkish tone, this could support Euro bulls. However, if the ECB disappoints hawks by adopting a cautious stance, expressing concerns over the economy, and offering nothing new on rate hike timelines, the Euro could weaken.

EURUSD poised to break below 1.0850?

Taking a look at the technical picture, the EURUSD remains in a wide range on the daily charts with support at 1.0850 and resistance around 1.1120. With prices trading well below the 200, 100, and 50-day Simple Moving Average, bears remain in a position of power.

EUR/USD Daily chart

Should prices secure a weekly daily close below 1.0850, this could open the doors towards 1.0780 and 1.0700. Alternatively, a move back above 1.1000 could inspire an incline towards 1.1120. Beyond this point, bulls may challenge 1.1230.

EUR/USD Weekly chart

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Week Ahead: Hawkish ECB May Offer EUR/USD Support

Major central banks such as the European Central Bank, the Reserve Bank of New Zealand, and the Bank of Canada are set to make their respective policy decisions, and perhaps more crucially convey its future policy intentions to investors and traders worldwide.

Market participants will also be digesting the latest consumer price indexes out of major economies such as China, Germany, and the US in the coming week, and what the inflation data could mean for the respective central banks’ policy outlooks.

Economic Data and Events for Week Ahead

Here are the major economic data releases and events scheduled for the week ahead:

Monday, April 11

CNH: China March PPI and CPI
GBP: UK February GDP, industrial production, and trade balance
USD: Chicago Fed President Charles Evans speech

Tuesday, April 12

EUR: Germany March CPI (final), April ZEW survey expectations
GBP: UK February unemployment, March jobless claims
Brent: OPEC monthly oil market report
USD: US March CPI
USD: Fed speak – Fed Governor Lael Brainard, Richmond Fed President Thomas Barkin

Wednesday, April 13

CNH: China March external trade
NZD: RBNZ rate decision
GBP: UK March CPI
CAD: Bank of Canada rate decision
S&P 500: US earnings season kicks off with JPMorgan Chase Q1 earnings
US crude: EIA weekly US crude inventories

Thursday, April 14

AUD: Australia March unemployment, April inflation expectations
EUR: ECB rate decision
US stocks: Wells Fargo, Citigroup, Morgan Stanley, Goldman Sachs earnings
USD: US weekly initial jobless claims, March retail sales, April consumer sentiment
USD: Fed speak – Cleveland Fed President Loretta Mester, Philadelphia Fed President Patrick Harker

Friday, April 15

UK and US markets closed for Good Friday
USD: US March industrial production

EUR/USD Fundamental Analysis

The European Central Bank is set to leave its policies unchanged in the week ahead.

Still, EUR traders are ready to react to what the ECB says about its plans to battle record-high inflation.

Note that a currency tends to strengthen when its central bank appears more eager about removing support for the economy (a.k.a. hawkish).

The ECB intends to eventually wind down support for the economy and isn’t ruling out a rate hike before 2022 is over. Yet, markets are doubting how much the ECB can actually tighten its policy, given that the EU’s economic outlook grows darker the longer the Russia-Ukraine war persists.

EUR/USD Daily chart

If the ECB can convince markets in the coming week that policymakers can press on with raising rates later this year, despite the ongoing security crisis, that could offer some relief for the euro with EURUSD perhaps clawing its way back up to 1.10. Otherwise, the world’s most popular currency pair could break below 1.080 for the first time since May 2020.

Gold’s $1920s support to finally give way?

Gold has long been deemed a hedge against inflation.

However, with faster inflation also comes greater prospects of US interest rates and Treasury yields climbing faster which weigh on the zero-yielding bullion.

Still, the precious metal has been able to hold its own, thanks to resilient demand for safe haven assets amid the ongoing Russia-Ukraine war. The conflict is darkening the global economic outlook and raising the risk of a policy error by major central banks (a central bank that raises rates too fast in a bid to quell red-hot inflation may instead trigger a recession).

These persisting fears and uncertainties ensure that safe havens such as gold remain well bid, with the $1920 region demonstrating its worth as an immediate support level – also where a key Fibonacci retracement level resides.

Gold daily chart

Gold is in search for a clear reason to either move upwards or downwards from here.

If the US March consumer price index, which is expected to post a new four-decade high at 8.4%, prompts markets to believe that the Fed has to be more aggressive and raise rates by 50 basis points in May (as opposed to the customary 25-basis point moves), that could trigger the next leg down for gold prices.

A breakdown past the psychologically-important $1900 level could then bring the $1877 region as the next area of interest for gold bears. $1877 marks the next Fibonacci support level and also the November high for spot prices.

Larger-than-expected RBNZ hike could see NZDUSD moving back closer to 0.70

The Reserve Bank of New Zealand is widely expected to raise its official cash rate by yet another 25 basis points next week, having already raised by 75 basis points since October.

However, a 50 basis point hike remains a possibility.

Such a larger-than-usual move by the RBNZ could see NZDUSD breaking above its 200-day simple moving average and moving back closer to 0.70.

That psychologically-important mark is also where its 50% Fibonacci retracement level resides from the February 2021 to January 2022 decline.

A move upwards for NZDUSD would buffer the Kiwi’s year-to-date gains against the US dollar, which currently stands at 0.5%, with NZD being one of a handful of G10 currencies that can still boast of year-to-date gains versus the buck.

NZD/USD Daily chart

Can US earnings season aid S&P 500 recovery?

The next US earnings season is just round the corner, with Wall Street banks kicking things off in the week ahead.

Note that financial stocks account for almost 11% of the S&P 500, and could set the tone for how US stocks perform in the weeks ahead as the earnings season rolls along.

The S&P 500 seems to have found support around its 200-day simple moving average of late, and could use fresh catalysts to recover closer towards its record high.

Market participants will be eager to find out not just how US companies fared over recent months, but also what CEOs and CFOs convey about their respective company earnings outlooks.

This earnings season is set to feature these hot talking points and how they’ll impact earnings moving forward:

  • Rising wages/inflation
  • Supply-chain constraints
  • China’s ongoing lockdowns
  • Russia-Ukraine war
  • Central bank policy normalisation and its impact on economic growth/consumption

Stock bulls would be heartened to know that, according to FactSet, analysts are raising their earnings estimates for the 2022 calendar year, despite lowering their estimate for Q1 earnings.

In other words, perhaps the ‘worst’ is already behind us and things could be looking up, at least from an earnings perspective.

Analysts also have the most ‘buy’ ratings on S&P 500 stocks since 2010. Of the 10,821 ratings on S&P 500 stocks (as of end-March), more than half (57.3%) of those ratings were ‘buys’, with analysts most optimistic for stocks in the energy, IT, and communication services sectors – in that order.

This earnings season may either provide a stronger impetus to restore the S&P 500 closer to its record high, or offer mere fleeting relief before stocks finally succumb to the downside risks.

The week and weeks ahead should prove telling.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

QT: The Fed Wants to Pull Out US$1.1 Trillion Per Year From Markets!

By Han Tan Chief Market Analyst at Exinity Group

Investors and traders worldwide for several months now have been obsessing over how the Fed intends to go about its ‘quantitative tightening’ a.k.a. QT.

Hold up! What even is QT?

To understand QT, first we must have an idea of QE (quantitative easing).

QE is when a central bank prints money, out of thin air, to support its economy. Recall that the Fed has pumped out trillions of dollars to support markets amid the pandemic.

Without getting bogged down with the complex details on how QE works, here’s a simple form of showing how the money flows:

Fed –> US Treasury Department –> banks/pension funds/financial institutions (via bonds) –> businesses/households (via loans) –> economy/markets

QT is essentially the reversal of the above, with the aim of taking money out of the financial system.

But it doesn’t mean that the money ends back up with the Fed. It just magically “disappears” back into thin air.

Note that, as of March 2022, the Fed’s balance sheet stands at around $8.94 trillion as – that’s more than double the amount it was before the pandemic.

It’s time to wind that down.

So why is the Fed unwinding its balance sheet?

The Fed now believes that markets no longer need as much financial support because the US economy has recovered enough from the pandemic.

The US unemployment rate for March 2022 reached 3.6%, which is the same rate as December 2019, before the pandemic struck.

The inflation rate (as measured by the ‘consumer price index’) is forecasted to reach 8.4% in March 2022. If so, that would be the fastest inflation since January 1982.

Why are we talking about this now?

Just yesterday (Wednesday, 6 April 2022), the latest FOMC minutes were released.

The minutes are a document that contains more details about what was discussed between FOMC (Federal Open Market Committee) members when they gather to decide how best to manage the US economy.

During the last FOMC meeting, held on 15-16 March 2022, the Fed discussed its intention to stop buying $1.1 trillion in bonds per year, or US$ 95 billion per month, potentially starting in May 2022.

How much is $1.1 trillion really?

$1,100,000,000,000 = About the same amount of money needed to buy the entire Tesla company as valued on April 6th (imagine one whole Tesla being removed from the markets per year.) can buy more than three million iPhone 13 Pros (which retails in the US for $999) every single day for an entire year.

That’s how much money the Fed intends to drain out of financial markets.

And this process could begin as early as next month (May 2022).

How might markets react to QT?

The Fed’s withdrawal of financial support could trigger big moves in various asset classes:

More US dollar strength expected. DXY set to surpass 100.

DXY Daily chart

The benchmark DXY is already trading at its highest levels since May 2020.

As the Fed stops re-investing in these bonds (a.k.a quantitative tightening), the overall demand for bonds such as US Treasuries is set to fall.

  • As demand drops, so do prices.
  • As Treasury prices fall, its yields rise.
  • As US yields rise, so too the US dollar.

Keep in mind that the Fed could be in a bid to out-hawk the other hawks, meaning to say the Fed may have to rush ahead of other major central banks (e.g. ECB, BOE etc.) to combat red-hot inflation by unwinding its supportive measures as a faster clip.

And remember, it’s all relative. Hence, the more “hawkish” a central bank sounds over another central bank, then the stronger the currency of the more hawkish-sounding central bank.

For example, if the US Federal Reserve sounds more hawkish than the Bank of England, then the US dollar is set to gain versus the British Pound, heaping downward pressure on GBPUSD.

GBP/USD Daily chart

Gold could fall back below $1900 and head towards $1877

Gold daily chart

Traditionally, when US interest rates and yields (nominal and real) rise, gold tends to fall.

This is because gold offers zero yields. Hence, investors would have to consider whether to park their money in US Treasuries where yields may rise faster than inflation (protect one’s wealth against inflation eroding one’s purchasing power), or park their money in zero-yielding bullion with mere hopes that gold prices can keep climbing.

However, this traditional relationship between rising yields and lower gold has yet to play out.

Despite struggling to keep its head above its 21-day simple moving average in recent weeks, spot gold remains well supported around the $1920 region, thanks to persistent fears over the global fallout of the Russia-Ukraine war.

If Europe’s security crisis can meaningfully subside, that could put the Fed’s policy tightening plans front and centre as the primary driver of prices.

And that could be the trigger for gold’s leg down, with a sustained presence below $1900 then inviting $1877 as the next key area of interest for gold bears.

Tech stocks could be dragged lower

NASDAQ 100 Daily chart

To be fair to tech aficionados, tech stocks have proven remarkably resilient even in the face of the Fed’s policy tightening. The tech-heavy Nasdaq 100 rose by as much as 13% since the Fed’s rate hike last month – its first since December 2018. Perhaps that’s driven by the fact that tech stocks had been beaten down by so much leading up to the March FOMC meeting that many market participants were enticed by the buy-the-dip mantra.

However, that could be as good as it gets for tech stocks over the near-term.

The Nasdaq 100 could retest the psychologically-important 13,000 region, as it did before the last FOMC meeting.

This lurch lower could be fuelled by greater prospects of a more aggressive Fed by way of larger-than-usual rate hikes or a faster drawdown of its balance sheet.

Overall, the Fed has the tricky task of embarking on rate hikes and withdrawing trillions from the markets with breaking the economy and roiling markets – something that’s a lot easier imagined than done.

In short, this could translate into more volatility across various asset classes.

Over the coming months, investors and traders will closely monitor how successful the Fed is at tightening policy (QT and rate hikes).

If it actually triggers a recession instead, that would fundamentally alter the markets outlook going into 2023.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

No April Love for the Single Currency

Euro Fundamental Analysis

The euro is getting bashed from all sides it seems this month, with peace talks in Ukraine a distant prospect from the hope sparked towards the end of last month. With fresh new sanctions most likely being piled onto Russia adding to the volatile situation, bond yields are ratcheting higher across the globe, and especially in the US, as inflation fears increase. This is pushing the world’s most popular currency pair, EUR/USD, back down to the hugely significant cycle lows at 1.08. The small matter of a French presidential election also kicks off this weekend to add yet another potential headwind to the single currency.

Rising bond yields have been bolstered by more comments from Fed officials in recent days. Known dove Lael Brainard called the task of reducing inflationary pressures “paramount”. She said the central bank will raise interest rates steadily while starting a “rapid” reduction of its balance sheet to tight policy further as soon as next month. This quantitative tightening talk raises the significance of asset runoff to the FOMC’s policy of overall tightening.

Markets are pricing in two bigger 50 basis point rate hikes at its next meetings in May and June. Front-loading is certainly the current narrative with the peak of the Fed’ hiking cycle eventually hitting around the 3% mark. Tonight’s FOMC minutes will be parsed for any signals of a wider consensus to shrink the balance sheet at a fast pace. This would keep bonds on the back foot and continue to support the greenback.

For the euro, mounting geopolitical risks have been the key factor in its very recent underperformance, and this shows no sign of ending. The recent shock to the eurozone’s terms of trade may be compounded by another round of sanctions on Russia. While oil exports have so far been excluded, further consequences for energy exports should keep EUR under pressure.

With investor confidence collapsing in the zone, the ECB’s response to rising inflation will also be key, with all eyes on next week’s meeting. Markets are pricing in around 50bps of rate hikes by year end. But the loss of support in EUR/USD around the 1.10 level may indicate that FX traders at least are concerned that policymakers will sound more cautious than current money market pricing.

French Presidential Election and the Euro

Another risk for the common currency is also looming with the upcoming French presidential election. Tightening polls have showed the lead for the incumbent Macron over the far-right Le Pen being cut from 61% to 39% two weeks ago to a much narrower 54% versus 46% recently. Some surveys even have a Le Pen victory within the margin of error. We note there is a noticeable pick up in implied volatility in EUR/USD options around the date of the second-round election on 24 April. All eyes will be on the first round of votes due this weekend as the beleaguered euro hopes for some Easter forgiveness.

Written on 06/04/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

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

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

 

Trade Of The Week: Gold Hunts For Fresh Fundamental Spark

Monday’s trading activity in gold was like watching paint dry…

The precious metal kicked off the new week in a muted fashion as investors digested last Friday’s US jobs report and ongoing geopolitical tensions.

Gold H1 chart

So why is gold the TOTW?

  1. This could be a volatile week for the precious metal thanks to heightened geopolitical risks, the FOMC meeting minutes, and speeches by key Fed officials.
  2. Price action shows a fierce tug of war between bulls and bears with a potential breakout/down on the horizon.

Gold could be waiting for a fresh fundamental spark to tilt the balance of power in favour of bulls or bears.

Gold H4 chart

Before we take a deep dive into what to expect from the precious metal in the week ahead, it is worth keeping in mind that gold glittered in Q1 by gaining almost 6%. This was its best quarter since mid-2020 as fears over the Ukraine-Russia conflict, soaring inflation, and global growth concerns boosted bullion’s safe-haven appeal.

Gold monthly chart

As we enter the second quarter of 2022, the path ahead could be rocky for gold bugs. Last Friday’s strong jobs report has reinforced market bets over the Fed adopting an aggressive policy stance against high inflation. Such expectations are likely to boost the dollar and Treasury yields at the expense of zero-yielding gold.

DXY Weekly chart

Gold offers no yield, making it less attractive for investors to own in an environment of rising Treasury yields.

10 year US Treasury Yield

Taking a quick look at the technical picture, the trend swings in favour of bulls on the weekly charts with weekly support found around $1900 and resistance at $1965. A move above $1965 could re-open the doors back towards the psychological $2000 level and higher.

Gold weekly chart

Fed minutes and speeches in focus

Investors across the globe will direct their attention toward the latest FOMC meeting minutes as well as scheduled speeches from key Fed officials.

The meeting minutes are expected to offer market players fresh insight into how officials view the monetary policy outlook after raising interest rates for the first time since 2018. Investors will also scrutinize the minutes for details on the central bank’s balance sheet reduction which is expected to kick off in May. Should the minutes strike a firmly hawkish tone with policymakers discussing the possibility of a 50-basis point rate hike next month, this could boost the dollar and Treasury yields – ultimately weighing heavily on gold.

There will also be a cavalry of US policymakers, including Fed Governor Lael Brainard scheduled to speak this week. Given how these speeches may influence rate hike expectations, gold could be injected with a fresh dose of volatility over the next few days.

Keep an eye on geopolitical risks

Over the weekend, things got messy on the geopolitical front with Ukraine-Russia tensions escalating following the destruction in Bucha, a town on the outskirts of Ukraine’s capital.

This negative development has dampened hopes of peace talks and prompted not only the European Union but world leaders to discuss new sanctions on Russia. The heightened levels of uncertainty and potential volatility caused by geopolitical risks could drain sentiment, extending some support to safe-haven gold.

Gold ETFs favour bulls

According to an automated report from Bloomberg, gold ETFs added 176,458 troy ounces of gold to their holdings last Friday – bringing this year’s net purchase to 8.06 million ounces. Since the start of 2022, total gold held by ETF’s are up over 8% – marking the highest level since February 2021.

The inflows could be the result of geopolitical tensions in Eastern Europe, soaring inflation, and concerns over global economic growth. An ETF (Exchange Traded Funds) is an investment instrument that allows retail traders to gain exposure to an existing market or groups of markets. A gold ETF provides investors exposure to gold without owning it physically. Inflows from ETFs are seen as bullish for the underlying asset.

Support, Resistance, Support….

The subtitle says it all.

Gold remains trapped within a $65 range on the daily charts with support at $1900 and resistance at $1965. Prices are trading above the 50, 100, and 200 Simple Moving Average while the MACD trades to the upside. A strong daily close above $1965 could trigger an incline towards $2000, $2020, and $2070.

Should $1900 prove to be unreliable support, gold could decline back towards $1874 and $1850, respectively.

Gold daily chart

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

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.