pair EUR/USD: on the way to 1.0000
The dollar continues to rise, while the EUR/USD pair continues to decline. The DXY Dollar Index crawled to approach 104.9 on Thursday, May 12th. The last time it rose to this level was 20 years ago. The pair found the bottom at 1.0349, in the area of the bottoms of December 2016 - January 2017. A little more than that, and it will reach where it was traded 20 years ago. And there, 1:1 parity would be a stone's throw away.
The reason for the next strengthening of the US currency, as usual, was two factors: the recovery of the labor market and the growth of inflation. These are the factors that determine the pace of monetary policy tightening by the Federal Reserve.
According to forecasts, US unemployment claims should show a slight increase. But the actual data, released on Thursday, May 12, showed that the situation in the labor market is much better than expected. The number of initial orders increased, but not by 3 thousand as expected, but only by a thousand. The number of repeat requests decreased, instead of increasing by 3 thousand, by up to 44 thousand.
The day before, on May 11, inflation data came out. The US core CPI rose 0.3% in April and stood at 0.6%. This growth is well below the 1.2% increase in March. But this does not mean at all that inflation in the country has reached its peak and will fall further. never. Oil prices are still above $100 a barrel, which has driven up the cost of goods, transportation costs and household spending. New car prices rose 1.1% in April (up only 0.2% in March), while airline ticket prices rose 18.6% during the month, marking the largest increase in 60 years. In addition, with a high degree of probability, a series of closures in China due to a new wave of the Corona virus will lead to problems in logistics and the exchange of goods, which will not help reduce inflation either.
The combination of these factors suggests that the US Federal Reserve is unlikely to change its plans to tighten monetary policy: to reduce the balance sheet and raise interest rates. After Regulatory Chairman Jerome Powell, his colleagues on the FOMC - Cleveland Fed President Loretta Meester and New York Fed President John Williams - endorsed the intention to raise the fed funds rate by 0.5% at each of the next two meetings, bringing the rate to 2.0 %.
As for their counterparts on the other side of the Atlantic, the key figures in the European Central Bank calling for a start in raising interest rates are still in the minority. Most members of the Bank's Board of Governors remain convinced that the increase in inflation in the eurozone is a temporary phenomenon, caused primarily by high energy prices due to sanctions against Russia, which invaded Ukraine.
As a result, the strong difference between the clear hawkish stance of the US Federal Reserve and the opaque pessimistic stance of the European Central Bank continues to push the EUR/USD pair lower, leading to new multi-year lows.
At the moment, analysts' voices are divided as follows: 70% of analysts are confident that the dollar will continue to strengthen, while the remaining 30% are waiting for the pair to correct north. At the same time, when switching from the weekly forecast to the monthly forecast, the number of those who vote for the growth of the pair increases to 80%. All 100% of the indicators are on the D1 side with the dollar after another drop in the pair. However, 20% of the oscillators are in the oversold territory. The nearest resistance is at the 1.0420 area, and the next target for the EUR/USD bulls is to return to the 1.0480-1.0580 area. If they succeed, they will then try to break through the resistance at 1.0640 and rise to the 1.0750-1.0800 area. For the bears, the first task is to update the May 13 low at 1.0350, after which they will break into the 2017 low at 1.0340, below is the support that has been there for only 20 years.
For the calendar for the coming week, we recommend paying attention to data on prices and retail sales volumes in the United States on Tuesday, May 17th. Expected on the same day. The Eurozone CPI will be released on Wednesday, May 18, and data on manufacturing activity and the state of the labor market in the US will be received on Thursday, May 19.
pair GBP/USD: A rate hike is possible
As mentioned earlier, the DXY Dollar Index has reached its highest level in 20 years. According to experts, it has risen by 5.1% over the past four weeks. Meanwhile, the GBP/USD pair is down 7.4%, outperforming the average by 2.3%. However, not everything is so bad for the British currency.
The Bank of England expected inflation to rise from the current 7.0% (the highest level in 30 years) to 10.25% at its May 5 meeting. And although the regulator left its GDP growth forecast for the current year unchanged (+3.75%), it expects a recession starting in the fourth quarter. The Bank of England expects a 0.25% decline in GDP in 2023 instead of the previously planned 1.25% growth. According to the new forecast, GDP will grow not by 1.0%, but by only 0.25% in 2024.
This scenario, of course, cannot be called optimistic. However, a week later, on May 12, statistics showed that the country's gross domestic product in the first quarter rose 8.7% year-on-year, topping the previous figure of 6.6%. These dynamics give investors hope that the regulator will not stop at the current interest rate of 1.0% and, like the Federal Reserve, will continue to increase it in order to combat inflation. This, in turn, will support the British currency. Or at least prevent it from slipping further.
The GBP/USD hit a weekly low at 1.2154, the last chord was at 1.2240. In the event of a further correction to the north, the pair will have to overcome the resistance in the region of 1.2300-1.2330 and then there are the areas of 1.2400, 1.2470-1.2570, 1.2600-1.2635, 1.2700-1.2750, 1.2800-1.2835 and 1.2975-1.3000. Moving south, the first support will be the 1.2200 level, then 1.2154-1.2164 and 1.2075. There is a strong support point for this pair at the psychologically important 1.2000 level. 85% of experts vote for further weakness for the British currency, and 15% expect an upward recovery. And here it is worth noting that when switching to the forecast until the end of June, the number of supporters of the growth of the pair increases to 75%. There is still an overall advantage of red among indicators on D1: 100% among trend indicators and 90% among oscillators looking down. The remaining 10% turned north.
As for next week's events related to the UK economy, we can highlight the release of unemployment and wages data in the country on Tuesday 17 May. The new CPI value will become known on Wednesday, May 17th. 18, UK retail sales for April at the end of the business week, on Friday, May 20.
pair USD/JPY: From Return on Capital to Safety
The Japanese yen performed better last week than its "colleagues", the euro and the pound sterling. As most experts expected, bulls attempted to renew the April 28 high at 131.24. However, after rising only 10 pips to 131.34, they gave up, and the USD/JPY pair fell to find support at just 127.51. Undoubtedly, the current volatility of the pair is impressive: the weekly trading range was 383 pips. This is despite the fact that it was hovering around 150 points on average in Q4 2021 - Q1 2022. It finished last week in the central zone of the indicated range, at the 129.30 level.
Excluding fluctuations during the coronavirus pandemic, the drop in the USD/JPY on Thursday, May 12 was the largest one-day swing since 2010. The strengthening of the Japanese currency, according to a number of experts, is attributed to the growing desire among investors to buy foreign currencies. Most of the assets are risk free. Up until this point, the dollar had rallied on the back of higher interest rates and higher yields on 10-year US Treasuries. However, if investors continue to prefer holding capital over returns, the USD/JPY will continue to decline.
The Japanese yen also strengthened due to anticipation of changes in the policy of the Bank of Japan. Many investors, especially foreign ones, expect that despite the regulator's assurances of commitment to ultra-soft monetary policy, it may continue to raise interest rates. Moreover, there were already such precedents, albeit in the opposite direction. Markets remember 2016, when the head of the central bank, Haruhiko Kuroda, first denied the possibility of introducing negative rates categorically, and then suddenly decided to take such a step.
At the moment, the forecasts of experts look as uncertain as the pair's prices. 40% voted for its growth, 50% supported the downfall of the pair and the remaining 10% took a neutral position. There is a similar discrepancy between the indicators in D1. As for trend indicators, 65% are green, 35% are red. The oscillators have 40% on the green side, 25% on the red side, and 35% on the neutral gray side. The nearest support is located at 128.60, followed by areas and levels at 128.00, 127.50, 127.00, 126.30-126.75, 126.00 and 125.00. The bulls' target is to rise above the 130.00 horizon and renew the May 05th top at 131.34. The January 1, 2002 high of 135.19 is the ultimate target.
Japan's GDP data for the first quarter of this year will be published next week, on Wednesday, May 18. This indicator is expected to decrease by 0.4% from the previous value of 1.1%.
Cryptocurrencies: $1 million per bitcoin or zero
If you read the headlines last week, you will get the strong impression that cryptocurrencies only have a few months, if not days, left. “Crypto Market Massacre”, “Bitcoin Requiem” and “Crypto Bubble Burst” are just some of them. But is all this scary?
In fact, the market is suffering huge losses. Bitcoin has lost about 45% of its value since the end of March, reaching $26,580 on May 12. Most other currencies feel worse. As has been said many times, the cause of the panic is the global decline in investors' appetite for risk. The cryptocurrency market only follows in the wake of the stock market: correlation between digital asset prices and the S&P500, Dow Jones and Nasdaq stock indices is at an extreme.
The tightening of monetary policy by the US Federal Reserve, the outbreak of the new Corona virus in China, and concerns about the future of the European Union economy: all this has led investors to prefer the dollar over risky assets. An additional motive is higher yields on 10-year US Treasuries. That number has nearly doubled since March and is up more than 3%: to the highest level since 2018, outpacing the returns of most sectors of the US stock market.
In addition to global factors, the collapse of the third largest stablecoin by capitalization, UST, has put additional pressure on the cryptocurrency market. It is believed that stablecoins facilitate investment transactions and should be pegged to the real dollar in a 1:1 ratio. The price of the coin immediately collapsed to $0.64, casting doubt on the ability of Terra team to maintain its price. Against the backdrop of stablecoin issues, the original Terra LUNA token has also fallen, losing more than 90% of its price. It cost about $120 in April, but you can buy it for $5 now. And here it must be taken into account that the Terra blockchain protocol is a rather large project that was in the top 10 by market capitalization.
The fate of the $82 billion central stablecoin Tether is also causing some concern. An audit of this project conducted in 2021 showed that instead of dollars, which should provide a reserve for the project, there are a lot of securities in the accounts. Against this background, the sale of USDT intensified: its capitalization decreased by 1.4 billion dollars in recent days.
The overall value of the cryptocurrency market continues to decline. At the time of writing this review, Friday evening, May 13th, the price was $1.290 trillion ($1.657 trillion a week ago). The Crypto Fear & Greed Index fell from 22 to 10 points out of 100, firmly anchored in the area of intense fear. The BTC/USD pair, after a slight bullish bounce, is trading around $ 30.150. The week low, as mentioned earlier, was flat at $26,580. The last time the pair was so low was like that in December 2020.
The number of “whales” among Bitcoin holders, whose capital exceeds 1,000 BTC, is rapidly declining. This number has already reached its lowest level since the beginning of the year. At the same time, the volume of cryptocurrency on exchanges, on the contrary, has reached its maximum over the past three months. According to Glassnode analysts, the average volume of cryptocurrency flows to central exchanges is now hovering around 1,755 BTC.
Galaxy Digital founder Mike Novogratz expressed doubt that the bulls would be able to defend the $30,000 support levels for Bitcoin and $2,000 for Ethereum. He wrote: “Until we reach a new equilibrium, digital assets will continue to trade in close relationship with Nasdaq. Intuition tells us there is still a downturn ahead, and this will happen in a very unstable, volatile and complex market.” Mike Novogratz warned that a negative scenario could materialize if the Nasdaq drops below 11,000 (11,688 on May 12th).
Gold advocate, billionaire Peter Schiff, predicted that the main cryptocurrency would collapse below $10,000. Another veteran of the Bitcoin industry, the 2020 US presidential candidate, Brock Pierce, said in an interview with Fox Business that he could be very successful, but he could also fail. “Bitcoin could drop to zero. Here is the binary result. He said: Either there will be a million dollars for every BTC, or zero.
Pierce believes that the current “cryptocurrency landscape” is very similar to the history of the tech bubble. “The situation is very similar to what it was in 1999. The market is now in the same stage. So what happened next? After the dot-com bubble, eBay, Amazon and other interesting companies appeared, but a lot of companies went bankrupt. But this does not mean that digital assets are unrealistic and will not play an important role in our collective future. Pierce admitted that he has diversified his portfolio, primarily through Ethereum. He also placed a “nine zeros” bet on EOS, and converted all of his Block.one shares into cryptocurrency.
Unlike other influencers, Catherine Wood, CEO of ARK Invest continues to express continued optimism and believes that the correlation between cryptocurrencies and traditional assets suggests that the downtrend will soon be over. The businesswoman saw the decline in the value of Bitcoin along with the traditional market as a temporary phenomenon: “Cryptocurrency is a new asset class that should not follow the Nasdaq, but that is what happens. We are currently in a downtrend where all assets are moving the same way and we are seeing market after market capitulation, but cryptocurrencies may be nearing an end.”
The head of ARK Invest believes that the cryptocurrency market will grow exponentially with the collapse of traditional assets. The current downturn in the stock, bond, commodity and cryptocurrency markets is causing negative sentiment among investors. But look at our research...I can't even tell you how confident we are that our products will change the world and are already on an accelerated growth path. According to Wood, blockchain in a technology sector will grow more than 20 times in the next seven to eight years.
Another hope for investors is that Bitcoin is already halfway to the next halving. It happened on block 735000 on May 5th. This event occurs every 210,000 blocks, or about once every four years, with just under 105,000 blocks remaining until the next day. The halving date can be expected in a couple of days, because the mass production time fluctuates around 10 minutes. The previous halving occurred on May 11, 2020, and the next halving will occur approximately in April 2024.
One of the main mechanisms of the Bitcoin network is halving cycles, which includes halving the reward for miners’ BTC. Accordingly, the issuance of bitcoins has also been halved, since the rewards for miners are the only source for the issuance of new coins. From the beginning of bitcoin to the first halving, miners were rewarded with 50 bitcoins per block. Then the amount in bitcoins was reduced to 25 BTC, and in the next cycle to 12.5 BTC. Currently, miners receive 6.25 bitcoins for mining the block.
And if the miners suffer losses due to the halving, then the investors, on the contrary, gain. As the notes show, before the first halving, the cost of BTC was around $127, before the second, its price had risen to $758, and before the third halving, it had reached $10,943. It remains to wait not long, less than two years, to see if there will be a similar massive rise in the price of BTC in 2024.