pair EUR/USD: The beginning of the end of the quantitative easing program is approaching
The Federal Reserve did not make any changes to its monetary policy at its meeting on September 21-22. However, the regulator clarified in its comment that it will likely be ready to start a gentle scaling back of its quantitative easing (QE) program as early as November.
More than half of the members of the Federal Open Market Committee (FOMC) believe that raising interest rates will begin a few months after the end of quantitative easing, that is, before the end of 2022. In total, in the period 2022-2024 it is planned to raise interest rates at least 6 times. (For comparison, the European Central Bank will start doing this in three years.)
Such expectations were in favor of the dollar, the DXY index rose to 93.498, and the EUR/USD pair renewed its monthly minimum, falling to 1.1683.
There was little chance of announcing the start of QE cuts now. But this has not happened, and the Fed will continue to print new dollars for the time being in a volume of at least $120 billion per month. The amount of money on US household balance sheets rose to $16.5 trillion in the second quarter and will continue to grow in the near future (it was $12.7 trillion at the end of 2019). But there has to come a time when the population starts spending that money to support the US economy after QE ends.
Such statistics have given investors confidence in a bright future and revived their appetite for risk, sending the S&P500, Nasdaq and Dow Jones stock indices higher once again. By the end of the week, the exchange had already made up for the losses it incurred on Monday due to information about a possible bankruptcy of Evergrande, one of the largest construction companies in China. Its debt of 2 trillion yuan ($309 billion) is the largest in the world and is nearly 80 times its net worth (about $3.9 billion). According to Bloomberg, Evergrande includes 200 offshore companies and 2,000 Chinese companies operating in many countries, so the bankruptcy of such a giant would deal a huge blow to the global economy.
The recovery of investor interest in risky assets and the flow of money into the stock market reversed the EUR/USD pair north on Thursday. Dollar weakness accelerated after weak data from the US labor market was published.
Initial jobless claims rose to 351,000 in the week versus expectations of 320,000. The number of repeat requests increased to 2.8 million. This is certainly not a disaster, but a wake-up call for the Federal Reserve. And if the nonfarm payroll data and other indicators, which will be published on October 8, also turn out to be disappointing, the regulator may consider delaying the quantitative easing cut further.
These two bullish factors helped the EUR/USD to lift the pair to 1.1750 on September 23rd. As for the end of the working week, the pair finally struck a chord at around 1.1715 after Jerome Powell's Friday night speech.
The fact that the US central bank can start ending quantitative easing within one to two months and complete the process by mid-2022, after which it will continue to raise interest rates, allows forecasting for a stronger dollar in the medium term. Most experts (65%) expect the US currency to rise and further decline in the EUR/USD pair in the coming week. It is supported by 85% of oscillators and 100% of trend indicators on D1. The remaining 35% of analysts voted in favor of the pair's growth, and 15% of oscillators are also indicating oversold.
Support levels are 1.1705, 1.1685, 1.1600 and 1525. Resistance levels are 1.1750, 1.1800, 1.1845, 1.1908, 1.1975, 1.2025 and 1.2100.
Among the upcoming events, it is worth noting the German elections, which will take place on Sunday, September 26, after which Chancellor Angela Merkel will leave office. US capital and durable goods orders will be released on Monday, September 27. There will be statistics on consumer markets in Germany and the Eurozone on the last day of the month, as well as data on US GDP. Finally, the ISM Manufacturing PMI will be released on Friday, October 1st.
pair GBP/USD: Central Bank hawks win
Last week can be safely called Central Banking Week. Not only the US Federal Reserve, but the banks of England, Japan and Switzerland also thrived with their meetings. And although the latter two are not yet ready to sweep the path, the British regulator suddenly came out with a hard-line rhetoric.
The Bank of England has been very negative over the past few years, following in the wake of the European Central Bank and Federal Reserve. It lasted until the middle of last week. But leaving the EU clearly made such behavior impossible. At its meeting on Thursday, September 23rd, the bank made decisions that literally took the market lower, and the GBP/USD pair rose 140 pips, from 1.3608 to 1.3748. The regulator not only announced its plans to tighten monetary policy, but also set the timing for an increase in the refinancing rate. The first increase to 0.25% is due in May 2022 and will increase to 0.50% in December.
In contrast to the Fed's ambiguous timetable, the BoE's plan set fairly clear milestones, which, as mentioned earlier, were greeted with enthusiasm by the market. But the GBP/USD pair did not exceed 1.3748, because although there are no concrete numbers at the moment, the Fed's massive plan to end quantitative easing will be implemented, and in a short enough time frame. This cooled the enthusiasm of the pound's supporters, and as a result, the week-long bout of bulls and bears on the GBP/USD pair ended with the latter's victory: starting at 1.3730, ending at 1.3670.
Technical analysis is also on the downside: both oscillators and trend indicators are in red at D1. It is not only the trend of the past two weeks that is affecting, but also the dynamics of the last three months. But for the experts who predicted next week, the vote is 50 to 50.
Resistance is at 1.3690, 1.3765, 1.3810, 1.3910, then 1.3960, 1.4000 and 1.4100. The bulls are aiming to refresh the June 1 high at 1.4250. Support is found in the 1.3640, 1.3600, 1.3570 and 1.3520 areas.
In terms of aggregate statistics, UK GDP for the second quarter of 2021 will be released on Thursday 30 September. While the previous value was positive (+4.8%), it is now expected to turn negative, -1.5%.
pair USD/JPY: Bank of Japan committed to soft monetary policy
The USD/JPY pair has been moving along the horizon of 110.00 since last March, in rare attempts to break out of the 108.30-111.00 trading channel. Also this time, after starting the five-day period at 109.95, it reached a high of 110.78 by the end of the week, and ended the trading session at 110.75.
Unlike other central banks in advanced economies, the Bank of Japan remains committed to ultra-soft monetary policy and negative interest rates. This is why the yen is still of interest not as a tool for making money, but as a safe haven currency.
He had a good start to the week: the risk aversion caused by the possible bankruptcy of Evergrande pushed the USD/JPY pair to the horizon of 109.10. However, things later went wrong. Investors wanted to profit again, turning to risky assets. After the Fed meeting, the US 10-year Treasury yield rose above 1.44%. In fact, the yield spread on 10-year Japanese bonds and similar US bonds has outpaced recent mergers in favor of US bonds. This balance of power was in favor of the USD/JPY bulls, weakening the JPY position.
If the BoJ continues to maintain its dovish policy and the US Federal Reserve cuts its fiscal stimulus program, the JPY will not feel comfortable. The USD/JPY pair will continue to climb to a high of 112.00. The Japanese currency can be rescued either by another drop in demand for risky assets or simply the market's reluctance to move the pair above the medium-term corridor.
At the moment, 60% of experts believe that the USD/JPY pair could approach 112.00. But only half of analysts vote in favor of moving above this level. The second half believes that the pair will return to the aforementioned corridor again.
As for the indicators on D1, 65% of the oscillators are heading north, the rest are either trending in neutral gray or indicating that the pair is overbought. However, trend indicators are voting unanimously to continue rising northward.
Support levels are unchanged: 110.15, 109.60, 109.10, 108.70 and 108.30. Bears dream (it seems impossible indeed) is to retest the April low at 107.45. The nearest resistance levels are 110.80, 111.00 and 111.65. The ultimate goal for the bulls remains the same: to reach the desired high at 112.00. And maybe even overcome.
As for the events to be held in Japan in the coming week, we note the meeting of the Bank of Japan Monetary Policy Committee on Tuesday 28th September and the publication of the Tankan Index of the country's top producers for the third quarter on Friday 01st October. But will they be able to seriously affect USD/JPY prices? In our opinion, unlikely.
Bitcoin: Whales Preparing for Bears Attack
This week's BTC/USD and ETH/USD charts are very similar to those of the S&P500 and Dow Jones stock indices. The reason is the volatility of investor sentiment.
The threat of default on obligations of one of China's largest construction companies, Evergrande, which has accumulated debts of 2 trillion yuan ($309 billion), sparked panic in financial markets on September 20. The cryptocurrency market has not escaped selling either. Bitcoin fell to $39,666 for a short time on Tuesday, losing as much as 25% of its value.
The panic caused by Evergrande subsided on September 22, followed by a correction, moderate risk appetite returned to investors after the Fed meeting, and the charts crept north. However, it was too early to believe that the massive sale was over. After rising to $45,150, the bitcoin price fell again on Friday, September 24, then the coin resisted and is trading at $43,000 at the time of writing.
Once again the reason for the downfall was China, where the People's Bank of China declared all crypto-related activities illegal (for the seventh time), and promised to crack down on violators. The ban includes foreign exchange services offered in the country, among other things.
In addition to pressure from regulators, whale behavior is another warning sign. On the one hand, the number of coins they own is increasing. If there was an average of 3,236 BTC per whale in February, that number rose to 3,722 BTC in September. But the number of whales themselves is down 15% and now stands at 2,125. This is the lowest in the last 15 months. In addition, large amounts of their cryptocurrency flowed from their wallets to exchange accounts. This indicates that the whales are preparing for a possible continuation of the bear market.
Of course, whales are not a single entity. And despite the general desire to make profits, it can be divided into short and long-term investors. The former are subject to speculation and quick fixation of small profits. The second, like MicroStrategy, favors restocking when prices drop. Thanks to them, the market was kept from a complete collapse.
As for investor sentiment, the data presented by Glassnode in the latest report is interesting. Since late July, while the bitcoin price has risen from $31,000 to $52,000, long-term coin holders have sold the coins they bought between $18,000 and $31,000. According to analysts, this indicates that some passive investors have moved into the category of active traders who sell the purchased currencies at prices close to the current ones.
The total cryptocurrency market cap has again fallen below the psychological level of $2.0 trillion and reached $1.84 trillion. The Crypto Fear & Greed indicator moved from the neutral zone (48 points) to the fear zone. It was 27 on Thursday, September 23, at its lowest level for the week, and it grew slightly on Friday, September 24 - up to 33 points.
In general, the cryptocurrency market is now in a state of uncertainty, with some influencers predicting unprecedented growth for it, while others, such as the head of Euro Pacific Capital, Peter Schiff, believe that this “bubble” will soon burst. Of course, this controversy applies not only to Bitcoin, but also to Ethereum.
The price of ETH fell by 40%, from $4,020 to $2,650 in just three days last week, from September 20 to September 22. At the same time, JPMorgan strategist Nikolaos Panigerzoglu thinks it should be less. In his opinion, the fair price of this altcoin is $1,500, based on network activity metrics.
The opposite view is taken from crypto trader and analyst Lark Davis, who said that ETH will reach $10,000 in the coming weeks. He noted that major investors, banks and companies continue to invest in the Ethereum ecosystem. Davis cited limited market supply as another factor in favor of altcoin growth. 87% of Ethereum coins have not moved in more than three months, indicating investors' reluctance to sell their savings. In addition, a significant shortage is created by burning the basic transaction fees as well as by increasing Ethereum 2.0 deposits.
And in conclusion, it turned out that exactly 100 years ago, the famous automaker Henry Ford was already putting forward the idea of replacing gold with the so-called “energy currency”. This issue was raised in the New York Tribune as early as 1921. Remarkably, Ford's proposed project to launch a new currency is strikingly similar to the description of BTC, which was introduced by Satoshi Nakamoto in 2008.
The front page of the newspaper included an article detailing the "energy currency" that Ford believed could replace gold and become the backbone of the new age monetary system. This coin will operate entirely on the basis of "units of force", and it has been proposed to build a huge hydroelectric power plant to issue it. Thus, the monetary unit can become the most stable and secure and prevent the growth of the rich who profit from speculation in gold.