pair EUR/USD: Surprises from the US Federal Reserve
The US Federal Reserve (FOMC) meeting and subsequent press conference of its administration were the main event last week. JPMorgan analysts described the speech of Jerome Powell, the US central bank chief, as the most "hawkish" during his tenure.
As for the first increase in the federal funds rate this year, there were no surprises: It is likely to take place in March as planned. True, Jerome Powell did not answer the question of how much the increase, 25 or 50 basis points, would be. But at the same time, he made clear that the Fed would be "fast-moving" and "recalcitrant" from now on. Apparently, the regulator will no longer pay attention to the Omicron strain of coronavirus or the collapse of stock indices and will focus on controlling inflation.
The number of potential increases in the refinancing rate in 2022 was a real surprise to the markets. Powell's talk led the market to raise the probability of the three increases by June from 45% to 60%. In total, there could be five or six of them this year. For example, Deutsche Bank experts expected a 25 basis point rate hike in March, May and June, as well as two other monetary tightening measures before the end of the year. And their colleagues from BNP Paribas have set their sights on six increases. There may be seven of them if inflation continues at a high level in the second half of the year. After all, the Fed Chairman has made it clear that the main tool for fighting inflation will be the federal funds rate.
In addition, the US central bank decided to double the pace of its rollback of the quantitative easing program. Government bond buybacks will drop by $20 billion per month from next month (now $10 billion), and mortgages by $10 billion (now $5 billion).
All these hawkish signs showed that the regulator's stance is getting tighter and has made a huge impression on the derivatives market. The direct correlation between government bond yields and the DXY dollar index was restored, with the index jumping above 97.35.
It is reported that the euro is the basis of the basket of six world currencies that make up DXY, with a share of 57.6%. Therefore, the European currency played a leading role in the growth of the index and the strengthening of the dollar in the current situation. The difference between the hawkish stance of the Fed and the pessimistic stance of the European Central Bank has been repeatedly talked about. The European Central Bank intends to start raising the rate only in 2023, while its counterpart abroad will already complete this program. This difference does not bode well for the old world currency.
The EUR/USD pair lost more than 220 pips at its highest level in the last week alone, a record for the past seven months. The local bottom was found on Friday, January 28 at the level of 1.1121, followed by a slight correction and the end at 1.1148.
Of course, if the US Federal Reserve conducts a very aggressive tightening of its monetary policy, it could lead to a sharp drop in consumer demand, with all the problems that follow. But this has not happened yet. And it will always be possible to alleviate the situation even if it does. Therefore, the probability of the pair falling towards 1.1000 is very high. This is the number that appears in both the forecasts of strategists and the Internationale Nederlanden Groep, as well as the Canadian Bank of Commerce.
At the time of writing, 100% of the trend indicators and 100% of the oscillators on D1 are red, although 30% of the latter are in oversold territory. Among experts, the majority (60%) support further strengthening of the dollar, and 40% believe that the euro has not lost everything so far, and the pair will be able to temporarily return to the border of the medium-term side of the channel 1.1220-1.1385. The nearest resistance area is located at 1.1185, followed by 1.1220, 1.1275, 1.1355-1.1385 and 1.1485. The nearest support area is 1.1075-1.1100 and then 1.0980-1.1025.
As for the agenda for the coming week, market attention will be mainly focused on the ECB meeting on Thursday, February 3rd. It is unlikely that any special surprises will be presented, and the interest rate will remain unchanged at the 0% level. However, some changes in the European regulator's monetary policy are still possible. Investors are expecting to get to know them at the latest press conference.
All in all, the week will be full of macroeconomic statistics. There will be data on Eurozone GDP and Germany's consumer market on Monday, January 31. Germany's retail sales volume, the ISM business activity index in the US manufacturing sector, as well as the results of a study of the European banking sector will be announced on Tuesday. There will be consumer market data in the Eurozone and the level of private sector employment in the US on Wednesday. The value of the ISM business activity index in the US service sector will become known on Thursday. In addition to data on Eurozone retail sales, we traditionally wait for a portion of the stats from the US labor market, including the number of new jobs created outside the agricultural sector (NFP) on the first Friday of the month, February 04.
pair GBP/USD: How will the Bank of England respond?
UK Markit Services PMI released on January 24th came in below expectations at 53.3 vs. 55.0 expected. Moreover, the expected active increase in interest rates by the Federal Reserve, and then the preliminary data on the US GDP for the fourth quarter of 2021, played a role on the dollar side. It showed an increase that no one expected: 6.9% versus the expected 5.5% and the previous value of 2.3%. Apparently, the US economy has not only recovered from the onslaught of COVID-19, but has recovered so much that economic growth even exceeded 2019 figures.
All this did not benefit the British currency, of course. Then there are calls for the resignation of British Prime Minister Boris Johnson, which the market considered another bearish factor. As a result, the GBP/USD pair consolidated as low as 1.3357, down nearly 400 pips in two weeks.
Can the pound return to growth despite the US Federal Reserve's hawkish stance? It is likely that we will get an answer to this question soon enough, after all, in addition to the ECB meeting, there will also be a meeting of the Bank of England on Thursday, February 3rd. How can he respond to the Americans? Of course, by increasing rates faster: according to a number of forecasts, the interest rate on the pound may rise by another 0.25 basis points, up to 0.50%.
How long will this support for the British currency? Many analysts doubt that the Bank of England's actions will meet market expectations, and that the regulator will act as aggressively as the Federal Reserve this year. Based on this, economists at Rabobank, the second largest bank in the Netherlands, do not rule out that the GBP/USD pair could drop below 1.3000 by the middle of the year.
As for the current situation, the 1.3400 level (the 1.3360-1.3415 range to be exact) is a very strong support/resistance area and can serve as a starting point for the pair to bounce. This development is supported by 30% of experts. The next resistance awaits the pair at the levels of 1.3440, 1.3500-1.3525, 1.3575, 1.3650, 1.3700 and 1.3750.
70% of analysts vote for a further decline in the pair. Supports are located at 1.3360, then 1.3275, and 1.3200, followed by a strong December trend reversal area 1.3160-1.3185.
The indicators on D1 look like this: only 10% of the oscillators are to the north, the remaining 90% are to the south, of which 20% indicate that the pair is oversold. Among the trend indicators, all 100% are looking down.
In addition to the BoE meeting, we should pay attention to the data on business activity (PMI) next week: in the manufacturing sector on February 1, in the services sector on February 3, and in the construction sector in the UK on February 3. 04.
pair USD/JPY: The Japanese Yen has no answer
If the Bank of England has something to respond to the US Federal Reserve, nothing like this can be expected from the Bank of Japan with a negative rate forever (minus 0.1%). The yen, as a safe haven currency, is usually supported by investors fleeing risky assets. But the rise of the dollar and US Treasuries is now a strong obstacle in their way. And the Bank of Japan doesn't really need a strong national currency.
As a result, as most experts (60%) expected, the USD/JPY pair surged north again. It is true that it failed to reach the top on Jan 04 at 116.35, but the rally still looks impressive. If the pair was at the level of 113.46 on Monday, January 24, it reached a high of 115.68 by the end of the working week. The last chord of the five-day period was identified at the level of 115.22.
At the time of writing, most indicators on D1 are pointing north. Among the oscillators, 90% of them (10% of them give signals that the pair is overbought), and the remaining 10% are colored red. Among the trend indicators, 100% recommend buying. Experts agree with the indicators: 70% are in favor of bulls, 20% are with bears, 10% are neutral. Support levels are 115.00, 114.45, 114.00, 113.75, 113.45, 113.20, 112.55 and 112.70. The nearest resistance area is 115.50-115.70, and the closest target for the bulls is a new five-year high at 116.35.
No serious macroeconomic statistics are expected from Japan this week.
Cryptocurrencies: the calm after the storm
If we talk about cryptocurrencies, nothing terrible will happen to them at the January meeting of the Federal Reserve. It has long been known that the regulator will tighten monetary policy and reduce monetary injections into the economy. In addition, it will raise interest rates. Yes this will to strike risky assets, but it will attract money from the stock market in the first place. Things probably won't make it to cryptocurrencies, as a super speculative asset at all: volumes are too small.
The cryptocurrency market grew by leaps and bounds as the Federal Reserve flooded the post-pandemic markets with trillions of newly minted dollars. There will be no more flow of this money, and it is probably not worth relying on a new crypto boom. Institutional investors will act more calmly, but they will not be in a hurry to part with Bitcoin and Ethereum either. Everyone who wanted to sell it had already sold it. Those who wanted to keep it, kept it as a long-term investment.
Of course, any surprises are possible in the industry In the meantime, the cryptocurrency market is recovering from the panic that arose before the Fed meeting. After dropping to $32.945 on Monday, January 24, the BTC/USD pair has grown slightly and is trading in the $37,000 region at the time of writing. Total market capitalization rose from $1.51 trillion to $1.70 trillion, and the Crypto Fear & Greed Index grew to only 24 points (11 points at the Jan 23 low), stuck firmly in the Extreme Fear territory. So it is clear that it is too early to speak with confidence even about the beginning of the recovery and the reversal of the trend. Moreover, the BTC/USD chart shows that the strong support that the pair relied on in both 2020 and 2021 is in the $29,000-30,000 region. So there is room for fall.
GoldBug and bitcoin skeptic Peter Schiff has allowed bitcoin to crash below $10,000. But Mike Novogratz, founder of the digital crypto bank Galaxy, immediately defended the main currency, offering Schiff a million-dollar bet. The banker promised to send this money to a charity or for any other purpose of choosing a discount if BTC was trading at less than $35,000 a year.
At the same time, Novogratz believes that the bear market will be long enough, and therefore does not recommend buying on a pullback now. It will be difficult for cryptocurrencies to start rising until the stock market drops. However, the digital assets have already seen a significant sell-off and are starting to receive support from buyers.
Robert Kiyosaki, author of the bestselling book Rich Dad Poor Dad, also recommends waiting when buying, saying that he will only buy more digital gold if its price drops to $20,000. He wrote: “Profits are made when buying, not selling. Bitcoin collapse. great news. I bought BTC for $6000 and $9000. I will buy more if the price tests $20,000. It's time to get rich."
Remember that Kiyosaki predicted a “giant stock market crash” last October and warned that the same fate awaited gold, silver and bitcoin. This is exactly what we see now.
Ton Weiss, a well-known trader, analyst and vice president of JP Morgan Chase, does not rule out completing a Bitcoin correction in the near future. According to him, the cryptocurrency has reached the 20-month moving average (MA), which is the $34,000 level. Weiss claims that this is a "perfect opportunity" for a trend reversal and the asset's return to growth. According to the specialist, in the event of a rebound, the bitcoin price will quickly return to the $40K level and consolidate above it.
Another cryptocurrency analyst, Nicholas Merten, predicts that despite the current market conditions, Bitcoin could rise nearly 7 times to $200,000 by the end of the year. Merten stated on his YouTube channel DataDash (502,000 subscribers) that if bitcoin's capitalization remains above $600 billion, it will set the stage for the currency's massive rally in the coming months.
The expert noted that all rallies happen after corrections and are often triggered by buying Bitcoin at very discounted prices. Merten says that understanding how the big players are buying is key to navigating the highly volatile cryptocurrency markets.
According to other market participants, bitcoin could visit the $30k area, and then likely turn around. Charles Edwards, founder of crypto investment firm Capriole, wrote that the signal from the NVT (Network Value to Transaction Ratio) indicator shows that BTC is oversold: this is a rare situation in the market. Edwards commented on the current situation, saying, "We have entered an open buying territory."
Remember that this indicator was proposed and actively used by well-known analyst Willy Wu. NVT is calculated by dividing the market value of bitcoin by its transaction volume (in US dollars) and is a common metric for assessing whether a currency is overbought or oversold.
Michael Saylor, founder of MicroStrategy, identified two reasons for the current correction in the cryptocurrency market. The first is the opaque regulation and regulatory uncertainty of the cryptocurrency industry. The second is the immaturity of the cryptocurrency industry. At the same time, the entrepreneur believes that the current market conditions provide an “excellent entry point for institutional investors interested in cryptocurrencies, who have been on the sidelines until now.”
According to Saylor, a lot of institutional investors are now watching Bitcoin and seeing that it is 40% below its all-time high and is consolidating. At the same time, they understood that Bitcoin is backed by serious investors such as Bill Miller, regulators, senators, members of Congress, as well as large public companies.
As for MicroStrategy itself, this software developer owns 124,391 BTC. The company spent about $3.7 billion on acquiring the cryptocurrency. Thus, the average purchase price is $30,100 per coin. And if it falls below this level, it will result in millions or even billions of losses for MicroStrategy owners.
And now, a few soothing phrases to wrap up the review. The first is from Scott Melker, trader, analyst and podcast host, who reminded his subscribers that there is nothing unusual about what is happening in the market right now. “People have short memories. Bitcoin dropped from $60,000 to $30,000 in 10 days in May. 10 days!!! All this has already happened. And that was only 8 months ago. Why are you so afraid? ”
The second is from fast food chain McDonald's, which offered digital asset holders a job in the catering industry during the downturn. This is a joke of course. But, as they say, there is some truth in every joke. The community liked McDonald's tweet and it quickly gained nearly 100,000 likes.
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