pair EUR/USD: The 'boring' FOMC protocol for the Federal Reserve
The DXY Dollar Index reached a multi-year high of 105.05 on Friday, May 13, after a six-week rally. The last time I jumped to such a high level was 20 years ago. However, a reversal followed, and it was already at the 101.50 level exactly two weeks later. Following the general trend, the EUR/USD pair has also been growing since May 13, reaching a peak of 1.0764 on May 27. The Euro pushed the Dollar by 415 pips during this time. And it's not at all the European currency that did that, but the American currency. More specifically, the US Federal Reserve.
The minutes of the latest Federal Open Market Committee (FOMC) meeting released on Wednesday, May 25th did not come as any surprises. He only had what everyone already knew. The content of the document simply confirmed the regulator's intent to raise the refinancing rate by 0.5% at each of the next two meetings. Federal Reserve officials also unanimously approved a plan to begin shrinking the asset portfolio, which currently stands at $9 trillion, effective June 1. The absence of any FOMC protocol surprises hurt the dollar, but helped stocks.
The Eurozone's macroeconomic calendar remained virtually empty last week. As for the statistics from the United States, they came rather multi-directional. Initial jobless claims for this week fell to 210K, which is lower than the expected 215K. Durable goods orders rose 0.4%, indicating further growth in consumer activity, the main driver of economic growth. However, on the other hand, US Q1 GDP was revised down to negative -1.5%, which is worse than the previous estimate of -1.3% and expectations of -1.4%.
Among the factors in the medium term, the aggressive policy of the US central bank continues to play on the side of the dollar. Its president, Jerome Powell, has repeatedly stressed his determination to raise interest rates in order to curb inflation and prevent the economy from overheating. The annual US inflation rate reached 8.3% in April, more than four times the target of 2%. At the same time, according to analysts, the record rise in energy prices will continue to push inflation higher in the coming months. This, in turn, could prompt the Federal Reserve to tighten monetary policy further.
The US currency also continues to gain support from its status as a protective asset. With the armed conflict between Russia and Ukraine expected to escalate, demand for it will continue to grow, as investors worry about the threat of stagflation in Europe. The escalating tensions between China and Taiwan have increased the desire for safe haven assets as well.
The EUR/USD completed last week at 1.0701. At the time of writing the review, on the evening of May 27, the expert vote was divided as follows: 30% of analysts are sure that the pair will return to the movement to the south, 50% of analysts are waiting for a continuation of the rally north, and the remaining 20% take a neutral position. There is no unit in the readings of the indicators on D1. Oscillators 80% green, 10% red, 10% neutral gray. At the same time. There is parity between trend indicators: 50% vote for the growth of the pair, and 50% vote for its fall. The nearest resistance is in the 1.0750-1.0800 area. If successful, the bulls will try to break through the resistance 1.0900-1.0945, then 1.1000 and 1.1050, after which they will meet the resistance in the area of 1.1120-1.1137. For the bears, task #1 is to break the support at 1.0640, then 1.0480-1.0500, and then update the May 13th low at 1.0350. If successful, they will move on to break into the 2017 low at 1.0340, and there is only 20-year support below.
Lots of stats on consumer markets in Germany (May 30 and June 1) and the European Union (May 31 and June 3) will be released this week. Also worth noting is the publication of the ISM Business Activity Index in the US manufacturing sector on Wednesday, June 1st. On the same day, the ADP report on non-farm employment in the US will be published, and another piece of data from the US labor market will arrive on Friday, October 08, including important indicators such as the unemployment rate and the number of new non-farm employees. Agricultural Payroll (NFP).
pair GBP/USD: Japan has its own way. But which one?
The main factor behind the strength of the pound and the growth of the GBP/USD pair, as in the case of the euro, was the general weakness of the US currency. The two-week decline in the DXY Dollar Index was its worst losing streak since December 2021. However, unlike the Euro, the British currency was helped by two other factors. The first is strong labor market data. The second was inflation in April, which peaked in four decades and gave investors hope for further monetary policy tightening and interest rate hikes by the Bank of England.
British Prime Minister Boris Johnson expressed his disappointment over the country's economic prospects last week. He said in an interview with Bloomberg TV on May 27 that he "expects a difficult period ahead" and "doesn't want to see a return to the 1970s-style wage-price spiral".
The day before, the UK government's decision had largely surprised the markets, in contrast to the "boring" Fed protocol. British Chancellor of the Exchequer Rishi Sunak has announced a one-time payment of £650 to low-income families to help them drive up prices. The total amount of this financial bailout will be £15 billion. And although Snack argued that the support package would have "little impact" on inflation, many analysts believed that the injection could prompt the Bank of England to revise its economic outlook for this year and next. It is possible that the regulator will decide to take a tougher stance in order to reduce the inflationary pressure on the country's economy.
At the same time, at the moment, the growth prospects for the British economy remain much lower than on the other side of the Atlantic. This makes many experts doubt that the pound, along with the GBP/USD pair, can continue to grow steadily in the medium term. Especially if tension increases over the Northern Ireland protocol. Remember that this document is an addendum to the Brexit Agreement, which regulates private trade, customs and immigration issues between the United Kingdom, Northern Ireland and the European Union.
The last chord from last week appeared at 1.2628. 55% of experts vote for further growth for the pair, 35% for its fall, and the remaining 10% for a sideways trend.
The situation with the indicators on D1 is similar to their readings for the EUR/USD pair. Among the trend indicators, 50% indicates growth in the pair, and the same number indicates a decrease. Among the oscillators, the balance of forces is somewhat different: only 10% are heading to the south, another 10% are neutral, and 80% are pointing to the north, although a quarter of them are already in the overbought zone. Supports are located at 1.2600-1.2620, 1.2475-1.2500, 1.2400, 1.2370, 1.2300, 1.2200, then 1.2154-1.2164 and 1.2075. The strong pivot point for the pair is at the psychologically important 1.2000 level. In the event of the continuation of the movement towards the north, the pair will have to overcome the resistance 1.2675 and then there are the areas of 1.2700-1.2750, 1.2800-1.2835 and 1.2975-1.3000.
Among the upcoming week's events related to the UK economy, we note Wednesday 01 June, when the May value of the Business Activity Index in the Manufacturing Sector (PMI) will be published. Thursday 02 June and Friday 03 June are bank holidays in the UK.
pair USD/JPY: Why is the yen strengthening
Japanese Prime Minister Fumio Kishida recently said that “the recent moves of the yen are being driven by various factors” and added that the government’s priority is to help relieve pressure on households and businesses through various policy measures.
It is interesting to know what lies behind the phrase “the yen’s recent moves”. Is the fact that the USD/JPY has risen from 102.58 to 131.34 since January 2021, and the Japanese currency has weakened by 2876 pips? So this is not just some kind of "movement", but a real breakdown, from which the families of the country are groaning.
Inflation in the country continues to grow, which eventually leads to dissatisfaction among the population. Consumer price increases are recorded for the eighth consecutive month. It rose 2.5% in April compared to the same month a year earlier, showing the highest growth rate since October 2014. As noted by Dow Jones, inflation crossed the 2.0% mark for the first time since September 2008, and that's without taking into account the impact of a consumption tax increase. But how did the country's leaders react to that?
While regulators in the US and UK fight inflation by tightening monetary policy, the opposite is true in Japan. According to the aforementioned Prime Minister Fumio Kishida, the authorities aim to achieve the inflation target through structural reforms of the government, fiscal policy and monetary policy easing of the Bank of Japan. (Remember that the interest rate on the yen has been at negative -0.1% for a long time.)
Bank of Japan Governor Haruhiko Kuroda, in turn, explained that if energy prices do not show a sharp decline, Japan's core CPI is likely to remain near the 2% mark for about 12 months.
At the same time, if we analyze the statements of both officials, some contradictions in their assessment of the economic situation become noticeable. On the other hand, Fumio Kishida says the government's priority is to relieve inflationary pressure, including raising citizens' wages. On the other hand, Haruhiko Kuroda says that against the background of such wage increases, a steady increase in inflation is possible. As a result, it is not yet clear whether a compromise will be reached between the government and the Bank of Japan, and what the country's economic policy will look like in the coming months.
Many investors, especially foreign ones, expect that despite the regulator's assurances of its commitment to ultra-soft monetary policy, it will still be forced to raise the interest rate. And this expectation, along with DXY's drop, seems to provide support for the yen: USD/JPY finished last week at 127.11.
At the moment, 60% of analysts are in favor of the bears, expecting further movement in the pair to the south, 15% vote for the resumption of the medium-term uptrend, and 25% expect a sideways movement.
Among the indicators on D1, for oscillators, 60% are red, among them a third gives signals that the pair is oversold, 10% is green, and 30% is neutral gray. Among trend indicators, parity is 50% to 50%. The nearest support is located at 126.35, followed by the areas and levels of 126.00, 125.00 and 123.65-124.05. The bulls' goal is to rise above the 127.55 horizon, then overcome the resistances of 128.00, 128.60, 129.40-129.60, 130.00 and 130.50 and renew the May 09 top at 131.34. As a final target, we see the January 01, 2002 high at 135.19.
No significant information regarding the state of the Japanese economy is expected this week.
Cryptocurrency: The background is negative, but there is still hope
We have two news for you: good and bad. Let's start with the good. Many experts, such as ARK Invest CEO Catherine Wood, literally dreamed that Bitcoin would “ditch” the S&P500, Dow Jones and Nasdaq stock indices, stop following them in the tail and take on a life of its own. Finally, we've seen something similar over the past two weeks. Despite the volatility in the stock markets, the bulls are desperately trying to defend the $30K region from May 13 to May 27, preventing BTC/USD from falling below the $28,620 support. This is where the good news ends. Let's move on to the bad.
The #1 cryptocurrency is trading in negative territory for the first time in its history for the eighth consecutive week. An important role in these dynamics was played by the direct correlation between BTC and stock indices, which was broken only in the last days of May.
Experts from Goldman Sachs noted in April that the aggressive policy of the Federal Reserve may provoke a recession in the US economy. Such expectations led institutional investors to flee risky assets, including cryptocurrencies.
General trading activity is declining. The outflow of funds from crypto funds in the past two weeks has reached its highest level since July 2021. The total amount in fund management has fallen to $38 billion. The number of transactions is also declining. The total volume of coins on cryptocurrency exchanges has fallen to 2.5 million BTC, and bitcoin is flowing into cold wallets.
Against this background, negative statements about the main cryptocurrency are heard quite often. European Central Bank President Christine Lagarde said on May 22 that the cryptocurrency does not have any security that can serve as stability. The next day, she was joined by Bank of England President Andrew Bailey, who said that bitcoin has no intrinsic value and is not suitable as a means of payment.
Scott Minerd, chief investment officer at Guggenheim Partners, agrees with central bank chiefs. Currency should store value, be a medium of exchange and a unit of account. There is nothing like that, they [cryptocurrencies] have not even reached a single foundation,” he concluded and compared the situation in the cryptocurrency market with the dot com bubble. According to him, most digital assets are “junk,” but Bitcoin and Ethereum will weather the crypto winter, which will be long. “When you break $30,000, $8,000 is the bottom line. So, I think we still have a lot of room to fall back, especially with the Fed acting tough,” Scott Minerd predicted.
As Mike Novogratz, CEO of Galaxy Digital, sees the outlook for the entire financial market is bleak. He believes that despite a significant drop from all-time highs, altcoins risk losing more than half their value. However, despite the bearish macroeconomic backdrop, the president of Galaxy Digital remains bullish and believes in the recovery of the cryptocurrency market in the future. According to the president of Galaxy Digital, “the crypto community is resilient and believes that markets still offer early entry opportunities.”
Indeed, if you analyze social networks, you can see that their users, unlike organizations, have more confidence in a better future. Thus, the analytical company Santiment published its data, which calculates negative and positive comments on an asset in social networks. Based on this information, a kind of mood is determined for the crypto community. According to the readings of this tool, Bitcoin has already reached a global bottom and is expected to rise in the coming weeks. “Now is the moment when Bitcoin has every chance of a limited boost,” Santiment analysts believe.
One of the most respected social media analysts aka Credible believes that despite the general bearish mood in the markets, BTC is ready to take off. Credible uses Elliott Wave Theory for technical analysis, which predicts the behavior of the rate based on the psychology of the audience, which manifests itself in the form of waves. This theory assumes that a bull market cycle goes through five motive waves, with the asset correcting during the second and fourth waves and rising during the first, third and fifth waves. In addition, each main wave is made up of 5 smaller sub waves.
According to the analyst, Bitcoin is now in the middle of the major fifth wave that started at the beginning of 2019. In addition, BTC is currently still in the fifth sub-wave, which could push the asset to a new all-time high above $100,000. Credibility wrote: “I understand that my approach is controversial. Most don't expect a new high at all until the next half in 2024, but I do expect it soon, in a few months."
Rekt Capital, which has more than 300,000 followers on Twitter, has warned that bitcoin could briefly drop 28% below its 200-week moving average. He explained that this SMA plays the role of the latest ever-increasing support. Bitcoin has fallen below this line in the past, but these capitulations have been very short. The weekly candle has never closed below this simple moving average yet, but its shadows are up 28%. If this happens again now, the price of the cryptocurrency will be at the level of $15,500. The 200-week moving average is currently in the $22,000 region.
According to another crypto-analyst named Rager, “If the price of BTC falls and bounces off the 200-week moving average, as in the previous bearish cycles, this is a good sign. There will only be a 68% drop from the maximum.” However, according to his calculations, such declines were as much as 84% in the past, and “in current reality, a decline of 84% would result in $11,000.” However, due to the long bearish cycles for BTC in 2014 and 2018, it may take 6-8 months before it reaches a bottom.
Rager believes that in the short term, the price of bitcoin will continue to depend on the strength or weakness of the US stock market: “BTC has limited upside at the moment, but it will not strengthen until stock markets turn around.”
According to Glassnode, the percentage of open call and call options for BTC has increased from 50% to 70%, which indicates an increased desire by investors to secure positions from ongoing negative dynamics.
Open interest (OI) in call contracts that expire at the end of July this year is centered around the $40,000 mark. However, the participants give the greatest preference to the purchase options, which will bring a profit in the event that the price is reduced to $25,000, $20,000 and $15,000. In other words, until the middle of the year, the market is focused on hedging risks and/or speculating on a further drop in prices.
Optimists dominate the longer distances. Contracts maturing at the end of the year are the most open positions in the range of $70,000 to $100,000. In the put option, the largest OI is concentrated between $25,000 and $30,000, i.e. in the area of current values.
We continue our review of the good and bad news for the day in this note. We only note that at the time of writing the review, on the evening of Friday, May 27, the total cryptocurrency market capitalization was $1.194 trillion ($1.248 trillion a week ago). The Bitcoin Fear & Greed indicator has solidified in the Extreme Fear area and is at around 12 points. (It is reported that it fell to 8 points on May 17, the lowest level since March 28, 2020). The BTC/USD pair is struggling to stay in the war zone, as it is trading at $28,800.