September 9, 2023
EUR/USD: September 13 and 14 - Key Days of the Week
- For the eighth consecutive week, the U.S. Dollar Index (DXY) is rising, while EUR/USD is declining. The currency pair has retreated to levels last seen three months ago, settling in the 1.0700 zone. It was only the dollar bulls starting to lock in accumulated gains on Friday, September 8, that prevented further declines.
The fundamental backdrop continues to favour the U.S. currency. Business activity, as measured by the Services PMI, shows consistent growth; it rose from 52.7 to 54.5 against a forecast of 52.5. Additionally, data released on September 8th indicated that the U.S. labour market is performing at least adequately. The number of initial jobless claims came in at 216K, lower than both the forecast of 234K and the previous figure of 229K.
On the same day, European statistics appeared decidedly weak. For instance, in Q2, the EU economy grew by a mere 0.1%, despite Q1 growth and market expectations being at 0.3%. In annual terms, with a forecast of 0.6%, the actual growth rate was also lower at 0.5%. Germany's industrial production volume decreased by -0.8% in July, compared to a forecast decline of -0.5%. Meanwhile, despite efforts to reduce it, inflation in Germany remains stable. The Consumer Price Index (CPI) published on Friday, September 8, stayed at 0.3% month-over-month (m/m) and 6.4% year-over-year (y/y).
According to many analysts, the European Central Bank (ECB) finds itself in a predicament. On one hand, to combat inflation, interest rates need to be raised; on the other hand, to assist the economy, they should be lowered. It is quite possible that in its meeting on Thursday, September 14, the regulator will take a pause and leave the key interest rate unchanged at 4.25%. Currently, the likelihood of such a decision is estimated at 35%.
As for the Federal Open Market Committee (FOMC) meeting of the U.S. Federal Reserve scheduled for September 20th, market participants are confident that the regulator will also leave interest rates unchanged. However, the reason in this case is different. While the Eurozone teeters on the edge of recession and stagflation, the U.S. is undergoing a "soft landing." As assured by John C. Williams, President of the Federal Reserve Bank of New York, "monetary policy is in a good place." Of course, the balance could tip one way or the other after inflation data for the United States becomes available on Wednesday, September 13.
That said, a pause in September does not mean the end of the monetary tightening cycle. According to CME FedWatch, the odds of a 25 basis point (b.p.) rate hike in November are at 37%. Even if this hike doesn't materialize, it is unlikely to harm the dollar. Much of the negative sentiment is already priced into the USD, as markets have long been betting on a recession in the U.S. economy and a corresponding easing of the Federal Reserve's monetary policy. Now, it has become clear that a dovish shift is unlikely, and the key interest rate will, at a minimum, remain at the peak level of 5.5% for an extended period.
EUR/USD pair began its descent from a high of 1.1275 eight weeks ago, on July 18, ending the past trading week at 1.0699, shedding 576 points. As of the evening of September 8, when this review was written, 45% of experts predict a rise for the pair in the near term, another 45% foresee a decline, and 10% hold a neutral stance. Regarding technical analysis, nothing has changed over the past week. All trend indicators and oscillators on the D1 timeframe continue to be 100% in favor of the U.S. currency and are coloured red. However, already 30% of the most recent indicators signal the pair is oversold. Immediate support for the pair is located around 1.0680, followed by 1.0620-1.0635, 1.0515-1.0525, 1.0480, 1.0370, and 1.0255. Bulls will encounter resistance around 1.0730-1.0745, followed by 1.0780-1.0800, 1.0835-1.0865, 1.0895-1.0925, 1.0985, 1.1045, 1.1090-1.1110, 1.1150-1.1170, 1.1230, and 1.1275-1.1290.
It's essential to note Wednesday, September 13 in the calendar for the upcoming week, when consumer inflation data (CPI) for the U.S. will be released. On Thursday, September 14, the European Central Bank (ECB) will announce its decision on interest rates. Of course, the subsequent central bank leadership press conference will also be of great interest. On the same day, the number of initial jobless claims in the U.S. will traditionally be published, along with retail sales data and the Producer Price Index (PPI) for the country.
GBP/USD: Peak Rate Continues to Lower
- At present, the central question for many central banks, including the Bank of England (BoE), is what takes precedence: taming inflation or preventing the economy from slipping into recession? Indeed, the British economy seems to be heading in the latter direction. The Purchasing Managers' Index (PMI) for the country's manufacturing sector in August stood at a mere 43.0, with the headline PMI dropping to a 39-month low. According to recent data, the PMI in the services sector has declined to 49.5, dipping below the 50.0 threshold into contraction territory for the first time since January.
So, what about inflation? Although the annual inflation rate in the UK decreased from 7.9% to 6.8% (the lowest since February 2022), it remains the highest among G7 countries. Moreover, the core Consumer Price Index (CPI) remained at 6.9% year-over-year, only 0.2% below the peak set two months earlier.
According to the latest survey conducted by the Bank of England's Monthly Decision Maker Panel (DMP) on Thursday, September 7th, British businesses anticipate that the CPI will decline to 4.8% year-over-year within the next year. It is worth noting that the regulator itself aims to bring the CPI closer to 5.0% by the end of this year.
Surveys indicate that under the current circumstances, the country's leadership is prioritizing economic salvation over the battle against inflation. Huw Pill, the Bank of England's Chief Economist, stated that while there is no room for complacency concerning inflation, he would prefer to keep the interest rate stable for a longer period. He added that in the upcoming BoE meeting on September 21, he will vote to maintain the rate at its current level of 5.25%.
According to Reuters, markets are currently pricing in an 85% likelihood that the BoE's final interest rate, after one or two hikes by year's end, will be 5.75%. This projection is significantly lower than July's, when a peak rate of 6.5% was anticipated. It is worth noting that the future 5.75% for the pound is just 25 basis points higher than the current 5.50% for the dollar, a gap that clearly does not favour the British currency. Moreover, the U.S. Federal Reserve's rate could potentially rise by an additional 25-50 basis points.
GBP/USD closed last week at a rate of 1.2465. Economists from Singapore's United Overseas Bank Limited (UOB) anticipate that the pair may test strong support at the 1.2400 level over the next 1-3 weeks. However, they believe that short-term oversold conditions could decelerate the pace of further decline. Expert forecasts are evenly divided, much like those for EUR/USD: 45% predict a northward correction, 45% foresee a continued southward trend, and the remaining 10% point to an eastward move. Among the oscillators on the D1 chart, 100% are coloured in red, with 15% indicating oversold conditions. Trend indicators show a 90% to 10% ratio favouring red. If the pair trends downward, it will encounter support levels and zones at 1.2445, 1.2370-1.2390, 1.2300-1.2330, 1.2270, 1.2190-1.2210, 1.2085, 1.1960, and 1.1800. In case of upward movement, resistance can be expected at levels 1.2510, 1.2560-1.2575, 1.2600-1.2615, 1.2690-1.2710, 1.2760, 1.2800-1.2815, 1.2880, 1.2940, 1.2995-1.3010, 1.3060, and 1.3125-1.3140, as well as 1.3185-1.3210.
In terms of key economic data for the United Kingdom, the unemployment figures set to be released on Tuesday, September 12, are of particular interest. Additionally, the country's July GDP numbers, which will be disclosed on Wednesday, September 13, are also noteworthy.
USD/JPY: Bulls Wary as Bears Anticipate Currency Interventions
- As for Japan, the question of "economy or inflation" is not up for debate; the answer is unequivocally the economy. On Wednesday, September 6, Kyodo News, citing anonymous sources, reported that the Japanese government apparently plans to roll out new economic stimulus measures in October. Reuters, quoting Japanese media outlets, identified the primary goals of the stimulus as "supporting wage increases within companies and mitigating electricity costs." "It is expected that Prime Minister Fumio Kishida will task [the responsible parties] with preparing a draft […] to allocate additional budget resources for these measures," the report stated. Reuters also presented an analysis indicating that the country's debt burden will increase due to the announced stimulus measures. According to estimates, Japan's debt, which is already twice its GDP, will hit a record level of 112 trillion yen (760 billion dollars) in the next fiscal year.
It becomes clear that under such circumstances, inflation will continue to rise. Meanwhile, USD/JPY continues its upward movement, reaching a level of 147.86 on September 7, marking a 10-month high. On Friday, September 8, Japan's Finance Minister Shunichi Suzuki reiterated once again that the country's authorities "are not ruling out any options to combat excessive currency fluctuations." However, no market participants believe in a rate hike anymore, given that it has been stuck at a negative level of -0.1% for many years. Concerns are growing among investors that the Ministry of Finance and the Bank of Japan (BoJ) may finally resort not to verbal, but to actual currency interventions, as was the case last fall. According to the same Reuters report, Japan's chief currency diplomat, Masato Kanda, stated that Japanese banking authorities are considering the possibility of intervention to put an end to "speculative" movements.
Against the backdrop of the DXY Dollar Index holding around 105.00, its highest level since March, only currency interventions by the Bank of Japan could help the yen strengthen its position somewhat. However, according to some analysts, the main reason for the yen's weakness lies in the disagreements among the country's politicians regarding its monetary policy.
The final point of the past trading week was marked at 147.79. Strategists at UOB Group anticipate that the continuation of the upward momentum could push USD/JPY towards an assault on the 149.00 level in the coming weeks. As for the consensus forecast, only 20% of analysts still believe in the dollar's potential and the pair's further growth. Bears have gained the favour of 80%. (It's worth noting that even a 100% consensus does not guarantee the accuracy of the forecast, especially when it comes to the Japanese yen.) As for the trend indicators and oscillators on the D1 chart, all 100% are coloured green, although 40% of these are signalling overbought conditions. The nearest support level lies in the 146.85-147.00 zone, followed by 146.10, 145.55-145.70, 145.30, 144.90, 144.50, 143.75-144.05, 142.90-143.05, 142.20, 141.40-141.75, 140.60-140.75, 139.85, 138.95-139.05, 138.05-138.30, and 137.25-137.50. The nearest resistance stands at 148.45, followed by 148.85-149.10, 150.00, and finally, the October 2022 peak at 151.90.
No significant economic data concerning the state of the Japanese economy is scheduled for release in the upcoming week.
CRYPTOCURRENCIES: Fear and Doubt in the Market
- For the third week, the market has been in a state of apathy. According to observations by crypto-millionaire William Clemente, the total trading volume for digital assets has fallen to its lowest levels since 2020. The BTC/USD chart on the H1 and H4 timeframes mostly resembles an ant trail, where these insects move in a thin, unbroken line.
The situation was invigorated by a court decision in the Grayscale case. This world-leading investment firm in cryptocurrency asset management won an appeal against the U.S. Securities and Exchange Commission (SEC). As a result, on August 29, bitcoin surged from $26,060 to $28,122 within three hours, showing its best growth rate in the last 12 months. However, the excitement was short-lived, as the SEC struck back by deciding to postpone until October the consideration of applications for spot bitcoin ETF registrations. Consequently, the flagship cryptocurrency returned to the support zone of $25,500.
Turning to technical analysis, this support corresponds to the Fibonacci level of 0.382. A break below this level could potentially lead to a fall to $21,700: the Fibonacci level of 0.618. Experts from Fairlead Strategies note that at the end of August, the digital gold's monthly chart confirmed an exit from the overbought zone on the stochastic oscillator, which could signal disappointment for bitcoin bulls. Analysts believe that this formed signal often indicates the passing of a local peak, as seen at the end of 2017 and the beginning of 2021. "The decline [in the stochastic oscillator] suggests that the bottom formation process may be prolonged. This is especially true when considering the Ichimoku cloud overhead, which serves as resistance (~$31,900)," said the report from Fairlead Strategies.
According to an analyst going by the nickname Tolberti, the BTC chart is forming a "head and shoulders" pattern, which threatens further price declines. Another argument supporting the bearish trend is that bitcoin is trading below its 200-week moving average (MA). As a result, Tolberti speculates that the leading cryptocurrency could fall to $10,000, with a possible reversal occurring in March 2024.
Negative forecasts are also coming from analysts at Cointelegraph. The fact is that bitcoin derivatives have started to show bearish tendencies. The BTC price chart leaves no doubt that investor sentiment has not improved following Grayscale's victory. Therefore, experts anticipate that the leading cryptocurrency's quotes could decline to $22,000 in the coming weeks.
Cointelegraph believes that not only the postponement of the launch of spot bitcoin ETFs is pressuring the market, but also U.S. regulatory actions against exchanges like Binance and Coinbase. Multiple sources claim that the U.S. Department of Justice (DOJ) is likely to charge the world's largest trading platform and initiate a criminal investigation. The allegations involve money laundering assistance and violation of sanctions against Russian companies.
Currently, market participants are in a state of limbo and are uncertain about what to expect. Regulatory uncertainty is favouring the bears. The derivatives market is ridden with fear and doubt, which benefits those betting on a decline, according to Cointelegraph.
We have previously noted that powerful catalysts for market growth in the medium and long term could be the launch of spot bitcoin ETFs and the bitcoin halving event scheduled for April 2024.
Recall that this summer, eight major financial institutions submitted applications to the SEC to enter the cryptocurrency market through spot bitcoin ETFs. Among them, in addition to BlackRock, are global asset managers like Invesco and Fidelity. According to some estimates, in the first six months after the ETF launch, new demand for the cryptocurrency could amount to $5-10 billion, and the value of BTC could rise to $50,000-120,000 per coin.
Despite the SEC's decision to postpone the review of applications until mid-autumn, the chances of approval are quite high. After all, BlackRock is not some small fish but a global investment giant, and it is in good standing with U.S. authorities. It's worth mentioning that when the Federal Reserve decided in 2020 to buy securities through ETFs to support the American economy, half of the volume went to BlackRock funds.
Interestingly, the company itself highly estimates the chances of application approval. This is evident from its purchasing of both bitcoin and shares of mining companies. In mid-August, it became known that BlackRock acquired shares of four major mining companies, spending a total of over $400 million. Larry Fink, BlackRock's CEO, has referred to bitcoin as digital gold and an international asset that potentially offers inflation protection.
Alistair Milne, the Chief Investment Officer of the Altana Digital Currency Fund, believes that the price of bitcoin could reach $100,000 even without the approval of spot bitcoin exchange-traded funds (ETFs). In his view, the ETF topic merely distracts market participants. Milne is confident that issues within the U.S. banking sector, the stabilization of risky assets following the end of the Federal Reserve's interest rate hikes and increasing profitability in the crypto-mining sector will drive the coin's price upward.
Arthur Hayes, the co-founder of the crypto exchange BitMEX, also thinks that due to issues in the banking sector, bitcoin is poised for substantial growth. According to him, the bull phase began after the Federal Reserve initiated a $25 billion program to stabilize the banking sector, notably including the "rescue" of Silicon Valley Bank. Hayes asserts that this situation has prompted traders to focus on assets with limited supply, such as bitcoin. While only a small fraction of market participants are currently taking this into account, he is convinced that their number will increase, and over the next 6-12 months, the leading cryptocurrency will experience a new surge.
As for the second driver, the halving, well-known blogger and analyst Lark Davis believes that this event could lead to a 500-600% increase in bitcoin's current price, potentially reaching around $150,000 to $180,000. However, with more than seven months to go before the halving, there are two upcoming events that could significantly influence investors' appetite for risky assets. These are the publication of U.S. inflation data on Wednesday, September 13, and the Federal Reserve meeting on September 20.
As of the time of writing this review, on the evening of Friday, September 8, BTC/USD is trading at around $25,890. The total market capitalization of the cryptocurrency market stands at $1.043 trillion, slightly down from $1.048 trillion a week ago. The Crypto Fear & Greed Index for bitcoin remains in the 'Fear' zone, registering at 46 points, up from 40 points a week earlier, though it is edging closer to the 'Neutral' zone.
In conclusion, another forecast comes from Artificial Intelligence. Utilizing several technical indicators, including Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), Bollinger Bands (BB), and others, the AI on the PricePredictions platform has calculated that the price of bitcoin should reach $26,228 by September 30. We don't have long to wait to see whether such intelligence can be trusted.
NordFX Analytical Group
Notice: These materials are not investment recommendations or guidelines for working in financial markets and are intended for informational purposes only. Trading in financial markets is risky and can result in a complete loss of deposited funds.