October 28, 2023
EUR/USD: Awaiting the Pair at 1.0200?
- Having started the past week on a positive note, EUR/USD approached a significant support/resistance level at the 1.0700 zone on Tuesday, October 24, before reversing and sharply declining. According to several analysts, the correction of the DXY Dollar Index that began on October 3rd, which correspondingly drove EUR/USD northward, has come to an end.
The trigger for the trend reversal was disappointing data on business activity (PMI) in Germany and the Eurozone, which fell short of forecasts and dropped below the key 50.0-point mark, indicating a deteriorating economic climate. These figures, remaining at a five-year low, starkly contrasted with similar indicators from the United States, which were released on the same day and exceeded both forecasts and the 50.0-point level. (As noted by proponents of technical analysis, the decline was also facilitated by the fact that as EUR/USD approached 1.0700, it hit its 50-day MA.)
In addition to PMI, preliminary U.S. GDP data for Q3, released on Thursday, October 26, served as further evidence that the American economy is coping well with a year and a half of aggressive monetary tightening. The annualized figures were significantly higher than both previous values and forecasts. Economic growth reached 4.9% compared to 2.1% and 4.2%, respectively. (It's worth noting that despite this growth, experts from the Wall Street Journal predict a GDP slowdown to 0.9%, which has led to a drop in the yield of U.S. Treasury bonds and slightly stalled the rise of the DXY.).
Also on Thursday, October 26, a European Central Bank (ECB) meeting took place, where the Governing Council members were expected to decide on the Eurozone interest rate. According to the consensus forecast, the rate was expected to remain at the current level of 4.50%, which indeed occurred. Market participants were more interested in the statements and comments made by the European Central Bank's leadership. From ECB President Christine Lagarde's remarks, it was inferred that the ECB is conducting "effective monetary policy, particularly in the banking sector." Nevertheless, the situation in Europe is not ideal. "Interest rates have likely reached their peak, but the Governing Council does not rule out an increase," she stated. Now more than ever, a data-dependent policy should be adopted. Inaction is sometimes also an action.
Apart from raising rates and maintaining the status quo, there is a third option: lowering rates. Madam Lagarde dismissed this route, stating that discussing a rate cut at this time is premature. However, market sentiment suggests that the ECB will formally announce the end of the current rate-hiking cycle at one of its upcoming meetings. Furthermore, derivatives indicate that the easing of the European regulator's monetary policy could start as early as April, with the likelihood of this happening by June being close to 100%. All of this could lead to a long-term depreciation of the European currency.
Certainly, the U.S. dollar benefits from a higher current interest rate (5.50% vs. 4.50%), as well as different economic dynamics and resilience to stress between the U.S. and Eurozone economies. Furthermore, the dollar is attractive as a safe-haven asset. These factors, along with expectations that the European Central Bank (ECB) will turn dovish before the Federal Reserve does, lead experts to predict a continuing downtrend for EUR/USD. However, considering the likelihood of a significant slowdown in U.S. GDP growth, some analysts believe the pair may stabilize within a sideways channel in the short term. For instance, economists at Singapore's United Overseas Bank (UOB) anticipate that the pair will likely trade in the range of 1.0510-1.0690 over the next 1-3 weeks.
Looking at forecasts for the end of the year, strategists from the Japanese financial holding company Nomura identify several other catalysts driving down EUR/USD: 1) deteriorating global risk sentiment due to rising bond yields; 2) widening yield spreads between German and Italian bonds; 3) reduced political uncertainty in the U.S., as the likelihood of a government shutdown diminishes; and 4) geopolitical tensions in the Middle East serving as a potential trigger for rising crude oil prices. Nomura believes that recent positive news about China's economic growth is unlikely to sufficiently offset these factors, keeping market participants bearish on the euro. Based on these elements, and even assuming that the Federal Reserve keeps interest rates unchanged next week, Nomura forecasts that the EUR/USD rate will fall to 1.0200 by year's end.
Strategists from Wells Fargo, part of the "big four" U.S. banks, expect the pair to reach the 1.0200 level slightly later, at the beginning of 2024. A bearish sentiment is also maintained by economists from ING, the largest banking group in the Netherlands.
Following the release of data on U.S. personal consumption expenditure, which aligned perfectly with forecasts, EUR/USD closed the past week at a level of 1.0564. Expert opinions on its near-term outlook are mixed: 45% advocate for a strengthening dollar, 30% favour the euro, and 25% maintain a neutral position. In terms of technical analysis, the D1 chart oscillators provide no clear direction: 30% point downward, 20% upward, and 50% remain neutral. Trend indicators offer more clarity: 90% look downward, while only 10% point upward. Immediate support levels for the pair are around 1.0500-1.0530, followed by 1.0450, 1.0375, 1.0200-1.0255, 1.0130, and 1.0000. Resistance for the bulls lies in the ranges of 1.0600-1.0620, 1.0740-1.0770, 1.0800, 1.0865, and 1.0945-1.0975.
The upcoming week promises to be packed with significant events. On Monday, October 30, we'll receive GDP and inflation (CPI) data from Germany. On Tuesday, October 31, retail sales figures from this engine of the European economy will be released, along with preliminary data on Eurozone-wide GDP and CPI. On Wednesday, November 1, employment levels in the U.S. private sector and Manufacturing PMI data will be published. The day will also feature the most critical event: the FOMC (Federal Open Market Committee) meeting, where an interest rate decision will be made. The consensus forecast suggests that rates will remain unchanged. Therefore, market participants will be particularly interested in statements and comments from the leaders of the U.S. Federal Reserve.
On Thursday, November 2, we'll find out the number of initial jobless claims in the U.S. The torrent of labour market data will continue on Friday, November 3. As is traditional on the first Friday of the month, we can expect another round of key macro statistics, including the unemployment rate and the number of new non-farm jobs created in the United States.
GBP/USD: Awaiting the Pair at 1.1600?
- Last week's published data indicated that although the UK's unemployment rate fell from 4.3% to 4.2%, the number of jobless claims amounted to 20.4K. This figure is significantly higher than both the previous value of 9.0K and the forecast of 2.3K. The Confederation of British Industry's (CBI) October data on major retailers' retail sales revealed that the Retail Sales Index dropped from -14 to -36 points, marking its lowest level since March 2021. Furthermore, analysts fear that the situation could deteriorate in November as households face pressure from high prices, leading them to significantly cut back on spending.
According to ING's forecast, in the short-term, risks for the pound remain skewed towards a decline to the key support level of 1.2000. Transitioning to medium-term expectations, Wells Fargo economists believe that not just the European but also the British currency will trend downward. "Europe's poor performance compared to the U.S. should exert pressure on both currencies," they write. "The ECB and the Bank of England have signalled that interest rates have likely reached their peak, which weakens the currencies' support from interest rates. Against this backdrop, we expect the pound to weaken [...] in early 2024, targeting a minimum for GBP/USD around 1.1600."
The Bank of England (BoE) is scheduled to hold a meeting on Thursday, November 2, following the Federal Reserve meeting earlier in the week. According to forecasts, the British regulator is expected to leave its monetary policy parameters unchanged, maintaining the interest rate at 5.25%, similar to the actions taken by the ECB and the Fed. However, given the high inflation rates in the United Kingdom, which exceed those of its main economic competitors, the BoE's rhetoric could be more hawkish than that of Madame Lagarde. In such a case, the pound may find some support against the European currency, but this is unlikely to offer much help against the dollar.
GBP/USD closed the past week at a level of 1.2120. When polled about the pair's near-term future, 50% of analysts voted for its rise. Only 20% believe the pair will continue its movement towards the target of 1.2000, while the remaining 30% maintain a neutral stance. Trend indicators on the D1 chart are unanimously bearish, with 100% pointing to a decline and coloured in red. Oscillators are slightly less conclusive: 80% indicate a decline (of which 15% are in the oversold zone), 10% suggest a rise, and the remaining 10% are in a neutral grey colour. In terms of support levels and zones, should the pair move downward, it would encounter support at 1.2000-1.2040, 1.1960, and 1.1800-1.1840, followed by 1.1720, 1.1595-1.1625, and 1.1450-1.1475. If the pair rises, it will meet resistance at 1.2145-1.2175, 1.2190-1.2215, 1.2280, 1.2335, 1.2450, 1.2550-1.2575, and 1.2690-1.2710.
Aside from the aforementioned Bank of England meeting on November 2, no other significant events concerning the British economy are anticipated for the upcoming week.
USD/JPY: Awaiting the Pair at 152.80?
- The Japanese yen remains the weakest among the currencies of developed nations. USD/JPY has been rising throughout the year, and on Thursday, October 26, it reached a new annual high of 150.77. The primary reason for this trend, as we have frequently emphasized in our reviews, is the disparity in monetary policies between the Bank of Japan (BoJ) and other leading central banks. The BoJ shows no signs of relinquishing its ultra-accommodative monetary policy, maintaining its interest rate at a negative -0.1%. With the Federal Reserve's rate standing at +5.50%, a simple carry-trade operation exchanging yen for dollars provides substantial returns due to this rate difference.
The yen is also not helped by the easing control over the yield curve of Japanese government bonds. Currently, the yield on 10-year bonds can deviate from zero by no more than 0.5%. At its July meeting, the BoJ decided that this range would be more of a guideline than a hard boundary. However, subsequent experience has shown that any notable deviation from this range triggers the BoJ to buy bonds, which again leads to yen weakening.
Even the currency interventions conducted on October 3, when USD/JPY exceeded the 150.00 mark, failed to support the yen. The pair was temporarily brought down to 147.26, but it quickly rebounded and is now once again approaching the 150.00 level.
Leaders of Japan's Ministry of Finance and the Central Bank continually attempt to bolster their currency with reassuring yet rather vague statements, asserting that Japan's overall financial system remains stable and that they are closely monitoring exchange rates. However, as evident, their words have had limited impact. On the past Friday, October 27, Hirokazu Matsuno, the Chief Cabinet Secretary, added to the ambiguity. According to him, he expects the Bank of Japan to conduct appropriate monetary policy in line with objectives for achieving stable and sustainable price levels. While this sounds very good, understanding its implications is also very challenging. What exactly constitutes "appropriate" policy? And where does this elusive "target price level" stand?
According to experts at Germany's Commerzbank, "not everything in Japan's monetary and foreign exchange policy is always logical." "The market is likely to continue testing higher levels in USD/JPY," forecast the bank's economists. "Then there are two possible scenarios: either the Ministry of Finance conducts another intervention, or the yen's depreciation accelerates as the market starts to price out the risk of intervention."
"In the medium to long term," Commerzbank analysts continue, "an intervention won't be able to prevent a depreciation of the currency, especially if the Bank of Japan keeps exerting pressure on the yen by maintaining its ultra-expansionary monetary policy. Therefore, the only logical response would be, at the very least, a gradual normalization of monetary policy, possibly through further easing of the yield curve control (YCC). However, there is no certainty that easing the YCC would be sufficient, nor is there any certainty that the Bank of Japan will change anything in its meeting on Tuesday [October 31]."
As a result, analysts at the French bank Societe Generale believe that current dynamics favour a continuation of the upward movement. The next potential hurdles, in their opinion, lie at the 151.25 level and in the zone of last year's highs of 152.00-152.80. A key support zone is at 149.30-148.85, but overcoming this area would be necessary to confirm a short-term decline.
USD/JPY closed the past trading week at a level of 149.63. When discussing its near-term prospects, analysts are evenly split: 50% predict the pair will rise, and 50% anticipate a decline. Trend indicators on the D1 chart show 65% in green, indicating bullishness, and 35% in red, signalling bearishness. Among oscillators, there is unanimous lack of sentiment for a downward move. 50% point north, and the remaining 50% indicate a sideways trend. The nearest support levels are situated in the zones of 148.30-148.70, followed by 146.85-147.30, 145.90-146.10, 145.30, 144.45, 143.75-144.05, and 142.20. The closest resistance lies at 150.00-150.15, then 150.40-150.80, followed by 151.90 (October 2022 high) and 152.80-153.15.
No significant economic data pertaining to the state of the Japanese economy is scheduled for release in the upcoming week. Naturally, attention should be paid to the Bank of Japan's meeting on Tuesday, October 31, although no major surprises are expected. Traders should also be aware that Friday, November 3, is a public holiday in Japan as the country observes Culture Day.
A bit of reassuring information for proponents of the Japanese currency comes from Wells Fargo. They anticipate that "if the Federal Reserve does indeed cut rates, and even if the Bank of Japan continues to gradually tighten monetary policy, the yield differential should shift in favour of the yen in the long term." Wells Fargo strategists forecast that "by the end of next year, USD/JPY could be heading toward 146.00."
This American bank's outlook may instil optimism in traders who opened short positions at 150.00. However, what course of action should be taken by those who pressed 'Sell' in January 2023 when the pair was trading at 127.00?
CRYPTOCURRENCIES: Start of a Bull Rally or Another Bull Trap?
- Today's cryptocurrency market review is decidedly optimistic, and for good reason. On October 23-24, bitcoin surged to $35,188 for the first time since May 2022. The rise in the leading cryptocurrency occurred amid a mix of tangible events, speculative buzz, and fake news related to the U.S. Securities and Exchange Commission (SEC).
For instance, Reuters and Bloomberg reported that the SEC will not appeal a court ruling in favour of Grayscale Investments. Additionally, news emerged that the SEC is discontinuing its lawsuit against Ripple and its executives. Speculation also abounded regarding potential SEC approval of an Ethereum ETF and rumours of a spot BTC-ETF approval for BlackRock. Last week, BlackRock confirmed that the latter news was false. However, the short squeeze triggered by this fake news facilitated the coin's rise, shaking up the market. The initial local trend was amplified by a cascade of liquidations of short positions opened with significant leverage. According to Coinglass, a total of $161 million in such positions was liquidated.
While the news was fake, the saying goes, "Where there's smoke, there's fire." BlackRock's spot bitcoin exchange-traded fund, iShares Bitcoin Trust, appeared on the Depository Trust and Clearing Corporation (DTCC) list. BlackRock itself informed the SEC about its plans to initiate a test seed round in October for its spot BTC-ETF, potentially already beginning its cryptocurrency purchasing. This too fuelled speculation and rumours that the approval of its ETF is inevitable.
Moreover, according to some experts, technical factors contributed to the rise in quotes. Technical analysis had long pointed to a possible bull rally following an exit from the sideways trend.
Some analysts believe that another trigger for bitcoin's surge was the decline of the Dollar Index (DXY) to monthly lows on October 23. However, this point is debatable. We have previously noted that bitcoin has recently lost both its inverse and direct correlations, becoming "decoupled" from both the U.S. currency and stock market indices. The chart shows that on October 24, the dollar reversed its trend and began to rise. Risk assets like the S&P 500, Dow Jones, and Nasdaq Composite indices responded to this with sharp declines. But not BTC/USD, which shifted to a sideways movement around the Pivot Point of $34,000.
While the S&P 500 has been in a bearish trend for 13 weeks, BTC has been rising since August 17 despite challenges. During this period, the leading cryptocurrency has gained approximately 40%. Looking at a more extended timeframe, over the last three years, bitcoin has grown by 147% (as of October 20, 2023), while the S&P 500 has increased by only 26%.
Last week, the average BTC holder returned to profitability. According to calculations by analytics agency Glassnode, the average acquisition cost for investors was $29,800. For short-term holders (coins with less than 6 months of inactivity), this figure stands at $28,000. As of the writing of this review, their profit is approximately 20%.
The situation is somewhat different for long-term hodlers. They rarely react to even significant market upheavals, aiming for substantial profits over a multi-year horizon. In 2023, over 30% of the coins they held were in a drawdown, but this did not deter them from continuing to accumulate. Currently, holdings for this investor category amount to a record 14.9 million BTC, equivalent to 75% of the total circulating supply. The most notable and largest among such "whales" is MicroStrategy Incorporated. The company purchased its first batch of bitcoin in September 2020 at a price of $11,600 per coin. Subsequent acquisitions occurred during both market upswings and downturns, and it now owns 158,245 BTC, having spent $4.7 billion on the asset. Therefore, MicroStrategy's unrealized profit stands at approximately $0.65 billion, or roughly 13.6%.
The anticipation of the imminent launch of spot BTC ETFs in the U.S. is fuelling institutional interest in cryptocurrency. However, due to regulatory hurdles posed by the SEC, this interest is mostly deferred, according to analysts at Ernst & Young. By some estimates, this pent-up demand amounts to around $15 trillion, which could potentially drive BTC/USD to $200,000 in the long term. What can be said for certain is that open interest in futures on the Chicago Mercantile Exchange (CME) has surpassed a record 100,000 BTC, and daily trading volume has reached $1.8 billion.
Another driver of increased activity, according to experts, is the inflationary concerns in the U.S. and geopolitical risks such as the escalating situation in the Middle East. Zach Pandl, Managing Director of Grayscale Investments, explained that many investors view bitcoin as "digital gold" and seek to minimize financial risks through it. According to CoinShares, investments in crypto funds increased by $66 million last week; this marks the fourth consecutive week of inflows.
According to experts at JPMorgan, a positive decision from the SEC on the registration of the first spot bitcoin ETFs can be expected "within months." The specialists noted the absence of an SEC appeal against the court decision in the Grayscale case. The regulator has been instructed not to obstruct the transformation of the bitcoin trust into an exchange-traded fund. "The timelines for approval remain uncertain, but it is likely to happen [...] by January 10, 2024, the final deadline for the ARK Invest and 21 Co. application. This is the earliest of various final deadlines by which the SEC must respond," noted the experts at JPMorgan. They also emphasized that the Commission, in the interest of maintaining fair competition, may approve all pending applications simultaneously.
The future price behaviour of bitcoin is a topic of divided opinion within the crypto community. Matrixport has published an analytical report discussing the rising FOMO (Fear of Missing Out) effect. Their analysts rely on proprietary indicators that enable them to make favourable predictions for digital assets. They believe that by year-end, bitcoin could reach $40,000 and may climb to $56,000 if a bitcoin ETF is approved.
Many market participants are confident that a positive news backdrop will continue to support further cryptocurrency growth. For instance, Will Clemente, co-founder of Reflexivity Research, believes that the coin's behaviour should unsettle bears planning to buy cheaper BTC. A trader and analyst known as Titan of Crypto predicts the coin to move towards $40,000 by November 2023. Optimism is also shared by Michael Van De Poppe, founder of venture company Eight, and Charles Edwards, founder of Capriole Fund.
However, there are those who believe that BTC will not make further gains. Analysts Trader_J and Doctor Profit, for example, are certain that after reaching a new local maximum, the coin will enter an extended correction. Their forecast does not rule out a decline of BTC/USD to $24,000-$26,000 by year-end. A trader known as Ninja supports this negative bitcoin outlook. According to him, the technical picture, which includes an analysis of gaps on CME (the space between the opening and closing prices of bitcoin futures on the Chicago Mercantile Exchange), suggests the likelihood of BTC falling to $20,000.
As of the time of writing this review, on Friday, October 27, BTC/USD is trading at $33,800. The overall market capitalization of the crypto market stands at $1.25 trillion, up from $1.12 trillion a week ago. The Crypto Fear & Greed Index has risen over the week from 53 points to 72, moving from the Neutral zone into the Greed zone. It recorded its 2023 peak before slightly retreating and currently stands at 70 points. It's worth noting that just a month ago, the Index was in the Fear zone. Similar explosive rises in market sentiment were previously recorded in mid-2020 and mid-2021, correlating with price increases.
In conclusion of this generally optimistic overview, let's introduce a bit of pessimism from Peter Schiff, President of Euro Pacific Capital. This long-time critic of the leading cryptocurrency stated that bitcoin is "not an asset, it's nothing." He also likened bitcoin holders to a cult, saying, "No one needs bitcoin. People buy it only after someone else convinces them to do so. After acquiring [BTC], they immediately try to draw others into it. It's like a cult," wrote Schiff.
However, it's worth noting that this is a very large and rapidly growing "cult." If in 2016 the number of BTC holders was just 1.2 million, by May 2023, according to various sources, global ownership is estimated at 420 million, or 5.1% of the world's population.
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.