EUR/USD: Another Surprise, from the ECB This Time
- It's hard to resist when you're attacked from both sides. The dollar received two powerful blows last week: one from the Bank of England, the second from the ECB, and could not resist them. The USD DXY index flew down. While it was at the level of 97.36 on January 28, it dropped to 95.14 on February 04. This is not a knockout of course, but a knockdown from which it will be difficult for the US currency to recover quickly.
So, the Bank of England raised the interest rate by another 25 basis points (bp) to 0.50%, which was expected. But what shocked the markets was a shift in the direction of the ECB's monetary policy. The market was waiting for the regulator to start discussing such changes towards the end of the year. But it turned out that this could happen much earlier. Maybe already in the spring.
The data on unemployment in the Eurozone exceeded all wildest expectations: its level fell to 7.0%. But this is not all either. The growth of consumer prices in January accelerated from 5% to 5.1% and renewed its historical high. This is despite the fact that many expected the opposite. For example, Bloomberg experts predicted a slowdown in inflation to 4.4%.
It is known that unemployment and inflation are the main factors that determine the monetary policy of regulators in the current environment. And if the head of the ECB, Christine Lagarde, stated until recently that her bank would not copy the actions of the Fed, she was forced to admit at a press conference on Thursday, February 03 that "the situation has really changed."
“Inflation is likely to remain high longer than initially expected,” said Ms Lagarde. “Compared to our December estimates, current inflation risks are biased upwards. especially in the short term”.
The head of the ECB did not repeat the mantra about the “extremely low probability” of a rate hike in 2022. And, although the key rate remained unchanged at 0% at the last meeting, it became known from informed sources that the bank's officials are already discussing the possibility of raising it at the end of this year. According to some experts, it could rise by as much as 40 or even 50 bp.
So, apparently, the European regulator is abandoning the policy of patience and, together with the US Federal Reserve and the Bank of England, joins the "hawk" race to tighten monetary policy. It is appropriate to draw an analogy between Christine Lagarde's current statement and what her American colleague Jerome Powell said in June 2021. The head of the Fed said something similar then, after which the dollar began to sharply gain strength and won 1135 points back from the euro, lowering the EUR/USD pair from 1.2255 to 1.1120. Now it seems that it is time for the euro to recoup its losses.
In addition to the frontal blows from the Bank of England and the ECB, the US currency also received backstabs from the “native” Fed. At least six representatives of the US Central bank made comments last week, and none of them mentioned that the FOMC (Federal Open Market Committee) could immediately raise rates by 50 bp at its meeting in March (although the market was waiting for this).
The result of all the events of the week, so painful for the dollar, was an impressive strengthening of the European currency. The EUR/USD pair has shown an active growth, which has not been seen since the beginning of the pandemic: it rose by 343 points in a week, from 1.1140 to 1.1483.
True, the dollar was slightly supported by statistics from the US at the very end of the working week, on Friday, February 04. Such an important indicator as the number of new jobs created outside agriculture (non-farm payrolls) was fixed at 467K, while the market expected it to fall to 150K. As a result, the dollar strengthened slightly, and the pair set the last chord at 1.1453.
Most of the indicators on D1 turned up by the end of the five-day period. Among the trend ones, there were 85% of them (15% are still colored red), among the oscillators - 80%, the remaining 20% took a neutral position. Among the experts, opinions are divided almost evenly, although the bulls have still got a slight advantage: 45% are in favor of continuing the uptrend, 35% are for moving down and 20% are for the sideways trend.
The nearest resistance is the highs of January 13 and February 04 in the zone of 1.1480, followed by 1.1525, 1.1560 and 1.1625. Supports are in zones and at levels 1.1365-1.1385, 1.1275, 1.1220, 1.1185 and Jan 28 low 1.1120.
As for the events of the upcoming week, the most important of them are related to inflation and will concern the consumer market. So, the values of the US Consumer Price Index (excluding food products and energy carriers) will become known on Thursday, February 10, and the values of the Harmonized Consumer Price Index of Germany and the Consumer Confidence Index of the University of Michigan USA will be published on Friday, February 11.
GBP/USD: The Bank of England: Not a Dove Yet, No Longer a Hawk
- Of course, the general weakening of the dollar affected the GBP/USD pair as well, which recorded the weekly high at 1.3627. However, as mentioned above, the increase in the interest rate by the Bank of England did not come as a surprise to anyone and had already taken into account by the market in quotations. In contrast to the statement of the head of the ECB, Christine Lagarde, which produced the effect of a bombshell. As a result, the European currency gained a significant advantage over the British one, and the EUR/GBP pair rose by more than 2.2%, from 0.82843 to 0.84650. As for GBP/USD, it finished well below the local high, at 1.3528 for the same reason.
The bulls on the pound were also disappointed by disagreements among members of the Bank of England committee. Only 4 out of 9 voted to raise the rate by 50 bps. The majority, including the head of the bank, Andrew Bailey, decided to raise rates by only 25 basis points, citing a slowdown in economic growth.
This regulator will apparently continue to act in an extremely balanced manner, which was confirmed by the chief economist of the Bank of England, Hugh Pill. He said in an interview with Reuters that the bank expects "further moderate tightening in the coming months if everything goes as planned" and that "you need to be careful in setting the rate level."
Strategists at Japan's MUFG Bank say this sneaky stance limits the prospects for a stronger British currency. MUFG does not expect a steady growth of the pound and believes that if the movement of GBP/USD to 1.4000 continues, the pair will encounter many pits and bumps along the way. And their colleagues from Scotiabank look in the opposite direction at all. In their opinion, due to the inability to gain a foothold above 1.3600, the British currency is now at risk of falling to 1.3400 initially and possibly to 1.3200 in a relatively short term.
The majority of experts (55%) are still set for further growth of the GBP/USD pair at the moment, the remaining 45% have taken the opposite position. The indicators on D1 look like this: 45% of oscillators point north, 10% point south, the remaining 45% remain neutral. Among trend indicators, 40% look up, 60% look down. Supports are located at 1.3500, 1.3425, 1.3365, next strong support is 100 pips lower. Levels and resistance zones: 1.3570-1.3600, 1.3640, 1.3700, 1.3750, 1.3835 and 1.3900.
Highlights of the coming week include a speech by Bank of England Governor Andrew Bailey on Thursday, February 10, and the release of UK GDP and industrial production data on Friday, February 11.
USD/JPY: Calm, and Calm Again
- While most G10 Central banks are either raising rates or becoming more aggressive (like the ECB), the BOJ's slogan is still "calm and calm again". Safe haven should remain as quiet as possible with its perpetually negative (minus 0.1%) interest rate.
It is already clear that, since inflation in Japan does not show signs of approaching the target level of 2% set by the Japanese regulator, its actions will lag behind the actions of other Central banks. And this, according to analysts at CIBC Capital Markets, will continue to put pressure on the yen.
At some point, rumors began circulating in the market that the Bank of Japan could move to normalize its monetary policy this year. However, the Bank's statement released after the January meeting made it clear that this is nothing more than speculation. Since central bank Governor Haruhiko Kuroda keeps saying that it is far from reaching the inflation target of 2.0%, his organization is quite comfortable with the weak yen.
What has been happening to the USD/JPY pair over the past four months can be considered a sideways trend with a predominance of bullish sentiment. So the general weakening of the dollar practically did not help the Japanese currency last week: having fallen on February 02 to the level of 114.14, the pair returned to the same place where it started, to the zone of 115.20, by the end of the week.
At the time of writing, the majority of experts (55%) expect the USD/JPY pair to continue moving towards a multi-year high of 116.35, recorded on January 04. The remaining 45% believe that the weakened dollar will still put downward pressure on it. All 100% of the indicators are green, although 15% of the oscillators give signals of the pair being overbought.
Support levels and zones are 115.00, 114.55-114.80, 114.15, 113.75, 113.45, 113.20, 112.55 and 112.70. The nearest resistance zone is 115.50-115.70, the nearest serious target of the bulls is a new five-year high at 116.35.
No serious macroeconomic statistics from Japan are expected either last or next week. We only note that Friday, February 11 is a day off in Japan. The country celebrates Kenko Kinen No Hi, the National Foundation Day. It is believed that the first emperor of Japan, Jimmu, ascended the throne on this day in 660 BC and founded the Imperial Dynasty of Japan and the State of Japan.
CRYPTOCURRENCIES: Who Is in Charge in the BTC/USD Pair? Answer: US Federal Reserve
- Whatever crypto enthusiasts say, bitcoin has long ceased to be an independent asset. And the decisive factor intheBTC/USD pair is the dollar. And the strength or weakness of the US currency depends, in turn, on the policy of the US Federal Reserve (and partly on the actions of other Central banks).
The same crypto enthusiasts crave an inflow of funds from institutional investors like manna from heaven. And the latter are waiting for the regulators to establish clear rules governing the work with digital assets. Therefore, the movement of quotes of leading cryptocurrencies will depend (and already depends) not on the mood of millions of small players, but on the mood of just a few governments and Central banks. Just look at the correlation between the cryptocurrency and stock markets. This link is becoming more and more rigid and is determined by the risk sentiment of large investors.
Of course, short-term fluctuations in BTC/USD can be affected by events such as bad weather that has suspended miners in Texas. But the main trends are set not by them, but by the actions of regulators.
Bitcoin is now perceived as a "money commodity". Analysts of Fidelity Digital Assets came to this conclusion, calling the first cryptocurrency not only a technology, but also a perfect form of money. And what kind of government will allow the flow of "perfect" money to pass it by? And there may be two solutions: either to ban them completely, as in China, or to take them under strict control.
The Central Bank of Russia wanted to follow the Chinese version. But Russia's President Vladimir Putin supported the proposal of the Ministry of Finance not to ban, but to regulate the cryptocurrency market, including their circulation and mining. This is a very serious decision, because, according to Bloomberg, residents of Russia possess a huge number of digital assets worth about $214 billion. In addition, according to the University of Cambridge, Russia became the third country in the world in bitcoin mining (11.23%) in the summer of 2021, after the USA (35.4%) and Kazakhstan (18.1%), where many miners migrated after the ban in China.
MicroStrategy founder Michael Saylor also believes that the current problems in the cryptocurrency market are caused, first of all, by the non-transparent regulation and regulatory uncertainty of the crypto industry. According to Saylor, many institutional investors are now tracking bitcoin, however, they are in no hurry to invest in it.
According to JPMorgan analysts, the persistence of high volatility, which limits the adoption of bitcoin by institutions, is also an obstacle.
Interestingly, analysts at another major investment bank, Goldman Sachs, agree that cryptocurrencies are unlikely to escape the influence of macroeconomic forces, such as the monetary policy of the US Federal Reserve. However, they believe that the mass adoption of cryptocurrency may not improve, but, on the contrary, worsen the chances for its long-term growth. Experts argue that the global popularity of digital assets will further increase their correlation with the traditional ones. This, in turn, will reduce the volatility of cryptocurrencies and reduce both their speculative attractiveness and their advantages as a diversifying asset in investor portfolios.
As for the current situation, despite a solid bounce off its 90-day low of $32,950, the main cryptocurrency has been unable to overcome the strong resistance in the $38,000-39,000 zone for a long time. However, the BTC/USD pair went on a breakthrough and reached $40,880 at the time of writing the review, on the evening of Friday, February 04.
The total market capitalization for the week has grown slightly: $1.85 trillion compared to $1.70 trillion seven days ago, and the Crypto Fear & Greed Index has deepened even more into the zone of Extreme Fear, falling from 24 to 20 points.
The latest JPMorgan report notes that “open interest in futures and the volume of exchange balances indicate less panic or liquidation of positions than in last May, especially in relation to large crypto investors”. At the same time, the bank’s specialists do not exclude a further decrease in bitcoin quotes, even in the absence of signs of capitulation of buyers. They seriously lowered the fair value of the first cryptocurrency from $150,000 to $38,000.
According to Business Insider, JPMorgan's model assumed that bitcoin's volatility would converge with gold's volatility and equalize their shares in investment portfolios. Now, the bank’s analysts have acknowledged that their previous forecast that the bitcoin-to-gold volatility ratio would drop to around 2/1 by the end of 2022 proved to be unrealistic, leading to the downgrade.
Peter Brandt, a well-known Wall Street trader with 45 years of experience, notes that most crypto enthusiasts are now in an extremely bearish mood. Most of the participants in the Laser Eyes flash mob are confident that the price of bitcoin will fall below $30,000 in the near future. According to the expert, this may be a signal to buy the first cryptocurrency. “When the bulls wear laser eyes, it’s time to sell. When bulls turn bears, is it time to buy?” Brandt asks.
Recall that the “Laser Eyes” flash mob started on Twitter in February 2021, when bitcoin reached a local high of $58,300. After that, many supporters of the first cryptocurrency, in anticipation of its growth to $100,000, posted photos with “laser eyes” as their profile avatar. Co-founder of Morgan Creek Digital Anthony Pompliano, TV presenter Max Kaiser, CEO of Binance crypto exchange Changpeng Zhao, Tesla CEO Elon Musk and other influencers were among the participants in the flash mob.
However, instead of rising to $100,000, the flagship cryptocurrency collapsed to $29,000 by June. So, Peter Brand's current remark about "laser eyes" in bears clearly deserves attention.
It is also worth paying close attention to the results of the round table organized by the Finder analytical website. The discussion was attended by 33 fintech experts, half of whom do not expect the cryptocurrency price to fall even against the backdrop of the upcoming increase in US interest rates. The average forecast given by the participants of the table says that bitcoin could soar to a high of $93,717 this year and is expected to be worth $76,360 by the end of 2022 and close to $193,000 by the end of 2025.
Vanessa Harris, director of the cryptocurrency startup Permission, was among the most optimistic participants in the discussion. She predicts that BTC will peak at $220,000 this year. A much more modest figure was voiced by the founder of the CoinFlip bitcoin ATM network, Daniel Polotsky. In his opinion, the cryptocurrency is unlikely to exceed $60,000 in 2022 as the bubbles created by the US Federal Reserve during the pandemic are now deflating.
Crypto analyst Jason Pizzino predicts BTC growth as well. According to his forecast, bitcoin will still enter an accumulation period in the medium term, when whales and investors with smart money will begin to invest in cryptocurrency, waiting for its next bullish trend. This may take a whole year, during which the BTC rate will rise. According to Pizzino's forecast, bitcoin is able to reach a new price high in the second half of 2022, but this will not be a sharp upward movement but a series of ascents.
Finally, the most cosmic forecast was given by Circle CEO Jeremy Aller in an interview with Business Insider. In his opinion, the worldwide adoption of bitcoin will certainly contribute to the growth of this coin to $1 million. The businessman admitted that he is not a "bitcoin maximalist", but he still believes in new cryptocurrency highs. At the same time, he prefers not to compare bitcoin with gold, believing that the digital asset is much more efficient than precious metals. According to the head of Circle, gold as money is simply useless in modern society.
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.
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