With mixed news last week came a mixed currencies market. The Dollar Index rose roughly 0.31% as sentiment looks to be leading markets towards further hikes in the U.S. Federal Funds Rate.
Higher than expected CPI, which recorded a price increase of 6.4% during the month of January 2023, lowered the demand towards U.S. treasury bonds, lifting the yield on the U.S. 2-year note to close above 4.5%. Consequently, this led to higher demand in the dollar and a fall in demand for equities.
Still, EUR/USD was able to withstand rising strength in the dollar as the euro also witnessed greater demand. Fueling the rise was the fact that markets are pricing in a future rate increase of 50 bps, as promised by Lagarde in the ECB's most recent press conference.
For the British Pound, the GBP/USD pair lost more than 0.2% last week, where it retraced from 1.22718 to 1.19165 as a result of lower-than-expected UK inflation figures. The Consumer Price Index in the UK read an increase of 10.1% during the month of January compared to the expected 10.3%.
The USD/CAD pair gained almost 1% last week after lower oil prices weakened the demand for the Canadian Dollar. The USD/JPY pair followed suit, rising in value following the election of the new BoJ president. Kazuo Ueda, the BoJ's newly elected governor, holds the same monetary ideas as his predecessor Haruhiko Kuroda, leading to further weakness for the Japanese Yen.
This week, focus shifts towards Tuesday which holds the U.S, Europe, and UK PMI releases for this month.
If the Dollar Index is able to break above the 104.00 level towards the upside, further downward pressures may be recorded on the GBP/USD and EUR/USD pairs, while further increases could be reported on the USD/CAD and USD/JPY currency pairs.
Gold declined in the previous week by -1.3% as a result of the rise in the US Dollar, after economic data indicated that the US Federal Reserve may raise interest rates by a higher rate than previously expected.
Several recent economic data releases indicates that the U.S. labor market remains strong. Meanwhile, annual inflation rose higher than expectations, while retail sales and monthly producer prices rose strongly and higher than expectations. This raised market expectations that the Federal Reserve must do more to control inflation and will continue to tighten monetary policy for longer than previously expected.
Technically, gold is currently trading between the important support area at $1825/oz and a resistance area near $1865. We will be monitoring to see if gold will be able to target this level. However, if the yellow metal breaks the $1825 zone, this may be negative for gold prices.
Figure 1: XAUUSD, MetaTrader 5, CFI Brokerage
Investors are confused between healthy growth and profit signals, and are now concerned that inflation trends could surprise the upside. Fears that the Fed would need to raise short-term interest rates more than previously expected caused stocks to decline. Cleveland Fed President Loretta Mester said last week that she saw a “compelling economic case” for a half-point hike at the central bank’s last gathering.
US CPI rose 0.5% in January as expected versus a revised 0.1% increase in December. The Producer Price Index rose 0.7% in January, its biggest gain since June.
The Dow Jones index lost 0.1% last week, while the S&P 500 declined 0.3% and the Nasdaq 100 gained 0.6%.
Looking at earnings, around 80% of companies in the S&P 500 have already reported to date, 68% of which beat market expectations in terms of EPS. Unlike last year, defensive stocks such as energy, utilities, staples, and healthcare are on the decline. However, the future behavior of the industries dependent on the monetary decisions made by the Federal Reserve.
Both WTI and Brent are still in their weekly trading range, discretionally at higher lows. Both partially gave away last week’s gains, -4% for WTI and Brent, closing at the trading range's upper boundary below their 100-week exponential moving average.
The US administration reported an inventory build of 16.3 million barrels for the week of February 10, which in comparison to the 2.4 million barrels of the previous week, reflects that the latest inventory figure is sizable enough to have a negative effect on oil prices since inventories are above the five years seasonal average.
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