Welcome to Forex Friday, a weekly report in which we discuss select currency topics primarily from a macro perspective, but also throw in a dash of technical analysis here and there.
- Dollar blinds, pound pounded
- USD/JPY flat ahead of CB meetings – for now
- What’s next for gold after the big meltdown?
- USDCAD breaks out
In this week’s edition, we discuss the dollar’s big rally ahead of Wednesday’s FOMC meeting. We are also discussing the pound and yen with the BoE and BoJ both meeting next week and wondering what’s next for gold after its collapse.
Dollar blinds, pound pounded
In response to this better-than-expected US inflation report, we’ve seen a major dollar rally this week, although at the time of writing it was off its highs against certain currencies. Aussie, Kiwi and Loonie have all collapsed – along with Gold. Short-term bond yields have risen sharply while long-term bonds have not, reflecting investor concerns about an economic slowdown amid all the near-term head-on from rate hikes and soaring price levels. The GBP/USD fell below the 1.14 level this morning, hitting a new decade low as a disappointing UK retail sales report increased concerns over the health of the UK economy.
Speaking of the pound, investors will be watching the GBP/USD pair closely from here as attention will turn to Wednesday’s FOMC and Thursday’s Bank of England meeting. With double-digit inflation and a struggling economy, the BoE is in a very difficult position. It has hiked rates six times already, with the last hike being 50 basis points to 1.75% at its August 2022 meeting. Analysts expect another 0.5% rise to 2.25%, but there are good chances for a 0.75% rise.
The dollar’s rally has started again after Tuesday’s hot CPI report boosted expectations that the Fed will hike rates by at least 75 basis points next week and continue with more aggressive rate hikes until inflation is brought under control. The Fed is looking to bring inflation back under control by creating a soft landing in the economy and we’ll see just how hawkish it is on Wednesday. If the dollar isn’t long already, I’d say be wary of currencies it’s already strongly appreciated against – like the pound.
USD/JPY flat ahead of CB meetings – for now
The USD/JPY rally has stalled below the 145.00 level for now, although the US dollar is strengthening against other currencies and commodities, as investors look forward to next week’s central bank meetings from both regions.
In addition to the Fed meeting, investors are also looking forward to next week’s Bank of Japan monetary policy meeting on Thursday and are taking profits on their short positions in the yen in advance. The BoJ remains the only major central bank to continue with its existing ultra-loose monetary policy. Unsurprisingly, the yen has fallen to repeated multi-year lows. The central bank has been talking about FX interventions, but this verbal intervention has not helped matters. Will the BoJ surprise markets and start tightening its belts – especially with inflation very high? It will have to change policy if the yen has any chance of a comeback anytime soon.
Part of the reason the yen has stopped falling is that the government in Japan appears to be preparing a more than 30 trillion yen stimulus package needed to counter inflationary pressures in the economy. Today, the Kyodo press office reported that the government will use about 3.5 trillion yen of reserve funds for economic measures.
What’s next for gold after the big meltdown?
One of the main reasons gold bugs bought the metal was sky-high inflation around the world. Still, the metal has proven to be a poor hedge against rising prices as investors dislike it amid rising bond yields and a very strong US dollar. In an environment of rising interest rates around the world, investors have instead chosen to sell assets that show little or no return, such as stocks. B. Stocks and metals with low div. The latter also costs money to store, making it even less attractive from an investment perspective in the current climate. Consequently, the precious metal has fallen below the key long-term support around $1676-$1680 this week. This area will now be the most important zone for the bears to defend.
Looking ahead, it’s all about when rate hikes are fully priced in. Until then, gold is unlikely to be able to shine. How quickly markets price in rate hikes depends largely on the incoming data, especially inflation numbers. The US dollar and bond yields therefore remain supportive for now until there are signs that inflation is coming down sharply. Perhaps in the event of a severe economic downturn, prices could fall, which would lead to a weakening of demand. For this reason, other macroeconomic indicators should also be closely monitored.
USDCAD breaks out
The USD/CAD is the prettiest of the above charts as it just broke the key resistance in the 1.3200 – 1.3225 range this week. Given what has happened and heading into a busy week of central bank meetings, declines to this 1.3200 – 1.3225 area should be supported given this week’s sharp breakout.