EUR/USD: Has the Market Gone Crazy?
What happened in the market after the US Federal Reserve meeting can be called “the theater of the absurd”. As expected, the regulator raised the key interest rate from 0.25% to 0.5% on Wednesday, March 16, for the first time since 2018. As expected, the dollar began to strengthen after that. But what no one expected was that the strengthening will last only about an hour and will amount to some 50 points. After that, it will be not the American, but the European currency that will begin to grow. As a result, the EUR/USD pair will fix a weekly high at 1.1137 the next day.
Everything that happened was completely contrary to logic. The forecasts for US GDP were revised. And they showed that the Fed expects economic growth to slow down in 2022 from 4% to 2.8% due to the sanctions war with Russia. In addition, the forecasts for the interest rate have also changed. It was earlier said that it will reach 0.75-1.00% by the end of the year. This figure has now risen to 1.75-2.00%. Given that there are only six meetings left this year, it turns out that the FOMC (Federal Open Market Committee) will have to raise the rate by 0.25% at each of them.
But this is not all either. The forecast for the end of 2023 was also raised from 1.50-1.75% to 2.75-3.00%. Moreover, it seems that we will face several more acts of monetary restriction in 2024. That is, this is not just a revision of forecasts, but a sharp tightening of the US monetary policy, which could deal a serious blow to the labor market and lead to a large-scale recession.
In such a situation, the dollar would have to grow steadily, and the S&P500, Dow Jones and Nasdaq stock indices would fall drastically. But everything went the opposite way: the DXY Dollar Index fell drastically, and stock indices quickly flew up.
As already mentioned, there is no logical explanation for this. Some believe that the reason for this is the rate increase not by 0.5%, but only by 0.25%. According to another version, the reason is that the regulator has not clarified plans to reduce the Fed’s balance sheet. And someone thinks that it is the greed factor that worked. Speculators remembered how quickly stock indices recovered after the shock at the beginning of the pandemic and decided that something similar would happen again soon. So now is the time to buy US stocks while they are still relatively cheap after a 10-week drop.
Logic began to return to the markets at the very end of the working week. The dollar began to rise again, and the EUR/USD turned south, finishing at 1.1050. As for its future, experts’ opinions are divided as follows: 45% have supported the growth of the pair, 35% support the fall, and 20% have taken a neutral position. Among the oscillators on D1, the picture is mixed: 30% of them are colored red, 30% are green and the remaining 40% are neutral gray. The trend indicators have an advantage on the side of the red ones: those are 65% against 35% of the green ones.
The nearest target for the bears will be to break through support at 1.1000, then 1.0900. If successful, we can expect a retest of the March 07 low at 1.0805. This will be followed by the 2020 low of 1.0635 and the 2016 low of 1.0325. The strategic goal is parity at the level of 1.0000.
The bulls’ immediate goal is to break through the resistance zone in the 1.1100-1.1135 area. Then there are zones 1.1280-1.1390 and the highs of January 13 and February 10 at 1.1485.
As for the upcoming week, there are few important macro data expected. Thursday, March 24, can be singled out in the economic calendar, when data on business activity in Germany and the Eurozone will arrive. The volume of orders for capital goods and durable goods in the US will be known on this day as well.
GBP/USD: Bank of England Is One Step Ahead of the Fed
Strange market reaction to the Fed meeting helped the pound as well. Positive statistics on the national labor market also sided with the British currency. The unemployment rate, with the forecast of 4.0%, actually fell from 4.1% to 3.9% in January, and the number of applications for unemployment benefits in February decreased by 48.1K (31.9K in the previous month). The average wage increased from 3.7% to 3.8%. Taking into account bonus payments, its growth amounted to 4.8%, which is also better than the forecast of 4.6%. All this allowed the Bank of England to once again be one step ahead of the US Federal Reserve and to raise the interest rate from 0.50% to 0.75% at its meeting on Thursday, March 17.
It is highly likely that the regulator of the United Kingdom will continue to tighten monetary policy and raise the refinancing rate again at its next meeting, in a month and a half. The new inflation forecast will also push it to this. Unlike its US and European counterparts, the Bank of England expects it to reach 7.25% in April. It will take at least two years to bring it down to the target level of 2.0% in such a situation.
The results of the meeting of the Bank of England initially caused the same paradoxical reaction of investors as in the case of the US Federal Reserve. The GBP/USD pair, instead of growing, fell from 1.3210 to 1.3087 on expectations of an active rate hike. However, then, as in the case of the euro, the market changed its mind, and the pair completed the five-day period at 1.3175.
Experts’ forecast for the GBP/USD pair for the next week is as follows: 50% vote for the movement to the north, 40% are for further movement to the south, the remaining 10% vote for the sideways trend. Among the oscillators on D1, 70% are looking down, 30% have taken a neutral position at the time of writing the review. For trend indicators, 65% side with the bears, 35% side with the bulls.
The nearest support is located in the zone 1.3080-1.3100, then comes the low of the past week (and at the same time of 2021-2022) – 1.3000, followed by the 2020 support. Resistance levels are 1.3185-1.3210, then 1.3270-1.3325, 1.3400, 1.3485, 1.3600, 1.3640.
As for the events of the upcoming week, one can pay attention to the data from the UK consumer market, which will arrive on Wednesday March 23. The country’s services PMI (Markit) will be released on the next day, Thursday, March 24, which is expected to rise from 60.5 to 60.7 over the month.
USD/JPY: Yen Falls to Six-Year Low
The headline of the previous USD/JPY review stated that “the markets chose the dollar”. The past week has only confirmed this conclusion. Despite the fact that the US currency fell against the euro and the pound, it continued to grow steadily against the yen. The high of the week was fixed at 119.40, while the finish was slightly lower, at the level of 119.15. The last time the USD/JPY pair traded so high was a very, very long time ago, at the turn of 2016/2017.
The reason for this is the Bank of Japan, which does not want to change its ultra-soft monetary policy. The position of the Japanese regulator differs sharply from the position of the Fed, the Bank of England, and even the ECB. Although, admittedly, there are certain reasons for this. Inflation in the country amounted to only 0.9% in February in annual terms against 0.5% in January. This indicator, although it was the highest since April 2019, is simply insignificant compared to the inflation rate in the UK or in the US, where it reached 7.9%, the highest in the last 39 years.
And although, following the results of the last meeting on Friday, March 18, the Central Bank of Japan announced that it expected inflationary pressure to increase due to rising energy and commodity prices, it still kept the interest rate at a negative level, minus 0.1%, and the target yield of ten-year government bonds are close to zero.
As for the forecast, 70% of analysts believe that it is time for the pair to turn down, 20% hold the opposite view, and 10% have just shrugged. Among the indicators on D1, there is almost complete unanimity after such a powerful breakthrough to the north. 100% of trend indicators and oscillators are looking up, although 35% of the oscillators are already in the overbought zone.
The pair easily broke through all the resistance levels indicated a week ago, and one can most likely focus on the next round values with a backlash of plus/minus 15-20 points now. The nearest zone is 119.80-120.20. Supports are located at the levels and in the zones 119.00, 118.00-118.35, 117.70, 116.75, 115.80-116.15.
Of the week’s macro statistics, inflation data in Tokyo, which will be released on Friday, March 25, is of interest. According to forecasts, the core consumer price index in the country’s capital may fall from 0.5% to 0.4%. A report on the latest meeting of the Japanese regulator’s Monetary Policy Committee will be published a day earlier. However, all its main decisions are already known, so one should hardly expect any surprises from this document.
CRYPTOCURRENCIES: The Salvation of Bitcoin Is in Small Holders
So, Jerome Powell’s speech at the end of the Fed meeting has returned investor interest to the stock market, becoming the driver of the best two-day increase in the S&P500 index since April 2020. Both Dow Jones and Nasdaq went up. This is not to say that the increase in such risk appetites has helped cryptocurrencies a lot, but at least it has kept them from falling further. The BTC/USD bulls tried to gain a foothold above $40,000 once again, while their ETH/USD counterparts tried to push the pair closer to $3,000.
Bitcoin is trading in the $41,650 zone at the time of writing this review, on the evening of Friday March 18. The total market capitalization increased from $1.740 trillion to $1.880 trillion over the week. And the Crypto Fear & Greed Index remained in the Extreme Fear zone, having hardly risen from 22 to 25 points.
Probably, the growth of US stock indices can be considered good news for the digital market as well. Another piece of good news came from the other side of the Atlantic, from Europe. The Committee on Economic and Monetary Affairs of the European Parliament (ECON) has adopted a bill to regulate cryptocurrencies. “It is a good day for the crypto sector! The EU Parliament has paved the way for innovative regulation of cryptocurrencies that can set standards for the whole world,” said one of the drafters of the law. It is also positive that the document has not included an amendment to ban mining on the Proof-of-Work consensus algorithm, which would de facto mean a ban on bitcoin.
The European Parliament’s decision came just days after US President Joe Biden signed an executive order on the same subject. Recall that this document instructs federal agencies to study the impact of cryptocurrencies on national security and the economy by the end of the year, as well as outline the necessary changes in legislation. In particular, it is supposed to coordinate the work of the SEC (Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission), as well as the definition of roles for government agencies – from the State Department to the Department of Commerce.
According to some analysts, the events in Ukraine prompted both the White House and the EU Parliament to take these steps. More precisely, the fear that some organizations and individuals may use digital assets to circumvent sanctions against Russia. And there is no doubt that such attempts are being made.
So, it became known last week that some large investors from Russia had been keeping their cryptocurrency reserves on Swiss exchanges, counting on the neutrality of this country. However, Switzerland announced unexpectedly that it was joining the European sanctions. And now the Russian oligarchs are trying to save their assets. For example, Reuters reports that a cryptocurrency company (the name is not published) received orders from Swiss brokers to sell 125,000 bitcoins, which are worth about $5 billion, and to convert them into cash.
Analytical company Elliptic said that it transfered to the US authorities information about digital wallets allegedly associated with sanctioned Russian officials and oligarchs, Bloomberg reports. To support the sanctions regime against Russia, Elliptic employees have identified more than 400 virtual asset service providers (mostly exchanges) where cryptocurrencies can be purchased for rubles (according to analysts, turnover on these platforms tripled in a week). In addition, the company’s specialists have identified several hundred thousand crypto wallets associated with sanctioned individuals and legal entities.
According to some experts, it is possible that bitcoin will return to a bearish trend, against the backdrop of a tense geopolitical situation and the upcoming tightening of the Fed’s monetary policy. AcheronInsights editor Christopher Yates expects BTC/USD to drop to $30,000. Well-known analyst Willy Woo shares similar fears. His calculations indicate that there is no necessary dip in the relative cost measurement. This, in his opinion, suggests that “there is room for another fall.”
In addition to the growth of investors’ risk appetite, bitcoin keeps the activity of small buyers with wallets up to 10 BTC from a collapse: they increase their purchases in the hope of a local bottom being formed. So, CoinMarketCap’s SMM service has conducted a survey among subscribers, as a result of which 4 out of 5 users expressed confidence that the price of BTC will rise to almost $50,000 by the end of March.
According to analysts from IntoTheBlock, the number of holders of the flagship cryptocurrency has now reached a record high: 39.79 million unique addresses. About 888 thousand new BTC holders have joined the network since the beginning of this year. At the same time, according to Finbold, a serious growth is observed among small holders holding less than 1 BTC on their balance. As for the whales (from 1000 to 10,000 BTC), they have not increased their holdings much. According to the analysts, this suggests that bitcoin is unlikely to show serious growth in the medium term.
Apple co-founder Steve Wozniak is more optimistic about the prospects of the flagship cryptocurrency; he believes that bitcoin will still rise to $100,000. According to him, BTC is “the most incredible mathematical miracle” that surpasses gold due to the confirmed digital scarcity.
Other influencers in the crypto world believe that the coin can reach this milestone as well. Bitbull CEO Joe DiPasquale is one of the biggest proponents of cryptocurrency. Even though bitcoin has been falling since November, he believes that the digital asset is still on track to reach the long-awaited $100,000 mark.
Galaxy Digital CEO Mike Novogratz named five times the figure during his speech at Bloomberg TV. He once again confirmed his forecast, according to which the largest cryptocurrency could rise to $500,000 in five years. And it will be a smooth, not aggressive growth.
The billionaire had accurately predicted that the cryptocurrency market would stall at the beginning of 2022. According to him, bitcoin’s upward rally in 2021 was fueled by fears that the Federal Reserve would “print money forever. Now that the Fed is winding down its stimulus program, the largest cryptocurrency is in the middle of a bearish trend.
The CEO of the crypto-bank Abra Bill Barhydt draws no less brilliant prospects for the ethereum. He believes that a steady decrease in fees within the ethereum network can serve as a driver for the growth of the asset to the $30,000-40,000 zone. Today, the ethereum network is one of the most sought after in the industry, as it is used in the field of non-fungible tokens (NFT), DeFi decentralized finance, games, etc. The number of ethereum holders will only grow with the launch of Ethereum 2.0 and the launch of staking approaching.
However, Bill Barhydt has not ruled out the possibility of selling small amounts of ETH in June or July. According to him, this will be a completely predictable correction against the backdrop of the growth of cryptocurrency.