EUR/USD: FOMC Meeting Results: Why the Dollar Is Falling and Stocks Are Rising
So, the meeting of the FOMC (Federal Open Market Committee) of the US Federal Reserve took place on Wednesday, July 27. There were no doubts that the key interest rate would be raised. But how much? By 100 basis points (bp), which has not happened since 1981, or by 75? It seems that the markets were counting on the first option, but the Fed went for the second, softer one. As a result, instead of a new assault on the 1.0000 horizon by the EUR/USD pair, it went up and returned to the 1.0150-1.0270 channel, where it had been moving since July 19. This was followed by an unsuccessful attempt by the bears to break through the lower border of the channel (the reasons are explained below, in the review for the GBP/USD pair) and the finish, which took place at the level of 1.0221.
Speaking at the end of the meeting, Fed Chairman Jerome Powell tried to convince everyone that the regulator is still hawkish. He stated that he does not believe in a recession as the labor market and some sectors are still strong. And that the risk of continued high inflation is more significant than the risk of a recession. And that, if necessary, the Fed is ready to accelerate the pace of interest rate hikes.
However, the markets did not believe Powell and reacted to the results of the FOMC meeting with a turn towards the stock market. The DXY dollar index fell by 0.7%, but stock indices went up: S&P500 rose by 2.6%, Dow Jones – by 1.4%, NASDAQ – by 4.1%. Oil futures also increased by 3.4%.
It was previously predicted that as a result of monetary restriction, the key rate could reach 3.4% by the end of this year, and it could rise even higher to 3.8% by the end of 2023. Rumors have spread around the market now that the US Central Bank may completely stop raising rates in November, and it will return to the quantitative easing (QE) program in 2023. The main reason is that fighting inflation by raising rates and reducing the budget deficit, despite Powell’s soothing assurances, has a negative impact on GDP. And this, in turn, can lead to a deterioration in the situation on the labor market.
What has just been said was confirmed by the macro statistics released on Thursday, July 28. The preliminary estimate of US GDP for the Q2 2022 was minus 0.9% against forecasts from +0.3% to +0.5%.
Thus, the decline in GDP plays against the dollar, as it may push the Fed to a more careful rate hike, much less than its 75 bp increase. at every meeting. According to the FedWatch tool from CME Group, the probability that the regulator will raise the discount rate by only 50 bp in September is almost 80%. The steady decline in the yield of ten-year US government bonds is also playing against the American currency: it fell from 3.4% to 2.68% in just a month. This gives market participants reason to think that inflation is under control and the program of quantitative tightening (QT) can be completed ahead of schedule.
On the other hand, things are not going smoothly in Europe either. Ongoing problems and interruptions in the supply of natural energy resources from Russia are playing against the euro. In response to energy blackmail from the Kremlin, the head of the European Commission Ursula von der Leyen called on the EU countries to prepare for a complete cessation of Russian gas supplies. In her opinion, it is necessary to save resources even in those countries where dependence on Russian energy carriers is small in order to avoid a full-scale collapse.
Klaus Müller, head of Germany’s energy regulator (Bundesnetzagentur), believes that the threat of gas shortages will hang over the country for the next two winters, and electricity prices will rise again in August.
Speaking of the Eurozone, it should be noted that the economic data published on Friday, July 29, do not look so intimidating. On the one hand, inflation continues to grow: the consumer price index (CPI), with the previous value of 8.6% and the same forecast, rose actually to 8.9% in July. On the other hand, GDP (y/y, Q2) of the Eurozone, fell to 4.0% instead of the expected fall from 5.4% to 3.4%. The situation with the labor market in Germany also looks good, the number of unemployed fell from 132K to 48K over the month.
As for the near future of the EUR/USD pair, at the time of writing the review, on the evening of July 29, 45% of experts supported its growth, 45% showed it the way to the south and 10% to the east. Indicator readings on D1 do not give definite signals either. As for trend indicators, 50% look south, 50% look north. Oscillators have 35% on the side of the bears, 65% side with the bulls, of which 25% signal the pair is overbought.
With the exception of 1.0200, the closest support for the EUR/USD pair is the 1.0150-1.0180 zone, then 1.0100 and, of course, the 1.0000 level. After it is broken, the bears will target the July 14 low at 0.9950, even lower is the strong 2002 support/resistance zone of 0.9900-0.9930. The next serious task for the bulls will be to break through the resistance at 1.0250-1.0270 and return to the 1.0400-1.0450 zone, followed by the 1.0520-1.0600 and 1.0650-1.0750 zones.
Upcoming events include the publication of business activity indices (ISM) in the manufacturing sectors of Germany and the United States on Monday, August 01. The volume of retail sales in Germany will become known the same day. Data on retail sales in the Eurozone, as well as on business activity (ISM) in the US services sector, will be published on Wednesday, August 3. Ф portion of data from the US labor market will arrive at the very end of the working week, on Friday, August 05, including the unemployment rate and such an important indicator as NFP, the number of new jobs outside the US agricultural sector.
GBP/USD: BOE Decision Threatens to Become a Sensation
Cautious decisions by the Fed, careful comments by Jerome Powell and disappointing Q2 US economic growth data fueled the GBP/USD rally last week. As a result, the bulls managed to raise the pair to a monthly high of 1.2245 on July 29. The pair briefly went south to 1.2062 in the afternoon of the same day. The dollar was strengthened by the data on the Personal Consumption Expenditures (PCE) index in the USA. The growth of this inflation indicator in monthly terms amounted to 0.6% (twice higher than the previous value of 0.3% and higher than the forecast of 0.5%). This influenced market sentiment and helped the US currency to start recovering. In addition, July 29 is the last working day of the month, and many investors decided to take profits after the growth of the pound. However, the growth of the dollar did not last long and the last chord of the week sounded at 1.2176.
As for macroeconomic news coming from the United Kingdom next week, we can note the publication of the composite PMI index and the index of business activity in the UK services sector on Wednesday August 3. But the main event of the week will certainly be the meeting of the Bank of England (BOE) on Thursday August 4.
This regulator raised the interest rate from 1.00% to 1.25% at its previous meeting on June 16. It would seem that 25 basis points is only a third of the 75 bps by which the Fed raises the rate, but the pound then flew up sharply. The British currency strengthened by 365 points in just a few hours and the GBP/USD pair fixed a local high at 1.2405.
Let’s see what happens this time and if it can return to this height. Or is it likely to exceed it? After all, according to forecasts, the BOE may decide to take a desperate step, raising the rate by 150 bps at once, in which case it will be 2.75% and will be higher than the current dollar rate of 2.50%, which will be a significant argument in favor of strengthening the British currency.
At the moment, 35% of experts believe that the British currency will continue to lose ground, 35% on the contrary expect a rebound upwards, and 30% remain neutral. The readings of the indicators on D1 are as follows. Among trend indicators, the parity is 50% to 50%. Among the oscillators, only 10% side with the bears, 90% indicate growth, of which 15% are in the overbought zone.
Immediate support is at 1.2045, followed by 1.2000 and 1.1875-1.1915 zone. Below is the level of 1.1800, the July 14 low of 1.1759, then 1.1650, 1.1535 and the lows of March 2020 in the zone 1.1400-1.1450. As for the bulls, they will meet resistance in the zones and at the levels of 1.2200-1.2245, 1.2300-1.2325 and 1.2400-1.2430.
USD/JPY: Record 500 Pips Down
All the same reasons mentioned above contributed to the strengthening of the Japanese currency. On the eve of the US Federal Reserve meeting on July 27, the USD/JPY pair was at a height of 137.45, and having flown by almost 500 points, it already fixed a six-week low at around 132.49 less than two days later. It is possible that such a sharp drop was facilitated by the oversold yen, which updated a 24-year low on July 14.
The publication of the US Personal Consumption Expenditures followed at the very end of the week, on Friday, July 29, causing a temporary rebound of the USD/JPY pair to the height of 134.58, after which the downtrend resumed, and the pair completed the five-day working period at 133.31.
As for the prospects of the Japanese currency, the experts’ forecast looks quite neutral, as in the cases of previous pairs. 45% of them are waiting for a new breakthrough of the pair to the north, another 45% hope for a continuation of the downtrend, the remaining 10% talk about a side corridor. The picture is somewhat different in the readings of indicators on D1: trend indicators have a ratio of 65% to 35% in favor of red ones, 25% of oscillators look north, 75% look south, but a third of them give signals that the pair is oversold.
The values of possible slippage and ranges of support/resistance zones have sharply increased due to the ultra-high volatility of the pair. Supports are located at the levels and in the zones 132.50-133.00, 131.40, 128.60 and 126.35-127.00. Resistances are 134.20-134.60, 135.00-135.55, 136.30-137.45, 137.90-138.40, 138.50-139.00, followed by July 14 high 139.38 and round bull targets of 140.00 and 142.00.
CRYPTOCURRENCIES: Bitcoin May Rise. But not soon.
The fact that the US Federal Reserve raised the rate not by 1.0%, but by 0.75% at its meeting on July 27 provided strong support for risky assets, primarily the stock market. Some of the most radical analysts said that the regulator might stop raising rates as early as November, and it would return to the quantitative easing (QE) program in 2023 and start buying assets and building up the balance sheet again, flooding the market with new flows of cheap dollars. The S&P500, Dow Jones and Nasdaq stock indices went further up on such joyful expectations for investors, and the quotes of such risky assets as bitcoin and other cryptocurrencies followed them.
The price of bitcoin has been holding above the $20,000 level for two weeks now, which has concentrated the greatest attraction of speculators. According to Glassnode experts, this happened as a result of the transfer of coins from surrendered hodlers to “new” optimistic buyers. The specialists emphasize that there was also demand from speculators earlier at the levels of $30,000 and $40,000.
According to a number of analysts, those whales (investors with a balance of 1000+ and 10000+ BTC) who maintain hodle moods and continue to buy bitcoins on exchange rate drawdowns, also contributed to this. The activity of owners of small BTC balances is also noted. For example, the number of addresses with a balance of 0.01+ BTC reached an all-time high of 10,543,548.
Glassnode warns that it may take additional time to form a solid foundation. This is evidenced by such long-term indicators as URPD. To increase the chances of a market reversal, it is important to see the transition of speculative coins into the category of “held by long-term investors” (in other words, the “age” of coins from the moment of purchase must exceed 155 days).
Crypto analyst Nicholas Merten believes that an unexpected market jump is possible in the current situation, which will be a big surprise for the bears. “Bitcoin skyrocketed from $29,000 to $53,000 last July, up 80% within a month. I suppose that the market can grow up again now and retest the previous consolidation area around $30,000. There are no major resistance zones ahead and the moving averages are leading right into this point, giving bitcoin a great upside opportunity. Most people do not believe in this possibility, but the rally can surprise you with its scale in a market with excessive volumes of derivatives.”
Note that although Merten does not rule out BTC rising in the short term, he doubts that the asset has already hit the bottom: “Many people believe that the bottom was reached on June 18. Yes, we saw a huge sell-off and a good rebound. The market also got rid of significant amounts of borrowed funds used for crypto speculation. But one cannot discount the reality of the continued impact of the macro market, which will continue to limit long-term investment in cryptocurrencies.”
A similar thought was expressed by analyst Aaron Chomsky. He believes that the exit of the BTC/USD pair from the side channel through the upper border can only become a trigger for a further fall in prices. He expects a reversal and a breakdown of the lower border of the channel with the target of $17,500. At the same time, Aaron Chomsky believes that the goal of $10,000 is also quite realistic. “Apparently, we are in for a long period of crypto winter,” the expert writes. “Bitcoin is targeting $5-7k, while any delay, like what we are seeing now, forces us to revise the final targets down.”
And the “lower side,” according to Jim Rogers, co-founder of Quantum Fund and Soros Fund Management, could be a drop in the price of bitcoin to zero. This major American investor said that you need to get the support of governments regarding this sector before considering cryptocurrency as a safe investment. BTC is only a gambling tool, not real money. Bitcoin is well suited for speculation but will eventually fail as a currency.
Jim Rogers emphasized that he would consider buying BTC if the European Union accepted it as the official currency and introduced it into the region’s payment system. However, his statement can only be taken as a sarcastic joke, since the EU is unlikely to take such a step in the next decade.
Of course, in contrast to the skeptics who are ready to bury the crypto market, there are always optimists who predict a bright future for bitcoin. For example, Real Vision Group co-founder and former Goldman Sachs CEO Raoul Pal believes that the cryptocurrency markets are preparing for a major positive trend reversal. The markets are mainly driven by liquidity, which comes from the M2 money supply, he said. This money supply correlates with the total amount of currency in circulation, plus it is highly liquid non-cash assets that can be easily converted into cash.
Most crypto investors believe that miner reward cuts at the next halving, which is scheduled for May 2024, will drive the price up. However, Pal argues that the role of M2 is greater than that of halving: “Cryptocurrency is not driven by the business cycle, but by global liquidity. So the main indicator of the growth of bitcoin is the rate of change of M2. Every time there was an increase in the money supply, there was always a reversal, the specialist says.
It is appropriate to recall what we talked about at the very beginning of the review. If the Fed actually returns from quantitative tightening (QT) to quantitative easing (QE), and there is extra money in the market, investor appetite for risky assets will definitely go up.
Raoul Pal is also right that many investors expect the next big rise in cryptocurrency prices to occur before the next halving. Moreover, such expectations are based on quite convincing historical data. One of the proponents of this scenario is financial analyst Florian Grummes, managing director of investment firm Midas Touch Consulting. In his opinion, despite the current rise, the cryptocurrency winter is far from over. The rise to $35,000, in his opinion, will occur only in 6-12 months. And this will be a so-called “auxiliary rally” that may precede larger rally in the future.
In the long term, Grummes is confidently optimistic, but warns that since the crypto market is directly correlated with the stock market, one must be prepared for deviations not only upwards, but also downwards at the current stage.
The biggest optimist last week was the well- known analyst under the nickname PlanB, the creator of the Stock-to-Flow model. He predicted the day when both US stocks and bitcoin would reach new all-time highs. “Some people are afraid of macroeconomics, bitcoin’s relationship with the stock market, etc.,” he tweeted. “My opinion is that the S&P 500 will be in the range of $5,000-$6,000 over the next 5 years, and bitcoin will be between $100,000 and $1 million.
The prospects are wonderful of course. But both PlanB and Florian Grummes have already been wrong in their predictions. Therefore, their forecasts, as well as all other ones, should be treated with sufficient caution now as well. The only thing that persists is that at the time of writing this review (Friday evening July 28), bitcoin is trading around $23,900. The total capitalization of the crypto market is $1.098 trillion ($1.026 trillion a week ago), and the Crypto Fear & Greed Index is still in the Fear zone at 39 points (33 points a week ago).