Weekly market report – 24 Jan 2022

Forex

Last week, the US Dollar Index gained approximately 0.40%, with the DXY trading at 95.60 ahead of Friday’s close. Despite this advance, the index remains within the range seen in January, and now the focus turns to next week's Federal Reserve interest rate announcement, and the broader rally for 2021 is at stake.

Here’s how our top pairs responded to this gain:

• USD/JPY is approaching its monthly low of ¥113.38 amid the decline in global equity markets. Meanwhile, the Federal Reserve's interest rate decision could change the outlook for the currency in the near future as it prepares for a normalised monetary policy. The US monetary policy decisions may support USD/JPY since the Federal Reserve is likely to raise interest rates over the next few months, while also explaining its exit strategy.
• After recent gains, EUR/USD seems to have returned to its comfort zone – just a few pips above the $1.1300 mark. On Tuesday, 18 January 2022, the pair fell the most as US traders returned to their desks and pushed government bond yields to a level not seen since February 2020.
  
• Having won four weeks in a row, GBP/USD lost nearly 1% last week following Friday's disappointing retail sales data that caused the British pound to continue losing interest. The US dollar struggled against falling US Treasury bond yields, however, risk-averse market conditions weighed on the pound ahead of the weekend.
• The GBP/JPY pair maintained its downwards trend, falling to a three-week low around the ¥154.45 level during the Asian session. This is the seventh day of a negative move, mainly fueled by reviving demand for the safe-haven Japanese yen.

Falling US Treasury bond yields made it difficult for the greenback to outperform its rivals ahead of the weekend. However, the Federal Open Market Committee’s (FOMC) rate decision is scheduled for Wednesday, 26 January 2022. Traders are hoping for clearer hints about upcoming rate hikes, and are pricing in a first-rate hike for March 2022 along with at least 3 hikes through the year.

Commodities

Gold and silver reached two-month highs on Thursday, 20 January 2022, driven by inflation fears and tightening Russia-Ukraine tensions. By Thursday afternoon, spot gold was trading at $1,841 per ounce. Aside from gold, silver rose 2.1% to $24.63 per ounce last week, whilst platinum and palladium extended gains from their previous rallies.

Currently, gold's primary support level is $1,765 at a retracement of 23.6%. The yellow metal is continuing with its upward momentum and has already broken through its first major resistance around $1,824. Meanwhile, its new resistance level sits at $1,765 at the 50% retracement level.

"With all indicators pointing to inflation continuing to be problematic and crude oil prices remaining high, gold prices could hit $2,000 an ounce this year," said Jim Wyckoff, Senior Market Analyst at Kitco News.

With the US dollar index levelling off and inflation still the centre of discussion, gold is seeing an unexpected rally as traders flock towards safe-haven assets whilst crypto and high-risk tech take the hit. At the moment, other precious metals are reaping the benefits of the current risk-averse market sentiment.

Cryptocurrencies

Last week, the cryptocurrency market suffered heavy losses as the US stock market declined sharply. Wall Street suffered a poor performance last Thursday, 20 January 2022, which led to a sell-off that wiped out almost $150 billion from the crypto market. With the Federal Reserve also indicating plans to reduce its balance sheet and raise interest rates, traders seemingly responded by shedding their positions in riskier assets. Cryptocurrencies, reputed for their high risk-high volatility, were included in the list.

Bitcoin fell by 15% on the week and was trading around the $36,000 mark by late Friday afternoon. The world's leading cryptocurrency was trading down almost 50% from its previous record high of $69,000 last November. Meanwhile, Ethereum dropped by more than 20%, trading close to $2,500.

Currently trading around $35,500, Bitcoin may find support around its first support level of $30,750 at 38.2% retracement. On the upside, Bitcoin's primary resistance level lies at $37,250 at 50% retracement. If this level is broken, its secondary resistance level of $43,700 would be activated.

Bitcoin's overall growth can be attributed to its use as a hedge against inflation caused by the US government's $2 trillion Covid stimulus package. However, with inflation now at its highest yearly pace in 4 decades, analysts believe that the risks of a more hawkish Federal Reserve will weigh down on Bitcoin's growth during this period.

It's important to note that regulators are also clamping down on cryptocurrencies, with China banning all crypto-related activities and US policymakers implementing restrictions on certain market aspects. Naturally, this poses an even larger threat to the long-term growth of decentralised digital currencies.

US Indices

US Indices have continued to slump 3 weeks in a row due to fears of rising interest rates and their impact on growth sectors.

Since the interest rate environment has changed, the stock market leaders have been shifting as the weak performance of the technology sector has caused the indices to fall. This led to traders shifting from high-risk stocks to defensive stocks.

Another contributing factor is the 10-year Treasury yield, which reached its highest level since 2019 on Wednesday, 19 January 2022, only to fall the following day due to the weaker-than-expected jobless claims report. The stock market has been shaken recently as interest rates have risen by more than 0.5% since early December, even though the rates are still relatively low by historical standards.

Additionally, short-term volatility in the US stock market jumped more than 50% for the week and, on Friday, 21 January 2022, hit its highest level since peaking in early December following the presence of the Omicron variant of Covid-19. Last week also saw the CBOE Volatility Index, also known as the VIX, rise from around 19 to almost 29 – these readings indicate increased volatility and uncertainty. 

This week, the focus is on the Federal Reserve, where the members could reveal how many rate hikes they plan to make to control inflation this year.

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