Weekly market report – 9 May 2022

Forex

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EUR/USD

The EUR/USD pair had a volatile week, ending at around $1.0547, not far from the year-to-date low of $1.0470. While the pair recovered some of its previous weekly losses, it remains bearish overall.

Last week, central banks took centre stage as overheating inflation continues to spiral out of control and monetary tightening becomes the new normal. On Wednesday, 4th May 2022, the Federal Reserve of the United States approved a half-point increase in interest rates (50 bps), which is twice as large as the quarter-point increase approved in March and the biggest hike since 2000. It was also announced that the bank will begin reducing its balance sheet on 1st June. 

The announcement, which was broadly expected, triggered little reaction from financial markets. However, with Chair Jerome Powell's press conference, all hell broke loose as he dismissed potential 75-bps hikes. Investors applauded the "less aggressive" stance, but Wall Street rallied, dragging high-yielding currencies with it to the detriment of the US dollar. Following the announcement, the EUR/USD pair reached a weekly high of $1.0626 before falling to a weekly low of $1.0487 the next day.

Furthermore, market participants realised that while the Fed may not have been more aggressive than expected, it is the one imposing the most stringent measures. The European Central Bank has mentioned July as a possible date for a rate hike, but by then, the Fed would have likely pulled the trigger again by 50 basis points. In the long run, the imbalance between central banks may continue to favour the US dollar.

The crisis in Eastern Europe is another significant factor weighing on the common currency. Russian aggression against Ukraine continues unabated. Even after the sixth round of sanction announcements, the European Union still has not agreed on a full oil embargo, despite its ongoing struggle to replace Russian energy.

On the technical side, EUR/USD went up modestly by 0.42%. As per the week’s hourly chart, EUR/USD is currently near the 38.2% retracement level at around the $1.0540 mark, acting as the support level. If it breaches its support level, the next support level would be at the 23.6% retracement level at around the $1.0519 mark. On the flip side, the current resistance level is at the 50% retracement level at around $1.0556, followed by the next resistance level at the 61.8% retracement level at around $1.0573.  

GBP/USD

For the GBP/USD pair, the Fed-BOE contrast remained in play as the UK's dire economic outlook widened the economic divergence alongside the monetary. GBP/USD remained relatively stable throughout the week before plunging to new 22-month lows below $1.23, dropping for the third week in a row. 

The Bank of England (BoE) raised interest rates by 0.25% to 1% on Thursday, 5th May 2022 in line with market expectations, but warned that inflation could reach double digits in the third quarter and growth could fall into negative territory in 2023. This double whammy of bad news sent the already weak British pound tumbling lower, with any minor recoveries being sold off again. 

This week’s focus would be on inflation, with the CPI report scheduled on 11th May 2022 and the UK’s GDP scheduled on 12th May 2022. 

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Commodities

Gold

Dropping again for the third week in a row, gold reached around the $1,850 mark – its lowest price since February. Although the yellow metal managed to recover in the second half of the week, broad-based dollar strength prevented gold from breaking its three-week losing streak.

On Wednesday, 4th May 2022, after the Fed announced the increased policy rate by 50 basis points and dismissed the possibility of 75-bps rate hikes, gold started to rebound, climbing to a 5-day high at around the $1,900 mark. But it couldn’t maintain its momentum due to the stock market sell-off and the strengthening of the US dollar. Another reason gold was unable to gain traction last week was due to rising US yields.

As per the hourly chart for the week, gold ended its week at around the $1,883 mark between the 50% and 61.8% retracement levels at around $1,880 and $1,887, acting as the support and resistance levels respectively. If the support level is breached, its next support level would be at the 38.2% retracement level at around $1,874. If the resistance level is breached, the next resistance level would be at the 76.4% retracement level at around $1,894.

Gold may struggle to make a decisive move in either direction ahead of this week's key US inflation data. Investors will also be paying close attention to new developments concerning China's lockdowns and the Russia-Ukraine conflict. 

Oil

Brent and WTI rose for the second week in a row, boosted by the EU's proposal to phase out Russian crude oil supplies in the next six months and the refined products by the end of 2022. It would also prohibit all shipping and insurance services for Russian oil transport.

If the EU successfully enacts this crude oil ban across its 27 member states, crude oil prices will likely remain high during the fall and winter months, when global crude oil demand typically declines.

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Cryptocurrencies

The cryptocurrency market saw a major decline during the course of last week, with Bitcoin spearheading the trend. 

Bitcoin started the week trading sideways. On 4th May 2022, investors saw a glimmer of hope when Bitcoin almost grazed the $40,000 mark. However, this was short lived when the cryptocurrency plummeted to the $36,000 mark on 6th May 2022, as you can see from the chart. The short term moving averages SMA 5, SMA 10, and SMA 15 kept changing roles of key supports and resistances. The trio of moving averages converged and diverged repeatedly to end the week at $34,352, $34,432, and $34,510 respectively. 

The world’s most popular cryptocurrency broke from its wave-like crest and trough pattern in the previous week and entered a nosedive, to slip for 4 consecutive days and end the week around the $34,000 mark. The digital currency is down 50% from its all-time high of nearly $68,000 in November 2021.

Barring stablecoins that are pegged to the US dollar, all major cryptocurrencies and altcoins followed the Bitcoin bandwagon into their lows. Ethereum dropped by 4%, Terra tumbled 6%, Avalanche plunged 5%, and Dogecoin traded 7.5% lower. 

The downtrend experienced by the cryptocurrency market can be attributed to several reasons. The broad stock-sell in the US last week caused havoc in the cryptocurrency world, and major cryptocurrencies followed the downtrend of the equity markets. In addition, investors reacted to the increase in the interest rates by the Fed Reserve, its steepest increase in 2 decades in a battle against inflation. 

The Russia-Ukraine war continues to impact investor sentiments, who are increasingly abandoning riskier assets and parking their funds in safe haven assets. 

In other cryptocurrency related news, Portugal remains what people call the ‘crypto heaven’ as other European countries impose regulations and obligations on digital currencies. 

Italian luxury fashion brand Gucci has announced that it will start accepting cryptocurrency payments in the US this month, as reported by Bloomberg. The fashion house will accept 10 cryptocurrencies including Bitcoin, Ethereum, and Dogecoin to start with.*

US Indices

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The major US indices continued to lose their traction for the fifth week in a row after a sharp shift in sentiment sent stocks tumbling and the major indices ended the week with relatively modest weekly declines: -2.92% for the NASDAQ, -0.77% for the S&P 500, and -0.49% for the Dow.

Meanwhile, the economy faces headwinds from ongoing supply disruptions caused by China's lockdowns as well as rising consumer costs worsened by high oil prices. However, consumer employment conditions remain positive as it generated around 428,000 jobs in April 2022.

We also saw a surge in the 10-year Treasury Bond yield, which jumped from around 2.90% to around 3.10% at the end of the week. 

Despite the heat of inflation, the latest trends indicate it has peaked and is headed towards a gradual decline. This can be seen by the Consumer Price Index report, due to be released on Wednesday, 11th May 2022, which will show whether the US economy experienced any relief from surging inflation in April. A month earlier, the government reported that inflation accelerated in March to an annual rate of 8.5%, the highest since 1981, surpassing the previous month's figure of 7.9%.

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