EUR/USD: Inflation, GDP, and Prospects for Monetary Policy
Looking at the two-week flat trend on the EUR/USD chart, one is reminded that it’s August, a vacation season. Even the US inflation data released on Thursday, August 10th, couldn’t disrupt the relaxed demeanour of traders. And yet, they warrant close attention. The year-on-year Consumer Price Index (CPI) growth of 3.2% and core inflation at 4.7% came in below forecasts (3.3% and 4.8% respectively). The monthly CPI remained unchanged at 0.2%, marking the lowest figure in over two years. As for the GDP, previously released data confirmed a diminished risk of the national economy slipping into a recession. After a 2.0% year-on-year rise in the first quarter of 2023, the second quarter recorded a 2.4% growth, significantly surpassing market expectations of 1.8%.
Therefore, the US boasts a robust economy with a gradually cooling labour market and inflation steadily approaching the 2.0% target level. All of this suggests that the Federal Reserve’s monetary policy has been bearing positive fruits. The regulator can now, at the very least, pause the tightening process. They might even conclude the current monetary restriction cycle. The likelihood of the dollar interest rate remaining at the current 5.50% level in September is estimated at 89%, whereas the odds of it increasing by 25 basis points (b.p.) by year’s end stand at just 27%.
In such a situation, the dollar should have begun to relinquish its positions, but this did not occur. Of course, immediately after the inflation data release, EUR/USD spiked by approximately 50 points but soon reverted. Why did this happen? While the vacation season theory could be considered, there are two considerably more crucial reasons. The first is the disappointing results of the latest auction for the 30-year US Treasury bonds, which concluded with a yield of 4.199%, lower than rates in the secondary market. The second reason lies in the weakness of the dollar’s European counterpart.
The best insight into how the Eurozone’s economy is faring is provided by the “Economic Bulletin” published by the European Central Bank (ECB) on that same Thursday, August 10. Here are its key points:
“Inflation continues to decline, but it is expected to remain too high for an extended period.” “The immediate economic outlook for the Eurozone has worsened, mainly due to weakening domestic demand. High inflation and tighter financing conditions are suppressing spending growth.” “A modest production growth in the Eurozone is anticipated in the third quarter, largely driven by the services sector.” “Upside risks for inflation include potential resurgence in energy and food prices, as well as risks associated with Russia’s unilateral withdrawal from the Black Sea Grain Initiative.” “The prospects for economic growth and inflation remain highly uncertain.” According to a recent Reuters poll, such a bulletin from the ECB has left market participants guessing about their next moves.
Next week, Eurostat will present a report with revised GDP data for the Eurozone for Q2 2023, as well as figures for industrial production and inflation for July. The preliminary GDP estimate showed a growth of +0.3% (+0.6% year-on-year) after stagnant growth in Q4 2022 and a decline of -0.1% in Q1 2023. While inflation is on the decline (currently at 5.5%, compared to 10.6% in October 2022), it still exceeds the target level of 2.0%. If the ECB continues to maintain a strict monetary policy and energy prices rise, many economists believe this could lead to a 5.0% drop in the Eurozone’s GDP in 2024.
The comparison of the provided data suggests that the US currency currently has a greater chance of prevailing. The dollar’s role as a safe-haven asset also plays in its favour. Naturally, a lot hinges on the actions of the Fed and the ECB this fall. As for the past week, after the release of the US production inflation data (PPI), the dollar further strengthened its position, and the EUR/USD pair concluded the week at 1.0947.
At the time of writing this review, on the evening of August 11, 35% of analysts have voiced in favour of the pair’s rise in the near term, 50% sided with the dollar and took the opposite stance, and the remaining 15% voted for the continuation of the sideways trend. Among the oscillators on D1, the majority, 80%, favor the US currency (with 15% in the oversold zone), 10% point northward, and 10% are in the neutral zone. Among the trend indicators, 65% recommend selling, and the remaining 35% suggest buying. The nearest support for the pair is located around 1.0895-1.0925, followed by 1.0845-1.0865, 1.0780-1.0805, 1.0740, 1.0665-1.0680, and 1.0620-1.0635. Bulls will encounter resistance around 1.0985, then at 1.1045, 1.1090-1.1110, 1.1150-1.1170, 1.1230, 1.1275-1.1290, 1.1355, 1.1475, and 1.1715.
For the upcoming week, notable events include the release of U.S. retail sales data on Tuesday, August 15. On Wednesday, August 16, the Eurozone’s GDP figures will be revealed, and the minutes from the latest FOMC (Federal Open Market Committee) meeting will also be published. Data on U.S. unemployment and manufacturing activity will be presented on Thursday. To cap off the week, on Friday, August 18, we’ll get insights into the inflation (CPI) situation in the Eurozone.
GBP/USD: Day X – August 16
According to data released on Friday, August 11, by the UK’s Office for National Statistics (ONS), the country’s economic growth for the second quarter was 0.2%, compared to a 0.1% increase in the first quarter (with a forecast of 0.0%). Year-on-year, while forecasts were at 0.2%, the actual GDP growth was 0.4% (with the previous figure being 0.2%). The total volume of industrial production in June also rose, registering a +1.8% compared to a forecast of +0.1% and a -0.6% decline in May. Overall, the upward momentum is evident. This reduces the risks of recession and heightens the likelihood that the Bank of England (BoE) will maintain its hawkish stance at least until the end of 2023. Especially given that the country’s inflation remains relatively high, with the year-on-year CPI at 7.9%. To combat this, according to predictions, the BoE might increase the key interest rate in 2-3 steps from the current 5.25% to 6.00% this year, giving the British currency a distinct edge.
Strategists at the Netherlands’ largest banking group, ING, believe that the positive GDP figures won’t be the defining factor for the Bank of England. “The June GDP growth numbers for the UK surpassed expectations,” they agree. “However, we believe that the implications for the Bank of England are likely to be quite limited, as the numbers aren’t significantly different from its forecasts. The primary focus will be on next week’s service sector inflation and wage growth figures, […] which are crucial for the pound.”
GBP/USD closed at the 1.2695 mark on Friday, August 11. The near-term forecast from experts is as follows: 60% are bearish on the pair, 20% are bullish, and the same percentage chose to remain neutral. On the D1 oscillators, bears have a unanimous 100% backing, with 15% of these indicating an oversold condition. Trend indicators display a 65% to 35% split in favour of the bears (red). Should the pair trend downwards, it will encounter support levels and zones at 1.2675, 1.2620-1.2635, 1.2575-1.2600, 1.2435-1.2450, 1.2300-1.2330, 1.2190-1.2210, 1.2085, 1.1960, and 1.1800. In the event of an upward movement, resistance can be expected at 1.2760, followed by 1.2800-1.2815, 1.2880, 1.2940, 1.2980-1.3000, 1.3050-1.3060, 1.3125-1.3140, 1.3185-1.3210, 1.3300-1.3335, 1.3425, and 1.3605.
As for the UK macroeconomic statistics, a flurry of data from the national labour market awaits us on Tuesday, August 15, including indicators such as wage growth and unemployment rates. The next day, on Wednesday, August 16, key inflation (CPI) figures for the United Kingdom will be released. Lastly, on Friday, August 18, we’ll receive statistics on retail sales in the country.
USD/JPY: The Pair Returns to its Moonshot
While EUR/USD and GBP/USD spent the week trading sideways, USD/JPY once again soared into the stratosphere. On Friday, it reached a height of 144.995, almost touching the peak of June 30. It last traded at such levels over a year ago, in June 2022. The week concluded slightly lower, settling at 144.93. Neither the Bank of Japan’s (BoJ) recent decision to shift from a rigid yield curve targeting for government bonds to a more flexible approach, nor the interventions conducted by the Japanese regulator, were able to support the yen.
Inflation data is crucial for most central banks. To combat rising prices, regulators in the US, EU, and the UK are tightening monetary policy and raising interest rates. However, the BoJ disregards such methods, even as inflation in the country continues to climb. Moreover, the country’s government has recommended a 4% increase in the minimum wage, and spring wage negotiations have resulted in the highest wage growth in three decades. Against this backdrop, there’s mounting evidence that businesses are ready to pass on these increases to consumers, which could lead to a rise in CPI.
At Japan’s MUFG Bank, they forecast that the Bank of Japan might only decide on its first rate hike in the first half of the following year. Only then will there be a shift towards strengthening the yen. As for the recent change in the yield curve control policy, MUFG believes it’s insufficient on its own to prompt a recovery of the Japanese currency.
Analysts at Germany’s Commerzbank feel that the lack of clarity in the Bank of Japan’s policy further depresses the yen and hinders its growth. Over the recent months, when all Central Banks, except the Japanese one, have raised their key rates, one thing has become clear: the monetary policy of the Bank of Japan will not be favourable for the yen in the foreseeable future, Commerzbank shares. They add that the yen is a complex currency to understand, possibly linked to the BoJ’s monetary policy.
Strategists at Societe Generale opine that if the USD/JPY pair consolidates above 144.50-145.00, growth may continue to 146.10 (76.4% correction of the movement from last October) and then even higher to 147.90.
Analysts at Credit Suisse also maintain a bullish outlook on the pair and aim higher in their forecasts. “We continue to anticipate a retest of our interim target of 145.00-145.12,” they write. “Although this mark is expected to hold again, our core forecast remains bullish, and we anticipate that it will ultimately be breached. This will lead the market to resistance at 146.54-146.66, and eventually, to a target of 148.57.”.
Concerning the near-term perspective, the median forecast of experts greatly diverges from the aforementioned opinions. An overwhelming majority of them (80%) expect a correction of USD/JPY downwards. (One possible reason for the decline could be another currency intervention.) The remaining 20% chose to remain neutral. The number of those expecting further growth of the pair this time was zero. Both trend indicators and oscillators on D1 are 100% green, although a quarter of the latter signals overbought conditions. The nearest support level is located at 144.50, followed by 143.75-144.04, 142.90-143.05, 142.20, 141.40-141.75, 140.60-140.75, 139.85, 138.95-139.05, 138.05-138.30, 137.25-137.50. The closest resistance stands at 145.30, followed by 146.85-147.15, 148.85, and finally, the October 2022 high of 151.95.
Among the events of the upcoming week in the calendar, one can note Tuesday, August 15, when data on consumer spending, industrial production volumes, and Japan’s GDP will be published. The next day, the value of the Reuters Tankan Business Confidence Index will be known, and on Friday, August 18, we will learn the values of the National Consumer Price Index (CPI).
CRYPTOCURRENCIES: The Search for a Trigger Continues
Two weeks ago, we titled our review “In Search of the Lost Trigger”. Over the days that have passed since then, the trigger has still not been found. After the drop on July 23-24, BTC/USD moved to another phase of sideways movement, moving along the Pivot Point around $29,500. According to some analysts, market participants avoided sharp movements in anticipation of inflation data in the US, which was published on Thursday, August 10. Which, as a result, the crypto market completely ignored.
Bitcoin network indicators suggest accumulation in anticipation of a price breakthrough. According to the Blockware Intelligence newsletter, the volume of liquid and highly liquid supply has dropped to its lowest level since 2018. As noted in Blockware, speculative traders are exchanging a decreasing amount of coins back and forth, while long-term holders have tucked their reserves into cold wallets.
Opinions on which direction this breakthrough may take, as usual, are divided. For instance, trader, analyst, and founder of the venture firm Eight, Michael Van De Poppe, refuted suggestions about the first cryptocurrency’s price dropping to the $12,000 mark and reassured those talking about a complete capitulation of altcoins.
“The bear market has been ongoing for more than two years,” he wrote, making it the longest market in cryptocurrency history. However, this is not surprising given the hacks, bankruptcies, and litigations in the crypto industry. From the analyst’s observations, the most bearish sentiments are often found among those who first invested in digital assets specifically in 2021. “For them, the slow loss of money feels extremely painful, and they only expect further portfolio value decreases,” the expert noted.
In his opinion, the second stage of capitulation is now taking place: the most boring period of the cycle, during which it seems that nothing at all is happening in the markets. “Be patient, enjoy the realization that you are still in the market, accumulate positions. […] Big companies are getting into the game, and the wisest thing you can do is to follow them,” Van De Poppe advised.
A considerably less optimistic forecast was given by another renowned trader, Tone Vays. He noted that selling pressure is increasing and the price of the first cryptocurrency might significantly decline. “Bitcoin continues to struggle, but I’d say there’s a high chance the BTC price could drop to the next moving average. And, if daily candles keep closing below the previous ones, I would advise reducing the position by 50% because I can’t predict how low bitcoin might fall. It could easily drop to $25,000. There are enough people in the market who, for some reason, keep selling their coins,” the analyst writes.
Tone Vays is convinced: if bitcoin does indeed drop to $25,000, there’s a high likelihood of further long-term decline. From the expert’s perspective, the first cryptocurrency is “on the edge of a cliff, and things look bad.” “The price needs to turn around immediately, I mean – this month. We don’t have the luxury to drop another month, otherwise, panic will spread in the market, and I won’t be surprised if BTC trades below $20,000. Miners will also start liquidating their holdings, which is very dangerous,” warns the specialist. (It’s worth noting that at the end of May, Vays spoke about the imminent rise of the first cryptocurrency above $30,000. The forecast turned out to be correct, but BTC couldn’t maintain that level.).
A potential trigger for the start of a bullish rally could have been the news of payment giant PayPal issuing its own stablecoin, PayPal USD (PYUSD). This was announced on Monday, August 7. The founder of the charity The Bitcoin Foundation, Charlie Shrem (Charles Shrem), quickly stated that this event would lead to a rise in bitcoin’s price to at least $250,000. Moreover, this will happen much faster than expected. In his opinion, ETH will also appreciate at an accelerated pace to $18,000, as PYUSD is issued on the Ethereum blockchain. Consequently, the price of this altcoin may increase due to a rise in the number of network users from PayPal’s clientele.
However, unlike Charlie Shrem, most experts reacted sceptically to the news, as the tool doesn’t offer anything new or useful for users. It also remains a mystery why Shrem suddenly decided that PYUSD would positively affect the price of bitcoin. Logically, the issuance of stablecoins should, on the contrary, cause a decrease in BTC’s value, as it would enhance the investment appeal of a competitor – ETH. Nonetheless, PYUSD did not act as a trigger for either bitcoin or Ethereum, which is evident from the BTC/USD and ETH/USD charts.
As a result, investors have three events in “reserve” that can potentially push the crypto market upward. These are: 1) a radical easing of the monetary policy of the US Federal Reserve, 2) the approval by the Securities and Exchange Commission (SEC) to launch spot bitcoin ETFs, and 3) the bitcoin halving.
It should be noted that the next halving is tentatively scheduled for April 12, 2024. Every 210,000 blocks or once every 4 years, it halves the reward that miners receive for mining a block. This is done to create a deflationary environment and support the value of BTC by reducing the rate of new coin issuance. (The total emission limit is set at 21 million coins). Initially, from 2009, miners received 50 BTC for each generated block. In 2012, the reward was reduced to 25 BTC, in 2016 to 12.5 BTC, and after 2020, to 6.25 BTC. When the 2024 halving occurs, the mining reward will decrease to 3.125 coins.
As a result of this event, miners will have to adapt to the new reality. They will need to acquire more powerful and energy-efficient equipment or upgrade existing ones. According to forecasts, many small companies will likely leave the market or be acquired by larger players. Consequently, a centralization of the mining market can be expected, which will be taken over by a few large pools. This will make the network more susceptible to manipulations and hacker attacks. However, a sharp increase in the price of BTC can at least partially offset these negative factors.
Many market participants expect that after this event, the bitcoin price might skyrocket once again, as evidenced by historical data. After the 2012 halving, the BTC price rose from $11 in November 2012 to $1,100 in November 2013. The 2016 halving: the price increased from $640 in July to $20,000 in December 2017. The 2020 halving allowed the coin’s price to rise from $9,000 in May 2020 to a peak of $69,000 in November 2021. However, despite these statistics, experts warn that past results do not guarantee their repetition in the future.
One of the leading figures in the crypto industry and CEO of Blockstream, Adam Back, placed a bet of one million satoshi (0.01 BTC) that the price of bitcoin would reach $100,000 a month before the halving. The bet was made as a result of a wager with a user of platform X (formerly Twitter) under the nickname Vikingo, who believes that the digital gold quotes will not reach this height until 2025.
Back’s former colleague at Blockstream, and now CEO of Jan3, Samson Mow, agreed with him. Experts from Seeking Alpha mention almost the same figure. They believe that the cryptocurrency should be worth about $98,000 for miners to stay afloat after the halving. However, a popular analyst known as PlanB, based on his S2F model, stated that by the time of the halving, BTC will be worth much less – only about $55,000.
As of the time of writing this review, on the evening of Friday, August 11, BTC/USD is trading around $29,400, ETH/USD is around $1,840. The total market capitalization of the crypto market has grown and is now $1.171 trillion ($1.157 trillion a week ago). The Crypto Fear & Greed Index remains in the Neutral zone at 51 points (54 points a week ago).