Past week was marked by a two-day speech of Janet Yellen, the head of the US Fed. Mrs. Yellen did not give a straightforward answer regarding the interest rate increase at the US Fed meeting in March. Moreover, Mrs. Yellen said that the Fed had considered probability of the short-term negative interest rates, which increased investors’ concern about economic recovery in the United States.
Market participants believe that the US Fed drop the idea of the interest rate increase this year or increase the rate twice at the end of the year instead of 4 times rise as was previously planned.
The growing concern about the increasing instability in the global financial markets has forced investors to invest into safer assets, such as gold, bonds, safe-haven currencies.
Spot price of gold exceeded $1260.00. Over 1.5 month gold has regained all losses of the year, as its price has grown over 10% since the beginning of the year. The rise in price was accompanied by sales in the European and American stock markets. European stock index StoxxEurope 600 has reached the lows since 2014; index of London stock exchange FTSE 100 closed at the lowest level since July 2012.
Market this week will be affected by the meeting of ECB and monetary policy in Eurozone. Outcome of the meeting will become known on Thursday at 14:30 (GMT 2). Other important news of this week will include minutes of the last meeting of the US FOMC on Wednesday at 21:00. This information can shed light on the sentiments of the Committee members and further monetary policy plans in the USA.
Since the beginning of the month the pair EUR/USD has grown over 500 points. Nevertheless, last Friday investors started to open short positions in the pairs of the USD with the Yen, gold and Euro.
ECB is now in the difficult situation. If US Fed refuses from the idea of the interest rate increase in March, European Central bank will have to introduce aggressive measures to the monetary policy easing in Eurozone. Economic situation in Eurozone is worsening. Back in January the head of European Central bank Mario Draghi said that at the meeting in March the bank would reevaluate and revise monetary policy. If ECB will expand QE program in March, the pair EUR/USD will sharply go down.
Today, at 16:00 (GMT 2) a speech by Mario Draghi is scheduled. If he highlights increasing risks to European economy and indicates probability of expansion of the quantitative easing program in Eurozone, European indices will start to rise, causing sales in the pair EUR/USD. The pair EUR/USD is oversold and correction, which started last Friday, may continue if Mario Draghi satisfies expectations of the market. The rise in European and American indices will also trigger the rise in the USD.
Earlier this month the Bank of England left interest rate in the UK at 0.5%. The head of the Bank of England Mark Carney has said that there are no conditions for raising interest rates in the UK.
In the quarterly inflation report, the Bank of England has lowered its growth forecast for the UK economy for 2016 and 2017 (up to 2.2% and 2.4%, respectively). Additional pressure on the pair GBP/USD was caused by the possibility of negative results in referendum on the UK's membership of the EU, which will take place this summer.
Short-term correction in the pair GBP/USD is possible. The pair will remain under pressure during the week and in the medium term.
On Tuesday at 11:30 price indices will be published, which indicates the rate of inflation in the UK, they will include the index of purchasing and selling prices of manufacturers in January. In December the indices showed decline, suggesting weakening of the inflationary pressure. The consumer price index in December was close to zero.
On Wednesday at 11:30 the data on unemployment and wages in December will be known. Volatility at this time will be high, and this should be considered when making trading decisions.
The pair GBP/USD is declining in the downward channel on the daily chart with the lower border below the level of 1.4000. The reversal and the rise in the pair GBP/USD will be possible after breakdown of the strong resistance level of 1.4600 (ЕМА50 on the daily chart and the April lows). Downtrend continues.
The pair USD/JPY showed high volatility in the past two weeks. After the unexpected decision of the Bank of Japan to introduce negative deposit rates at its meeting January, the pair USD/JPY rose sharply. However, since the beginning of February, the decline in the pair resumed with renewed vigor.
Japanese data released today showed the decline in GDP in Q4 by 1.4% on annual basis. This was the second wave of decline in GDO over the past three quarters. Consumers reduce expenses and investors’ concerns about the state of economy are growing. According to today’s statistics, industrial production fell in December ((-1.9 % on annual basis versus the forecast of -1.6%). This statistics shows that Japanese economy is weakening and incentives measures introduced in the country arose criticism. Despite large-scale QE, inflation rate is close to zero, wages are decreasing and economic recovery is slow.
Based on the economic data the Bank of Japan can introduce additional measures at the meeting on 14-15 March, if the pair USD/JPY will remain below the level of 115.00. The rise in the pair USD/JPY and in the stock market will depend on the measures introduced by the ban.
Meanwhile, uncertainty of the investors about stability of the global financial markets will trigger the decline in the pair USD/JPY to support levels of 111.50 and 108.00, and moving average lines with the periods of 144 and 200 on the daily chart.