Global Markets Unfazed by Central Banks’ Moves, Risk-On Sentiment Prevails
Although the ECB and Fed implemented stricter policies and remained leaning towards higher interest rates last week, the worldwide markets didn't respond much to their actions. The positive feelings of investors sustained, leading many markets to significant gains. The German DAX index even reached a brand new record peak.
During the past week, the Japanese Yen experienced a major decrease in value and was by far the currency with the worst performance. The reason for this was due to the difference in policies between the Bank of Japan and other central banks, which negatively affected the Yen. The American Dollar also suffered a decline and followed closely behind the Yen, as it appeared that the relationship between the currency and market risk shifted. In addition, the Swiss Franc, which has traditionally been considered a secure currency, had the third weakest performance. This further emphasizes the current trend towards a higher level of acceptance of risk-taking.
On the other hand, the Australian Dollar did very well thanks to great job news and predictions that the monetary policy would get even stronger. The prices of commodities also went up after China lowered its rates, so this gave the Australian Dollar a good bump too. The British Pound was next in line, doing well because people think the Bank of England will raise rates more and people were buying a lot of it instead of other European money. Even though the European Central Bank raised its rates, the Euro didn't do as well and only came in third place.
Investors Doubtful Of Fed's Rates, US Stocks Rally
The Fed chose to keep interest rates steady at 5.00-5.25% during their recent FOMC meeting, which was expected by investors. However, they surprised many by increasing their projections for the year's median economic growth, hinting that the federal funds rate may reach a peak of 5.60% instead of the previously predicted 5.10%. This means that there may be two more increases of 25bps later this year.
Based on the latest dot plot, it has been reported that twelve members of the Fed anticipate interest rates to increase to 5.50-5.75% or exceed that mark within the coming year. In addition, the central bank predicts that the pace of interest rate reduction will be slower. It is expected to decline to 4.6% in 2024, as opposed to the previous estimate of 4.3%. Then, the rate will decrease to 3.4% in 2025, instead of 3.1%.
Despite expressing a strong stance on interest rate increases, it seems the markets have not been fully convinced. The futures market presents a probability of 74.4% for another 25bps hike in July, resulting in rates of 5.25-5.50%. Nevertheless, the likelihood of further increases for the remainder of the year is currently less than 10%. As for the first rate reduction, it is now expected to happen in January with odds of around 68%.
It's worth noting that the recent announcement of the Federal Reserve's accelerated interest rate projections didn't have much of an impact on the US stock market. In fact, the three major indexes finished the week on a positive note. The S&P 500 managed to surpass significant resistance levels at 4325.28 (which represents the 61.8% retracement of a previous trend), ultimately closing at 4409.50.
The recent progress indicates that the previous downtrend from 4818.62 has come to an end at 3491.58. This was made possible by the backing of the 55 M EMA.
It's uncertain if the increase from 3491.58 represents the second part of the restorative pattern from 4818.62 or shows a continuation of the long-standing upward trend. However, if the support at 4261.07 doesn't waver, the short-term prospects are positive. The next move should be a re-test of the 4818.62 high point.
DAX Reaches Record High Despite ECB Hike And Hawkish Approach
The ECB did what people thought they would by raising interest rates by 25 basis points. This means that the main refinancing and deposit rates are now at 4.00% and 3.50%. They also changed their forecast for core inflation, which is expected to go up more than they previously thought in 2023 and 2024. They only made a small change to the projection for 2025. At the same time, they decreased their estimate for how much the economy will grow in 2023 and 2024, but only by a little bit.
During a press conference after a meeting, Christine Lagarde, the President of the ECB, made it clear that the central bank is adopting a hawkish approach. Lagarde stressed that the institution isn't done making policy changes and stated that they still have a long way to go before reaching their goal. She commented, "Have we completed our journey? Are we finished? No. We're not where we need to be. Do we still have work to do? Absolutely."
Instead of saying "Lagarde explicitly indicated continued tightening trajectory", it could be rephrased as "Lagarde clearly stated that they plan to keep increasing rates in the near future". Using different words, the quote "Barring a material change to our baseline, it is very likely that we will continue to increase rates at our next policy meeting in July" could be rewritten as "Unless there are significant changes, it is probable that rates will continue to rise at the next policy meeting in July". The phrase "thereafter, the central bank will continue to follow a "data-dependent approach"" could be rewritten as "after this point, the central bank will base their decisions on the information and data available to them".
The European stock market investors showed no concern about the strict European Central Bank. DAX has continued to rise in the medium run and has reached a new all-time high at 16357.53. In the short term, things will remain positive as long as the 55 D EMA does not fall below (currently at 15851.59). The upcoming goal is a 61.8% prediction based on the range of 11862.84 to 15658.56 from 14458.39, which is expected to reach 16804.14.
Looking at how well the buying momentum continues, we could possibly see the DAX reach a goal of 18263.66 in the medium term. This would be the projection of 61.8% between the numbers 3588.88 to 13596.89, starting at 8255.65.
BoJ's Policy Hold Boosts Nikkei To Record High?
The situation in Japan was a bit distinct. BoJ chose to sustain the ultra-flexible monetary policy and did not make changes last week. Governor Kazuo Ueda stated outright that inflation might go down below expectations, which is why they are not normalizing the monetary policy.
The Nikkei experienced an increase earlier this week and managed to maintain most of the progress even after the Bank of Japan's intervention. It closed at 33706.07 which is its highest in the past three decades. Notably, the Nikkei stayed above a vital projection level of around 33500, which includes 61.8% prediction from 16358.19 to 30714.52 starting at 24681.74 and ending at 33533.95, as well as 100% prediction from 6994.89 to 24129.34 starting at 16458.19 and ending at 33492.64.
The short-term forecast remains positive as long as the support level at 31383.05 remains intact. The next objective is to reach the 100% projection level, which is projected to climb from 16358.16 to 30714.52, starting from 24681.74 and ending at 39119.32. This projection is close to the peak of 1990, which was 39260.00.
However, it is important to mention that the momentum of Nikkei might be influenced by Japan's decision to continue the devaluation of Yen at its current rate.
"Possible Breakout: Dollar Index At 100"
Even though the Federal Reserve was projecting higher rates, the dollar didn't do well and ended up being the second worst currency. The reason for this could be the strong rally in stock markets around the world, but we don't know for sure if the connection between the dollar and people's feelings about risk is fully restored.
No matter what, the Dollar index's recovery from the level 100.78 probably ended at 104.69. It's possible that the period of consolidation starting at 100.82 ended in a three-wave structure as well. The risk is now mainly on the negative side as long as the 55-day Exponential Moving Average remains at 103.05. We'll likely see the support zone testing at 100.78/82 next. If we decisively break that point, it confirms the continuation of the downtrend starting at 114.77.
Looking at things in the long run, it would be great if DXY finds support at 97/98. This level is significant because it corresponds to the 55 M EMA (which is currently at 97.87) and the 38.2% retracement from 70.69 to 114.77, which is at 97.93. If DXY bounces back strongly from this level, it could signal the end of the first part of a corrective pattern that has been going on since 114.77. However, if 97 is broken, the next level to watch out for would be around 93.00. This is the second line of defense for channel support.
Upward Momentum Of AUD/JPY Signals Resurgence Of Uptrend
Last week, the Yen performed even worse than the Dollar. The AUD/JPY, GBP/JPY, EUR/JPY, and NZD/JPY all experienced a gain of over 3.4%. The AUD/JPY in particular showed a strong upward movement which was visible in the breakout of the short-term resistance level and the D MACD. This indicates that the overall upward trend from 59.85 is likely to continue. The outlook for this trend remains positive as long as the support level of 94.58 is maintained. We should expect a retest of 99.32 in the near future.
We're wondering where AUD/JPY will go after passing the 99.32 mark. It might be challenging to surpass the long term trend line resistance, which currently sits at approximately 100.34. But, if AUD/JPY persistently trades above this point, it could pave the way for reaching 105.42 (2013 high) and even 107.88 (2007 high). If that happens, the next medium to long term objective will be reaching 110.43, which is the 61.8% projection of the range from 59.85 to 99.32, starting at 86.04.
GBP/CHF To Retest 1.1574 Resistance Pre-BoE/SNB
In the near future, it would be valuable to keep an eye on GBP/CHF as there are upcoming rate decisions from the Bank of England and the Swiss National Bank. The recent breakthrough of 1.1412 resistance indicates that the period of consolidation from 1.1574 has concluded at 1.1025. What's more, the increase from 1.0183 seems primed to continue.
If the trading remains consistently above the level of 1.1412 throughout the current week, it will lead to a re-evaluation of 1.1574 initially. If there is a firm breakout above this point, it will signify a positive trend in the market and the target will then be 61.8% projection of 1.0183 to 1.1574 from 1.1024 at 1.1884.
Looking at the big picture, it's too soon to say whether a change in trend is happening. However, there's a good sign of positivity with the bullish convergence condition in M MACD. If 1.1574 can be successfully surpassed, then a test on 55 M EMA (currently at 1.2155) could happen.
Last week, the upward trend of EUR/JPY continued and climbed as high as 155.23. This week, the initial momentum remains bullish, with a projected 100% increase from 139.05 to 151.60, reaching 158.67 from 146.12. However, if the minor support level of 153.08 breaks, the bias for the day will be neutral, leading to first consolidations before another upward surge.
Looking at the overall situation, there has been an increase from a low of 114.42 in 2020, and this is ongoing. The next objective is to reach 162.82, which is 100% of the projection from 124.37 to 148.38 from the point of 138.81. At present, the mid-term perspective will continue to be positive as long as the resistance at 148.38 switches to support, even in the event of a significant decline.
Looking at the bigger picture, it appears that going up from 109.03 (the lowest point in 2016) is the third part of the overall upward trend from 94.11 (the lowest point in 2012). The next aim is to reach the full projection of 100% from 94.11 to 149.76 starting from 109.03, which would be at 164.68. It could even go beyond that and reach 169.96 (which was the highest point in 2008).
