FUNDAMENTAL ANALYSIS
Carl Braganza
AUD/USD
The Australian Dollar rallied 1.53% against the greenback in the past week to hover around 0.7518. The continued strength this week has been despite the US Federal Reserve’s hawkish stance, with Fed chairman, Jerome Powell, reiterating the possibility of a 50 basis point increase in the near future, which would widen the interest rate differential. Risk-on sentiment, soaring commodity prices and favourable manufacturing data helped to stifle the impact of Powell’s comments and push the AUD higher over the week. Brent crude rose more than 4% this week to top $110 per barrel, and the price of coal, Australia’s second most valuable mineral export, firmed 3% to $325 an ounce. This will have a positive impact on Australia’s terms of trade and lead to improvements in our current account surplus. Furthermore, news this Thursday showed that Australia’s purchasing managers’ index (PMI) rose from 57.0 to 57.3, with the services component growing from 57.4 to 57.9. This has reaffirmed the strong recovery of the Australian economy as the country progresses away from the plethora of coronavirus lockdowns and restrictions that were in place for much of 2021 and early 2022.
EUR/USD
The overwhelming event impacting markets right now is the Russia-Ukraine Crisis. Sanctions imposed on Russia will have a collateral impact on the European economy, with analysts downgrading the 2022 EU GDP growth outlook. Barclays, for instance, sees GDP at 2.4 percent this year and 2.1 percent next year. ECB president Lagarde stated on the 21st that the Fed and the ECB will move out of sync in the future as a result of the Russia-Ukraine Crisis, having a more severe impact on the European economy. On March 17, Lagarde also stated that the ECB “will be in no hurry to raise interest rates and any move will be gradual.”
This is in contrast to the hawkish stance of the Federal reserve with 10-year yields reaching a two-year high at 2.5%. Right now, according to the CME’s fedwatch tool, the markets have priced rate hikes of 75-100 points at 68.3% for the May 4 Fed meeting. It is to be noted that American Non-Farm Payroll statistics come out this week on Friday and ISM manufacturing on Saturday.
GBP/USD
The Bank of England raised interest rates by 0.25% on Thursday last week. More significantly, the markets noticed the Bank of England’s more dovish message about futures hikes due to the economic uncertainty of the Russia-Ukraine Crisis. This sent British bond prices on their biggest two-day advance in one month. Higher bond prices means lower yields and is therefore bearish for the pound. Markets will also price in the lower probability of future rate hikes. The monthly correlation of GBP/USD to EUR/USD has been at 80% since September 2020, furthering the downside from collateral economic damage from the Russian-Ukraine Crisis.
This is in contrast to the hawkish stance of the Federal reserve with 10-year yields reaching a two year high at 2.5%. Right now, according to the CME’s fedwatch tool, the markets have priced rate hikes of 75-100 points at 68.3% for the May 4 Fed meeting. It is to be noted that American Non-Farm Payroll statistics come out this week on Friday and ISM manufacturing on Saturday.
TECHNICAL ANALYSIS
Vikas Arkalgud
AUD/USD
The Australian Dollar showed strength this week, topping at 0.7518 due to positive sentiment and healthy PMI data. It has broken out of a long-term descending triangle on relatively high volume, which gives a strong indication of a bullish reversal. The movement of the MA, EMA and the increased MACD divergence all support this hypothesis. However, with the RSI at 67.8 and fast approaching 70, it is nearing overbought territory. It will be interesting to see if the AUD will respect the breakout by retesting the top trendline at the 0.74 area, or if it will fake out and revert back towards the 0.70 support area. If the former occurs, 0.8400 could be a key long-term price target.
EUR/USD
The Euro has risen moderately over the past week to hit 1.105USD. However, the pair is still in a long-term bearish trend, with the 52-day EMA having crossed below the 200-day EMA in August 2021. It will be interesting to see whether the pair re-enters the sideways market which occurred last summer, with support and resistance lines at 1.112 and 1.149, respectively.
The MACD line crossed above the signal line on Wednesday 16 March, thereby indicating some bullish momentum for the pair. However, the RSI shows a neutral reading of 45.82, thereby not giving an overbought or oversold condition for the past week.