An interesting spread on metals
12 January 2022
A fundamental aspect of trading
20 January 2022
Today I want to publish an analysis that Hannah, one of my readers, sent me because I find it very well done. I do this with a touch of pride, so my books are good for something. Hannah has analysed Eur-Usd and you can read it below.
First, let me show you the chart with the most significant levels highlighted.
Now, I start with my analysis.
Eurozone
Pros:
- Interest rates remain unchanged for the moment even though Christine Lagarde, although sceptical about a rate increase in Europe, is ready to change her mind if necessary.
- Tapering.
- The Euro has become one of the main currencies of foreign reserves.
Cons:
- Increased Omicron cases all over Europe and looming lockdowns.
- Ukraine, Russia conflict natural gas supplies. European energy prices continue to surge creating fears among Businesses.
- Inflation hits record high. Global supply chain disruption is weighing on activity in the EU manufacturing are pushing inflation higher.
- Labour shortages are pushing up wages in some sectors but for many earnings are not keeping pace with higher prices of goods resulting in lower consumer spending.
- Zew sentiment improved to 26.8 (Nov 25.9 and Oct 21) but it was at 31.1 in Sept and 42.7 in Aug.
- Legislative election in Portugal (30 January) and the presidential election in France (10 April).
United States
Pros:
- The stock market is holding steady despite dipping in Jan on omicron fears, but over all, it has not dipped more than 10% as of yet. Higher yields and hawkish Fed are still a worry for investors.
- World’s reserve currency.
- Domestic consumption-based economy.
- Currency used for international trade.
- Three projected interest rates hike in 2022 will bolster the US dollar.
- Imports are cheaper with a stronger US dollar.
Cons:
- Increased omicron cases may impact on employment figures as many Americans refuse to return to offices.
- International policy (Iran, North Korea).
- US budget deficit is still very high.
- Manufacturing has gained jobs but nowhere near enough to replace the loss since Covid 19 lockdowns worldwide. And with concerns that Omicron strain of Covid-19 could contribute to supply chain disruption and weigh on global economic growth have also weighed on riskier assets.
Macroeconomic analysis.
After the US GDP grew at a faster pace than the Eurozone in the previous two quarters, the Q3 figure released in October 2021 shows the Eurozone's GDP (2.2%) growing at a faster pace than the US (2%).
The unemployment rate in the last year has fallen in both the Eurozone and the US, but at a very different rate as shown in the graph below (constructed by subtracting the US figure from the Eurozone figure).
As you can see, since July 2021 the differential between the two rates has steadily increased, reflecting a greater fall in unemployment in the US than in the eurozone.
The Eurozone unemployment rate is at 7.2% from 8.3% in January 2021, below pre-pandemic levels (7.3% in April 2020). The US unemployment rate is at 3.9% from 6.7% in January 2021, still above but very close to pre-pandemic levels (3.5% in March 2020).
As for the main theme of the world economy, particularly the US economy, below you can see the graph of the Consumer Price Index (also constructed by subtracting the US figure from the Eurozone figure).
The graph clearly shows that inflation in the US is growing at a faster pace than in the eurozone.
With the next graph, here is how all this translated into consumer spending with the Retail Sales figure (I added up the monthly data).
After strengthening the figure in early 2021, there has been a gradual recovery, nothing dramatic, of the Eurozone figure, confirming that rising inflation in the US is beginning to be felt somewhat in consumption.
The macroeconomic picture that emerges is one of a stronger US economy than that of the eurozone, but one that has nevertheless seen the latter appreciate more in several areas in recent months.
From last meetings
ECB 16 December 2021
The ECB on last meeting laid out a plan to phase out the pandemic emergency purchase program (PEPP), a so-called "non-standard monetary policy measure" initiated in March 2020 through which the ECB looked to support the euro area economy by purchasing public and private sector securities. Meanwhile sent a clear message that it would keep its asset purchase program running, among other measures, to support economic recovery.
As the rising cost of living clouds global economic recovery and prompts central banks across the world to taper down stimulus or raise interest rates, the ECB plays down the threat of price hikes and remains reluctant to scale back accommodative measures.
The ECB revised up its forecast of inflation for the euro area to 2.6 percent in 2021, 3.2 percent in 2022, markedly higher than its projections in September. However, the bank still shrugged off the inflation concern and stuck to its forecast that inflation will decline in 2022.
Fed Minutes meeting 14-15 December 2021
The minutes from the Fed's Dec. 14-15 policy meeting offered more details on the central bank's shift last month toward a tighter monetary policy to curb inflation. Policymakers said last month that the U.S. labour market was "very tight." This is more hawkish than expected. So, the central bank may have to raise interest rates sooner than expected.
A rate hike at the 25-26 January meeting would surprise the markets which currently give a 96.9% probability that rates will remain unchanged. While the probability of a rate hike at the next meeting on 15-16 March of 25 basis points is 83.1% when a month earlier it was 31.2%.
U.S. consumer inflation running at levels not seen in more than a generation will keep the Federal Reserve on track with interest rate hikes and other changes expected in coming months to try to tame the surge in prices. Inflation hit 7% in December, with price increases spreading to a broader set of goods and services, according to the latest Consumer Price Index (CPI) data released on Wednesday.
Fed Chair Jerome Powell said last year that he has been monitoring to see if inflation will ease on its own. So far it hasn't happened. Sorry Hannah I add my personal comment, for the series, “I don't know what to do, I hope for providence.”
Conclusion
In my opinion, both countries will be facing economic difficulties in 2022. And the road to recovery is not as smooth for the following reasons.
- Supply chain disruption are global issues and that will affect imports/exports in both countries
- High Inflation is also a concern, hence a reduction in consumer spending in both countries.
- Energy crisis is mainly a European problem, which will impact consumers’ pockets heavily. Equally, rising Oil prices will cause an increase in the cost of transportation that affects Americans more than Europeans for their reliance on cars as the only mean of transportation to get to work.
- As a result of higher oil prices, most goods will increase in prices contributing to a higher inflation level.
- The airline industry will see a reduction in tourism and travel globally.
- China’s growth is slowing down which has a direct impact on the US economy.
- Omicron surge may push for a fresh stimulus package for small businesses in the US
- In November, a record-breaking 1 million leisure and hospitality workers quit - showing that workers might be pushing back against a wage shortage.
I will not trade this pair for now. From the analysis, the US economy, despite the sharp rise in inflation, remains stronger than the European economy, and the macroeconomic analysis also showed this. However, the improvement in Eurozone data compared to the US in recent months (excluding the unemployment rate, but it should be taken into account that the Eurozone rate has already returned below pre-pandemic levels, something that the US rate has not yet done), the uncertainty regarding inflation, interest rates and the end of the ECB's immobility with the probable tapering, should make Eur-Usd rebound with a target in the 1.15500/1.16000 area.
Here, then, the new data that will come out in the coming weeks should tell us something more. Especially how high inflation will affect consumer spending.
This is the analysis sent to me by Hannah, whom I thank and congratulate.
In this article, I want to publish an analysis that Hannah, one of my readers, sent me because I find it very well done. Hannah analysed Eur-Usd and reported her conclusions at the end. Happy reading!
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
2 Comments
I have ordered one your books (forex fundamental analysis). I’m waiting to have a read when I receive. i have studied technical analysis but want more of a long term trading based on fundamental analysis. please do you offer mentorship. thanks
Hi Sam,
I’m sorry but I don’t offer mentorship.
Have a nice day!
David