Markets Report - 22 August 2022

A daily breakdown of the markets for the 22nd August 2022, provided to you by Sterlex.

🇪🇺💶EUR/USD hovers around the parity level, or multi-week lows, in a context clearly favoured to further dollar strength. The daily decline in the pair comes along another positive performance in the German 10y Bund yields, which already approach the 1.25% region. Sellers remain well in control of the sentiment surrounding the European currency and drag EUR/USD to levels just below parity at the beginning of the week. Price action around the European currency, in the meantime, is expected to closely follow dollar dynamics, geopolitical concerns, fragmentation worries and the Fed-ECB divergence. On the negatives for the single currency emerge the so far increasing speculation of a potential recession in the region, which looks propped up by dwindling sentiment gauges and the incipient slowdown in some fundamentals.

🇬🇧💷While further GBP weakness is not ruled out, the downside risk appears to be limited, at least for today. Resistance is at 1.1885 but only a break of 1.1935 would indicate that the current GBP weakness has stabilized.” The inflation rate is accelerating in the UK zone dramatically and in order to pay off the higher payouts, improvement in the wage rate was vulnerable. Therefore, the BOE policymakers were not deploying the tightening quantitative measures with full independence. Now, the meaningful improvement in the labor cost index will delight BOE Governor Andrew Bailey while drafting the monetary policy. While conditions are oversold, a break of the year-to-date low near 1.1760 would not be surprising. 24-hour view: “The sharp and rapid drop in GBP last Friday is deeply oversold. To look at it another way, GBP could drop further but a sustained decline below July’s low near 1.1760 appears unlikely for now (next support is at 1.1730). Resistance is at 1.1850 followed by 1.1885.” Next 1-3 weeks: “The sharp drop in GBP last week has gathered considerable momentum and further GBP weakness appears likely. In view of the oversold conditions, the pace of any further decline is likely to be at a slower pace and 1.1730 is expected to offer solid support.

🇺🇸 🏦The greenback, in terms of the US Dollar Index (DXY), maintains the bid bias well and sound for yet another session and extends the upside further north of the 108.00 hurdle. DXY, in the meantime, is poised to suffer some extra volatility amidst investors’ repricing of the next move by the Federal Reserve, namely a 50 bps or 75 bps hike in September. Hawkish rhetoric from Fed’s rate-setters coupled with deteriorating sentiment in the risk complex propel the index back above the 108.00 barrier, exposing at the same time a probable move to cycle highs north of 109.00 in the near term. Bolstering the dollar’s strength appears the firm conviction of the Federal Reserve to keep hiking rates until inflation looks well under control regardless of a likely slowdown in the economic activity and some loss of momentum in the labour market. The index advances for the fourth consecutive session and navigates 6-week peaks well past the 108.00 yardstick, as market participants continue to assess the recent hawkish messages from FOMC governors ahead of the key September meeting.