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The Battle of XAUUSD. Inflation Fuelled by Supply Chain and Labour Issues.

   

Overview

Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout February and beyond.

The good news is that many major economies have come to the realisation that the latest flavour of COVID — Omicron — while wildly contagious, will not likely clog up hospitals and, we hope, it will only be a matter of time before we can get on with our normal lives.

Central banks were still struggling with inflation and supply chain issues are now the scourge of the entire planet and raising interest rates may be a double-edged sword as central banks need to balance inflation with fragile economies.  The idea of Interest Rate rises spooked the global equity markets but many investors suddenly “Bought the Dip” at the end of the month and got on with it.

Price action on crude oil is still flying high based on energy inflation caused mostly by the Ukraine situation.

Crude Oil

Since the beginning of the COVID pandemic, the price of WTI and Brent Crude had been driven by supply and demand forces.  Lately, however, prices have been driven by perceived demand with the supply of Natural Gas being threatened in Europe.  Also, the threat of geopolitical disruption in Ukraine has kept prices higher.Screenshot 2022-02-01 at 14.44.38

However, the US Energy Information Administration (EIA) is predicting that prices will fall, throughout 2022 and 2023, due to decreasing consumption and increased production.  OPEC+ is on the same page with a predicted increase in production of 400,000 barrels per day in March.

US Equities

After starting the year at all-time highs, indices like the Dow Jones Industrial Average declined dramatically throughout most of January.  Why?

The idea that the US Federal Reserve will be rising Interest Rates to fight inflation impacts most corporations as borrowing and mortgage costs will rise, thereby affecting the bottom line.  Also, the threat of COVID Omicron was another uncertainty.Screenshot 2022-02-01 at 15.34.28

Finally, near the end of the month, investors got tired of sitting on the sidelines, a buying and selling frenzy began, and the bulls seem to be winning.  Also, economies and health services all over the world have come to the realisation that Omicron, while wildly contagious, is putting less of a strain on hospitals.

Time to get back to normal?

The big debate in US investors’ minds is just how many times the Fed will raise Interest Rates this year.  My own personal feeling is 3.  Many investors, including big banks, are saying 7!  Check back with me in December and we will see.

USD

As we can see from the charts, the month of January was literally down, up and down again for the Greenback.Screenshot 2022-02-01 at 16.34.27

As we discussed in the chapter above (US Equities) the market has been torn by inflation fears, COVID fears, the impending tapering of bond purchases and the moveable feast of 3 to 7 Interest rate rises this year.

The recent fall in USD (yellow boxes on the chart) was caused by a rush away from cash as investors “Bought the Dip” and entered the equities market once again.

February will be an important month for USD, with this week’s NFP report and constant questions and rhetoric from every US Fed member.

GBP

Again, the charts tell the story with price action on GBP pairs resembling more of a rollercoaster than any kind of a market to which we might be accustomed.  As well, almost every pair behaved differently.Screenshot 2022-02-02 at 09.43.03

The Bank of England was the first major reserve bank to raise Interest Rates in the face of inflation caused by supply chain and labour issues.  We will see in the first week of February if there are more rises to come.  Of course, any rise in rates will cause GBP to grow stronger.

The UK is also the first major economy to take a “let’s get on with it” attitude to the COVID pandemic with the Omicron variant unlikely to clog up hospitals and health services as previous variants did.  However, the BoE governor, Andrew Bailey, is quite concerned about the Ukraine/Russia situation and how this will impact energy prices and inflation in general.

Through February and beyond, we predict more GBP volatility, with the factors above, and the growing instability in the UK government with Boris Johnson facing huge criticism over his handling of “gatherings” during the height of the COVID pandemic.

NZD

By far, the weakest major currency of January was the New Zealand Dollar and the charts tell the story.Screenshot 2022-02-01 at 13.48.24

However, this is just a continuation of weakness from October 2021 and even the Reserve Bank of New Zealand’s Interest Rate rise, from 0.25% to 0.5% in October and again, to 0.75% in November, was not enough to slow the slide.

Looking into February, they have another chance to raise Interest Rates on the 23rd of the month but the markets still feel they are lagging behind.Screenshot 2022-02-01 at 14.05.33

Regardless, we will be looking for technical opportunities but you will need to examine your Daily charts on pairs like NZDUSD, EURNZD and NZDJPY to find support and resistance.

Gold

As the value of USD increases and US bond yields rise, price action on XAUUSD falls.  On the other side, geopolitical risks, like the Russia/Ukraine situation, will drive Gold higher.  This is the grand battle within XAUUSD.

Screenshot 2022-02-01 at 20.42.21January saw a steady rise in Gold but ended in a dramatic fall due to the fact that the markets are finally catching on to the Fed's Interest Rate rises starting in March.

To properly view this battle from the technical standpoint, we have to look at the daily chart and we can see consolidation in a symmetrical pennant which started about a year ago.  The questions are, when will price action break out and in which direction.

We see this consolidation lasting for a least one more month until the US Fed gives us a better idea on how it will handle inflation and some calming of the Russia/Ukraine situation.  

That’s all for now.  Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of February.

Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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