Monthly Review: January 2023: USD Weaker and Gold Higher on Fed Comments. More to Come?

Overview

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

I’ve written this blog a couple of days into February for only one reason:  Everyone was waiting for Jerome Powell and the rest of the FOMC to set their latest Interest Rate, and to conduct their briefing.  They set an increase of 0.25%, as expected.  The rest was good news and the markets reacted positively.  However, many analysts feel that the tone is too optimistic even though most expect the Fed to Pivot in Q2.  See below in the USD and US Equities sections.

In one sense, global economies are reacting favourably to the recovery of China but, on the other hand, the idea of an impending recession is putting the breaks on things.  See below regarding Crude Oil.

If you read my commentaries on the Davos World Economic Forum earlier this month you would have seen the overall synopsis of world leaders:  Good news about inflation and China, but overall, inflation is still too high.  Central Banks have more to do. More good news; Olaf Scholz and many other analysts feel that Germany will avoid a recession this year.  Let’s hope the optimism is contagious!

Regarding the balance between inflation and the labour market, Jerome Powell stated it perfectly, “Without price stability, the economy does not work for anyone” and “…we will not achieve a sustained period of labour market conditions that benefit all.”

You can watch a 6:45-minute video of Powell’s speech here:https://www.bloomberg.com/news/articles/2023-02-01/powell-holds-fire-on-markets-breaking-loose-from-fed-control

US Equities

Last month we predicted uncertainty in the markets going into January but, as mentioned, Davos gave us good reason to hope.

This chart on the NASDAQ tells the story:  Generally pessimistic since November 2021, but with price action forming a falling wedge into Q2 of 2022 and into January.  Lately, it has broken through the 200-day moving average into bullish territory and more buying occurred as Jerome Powell spoke last night.

Many analysts feel that investors are making a big mistake by investing too soon and that it will backfire as it has done before.  In my opinion, however, the COVID pandemic proved to us just how resilient investors could be.

As it was pointed out in Davos several times, this “recession” may be a weak one as corporate and banking balance sheets are quite strong, as opposed to the state of previous balance sheets, before past recessions.

USD 

Continuing on from the Overview above, the US Federal Reserve are now optimistic that they can get back to their targeted inflation of 2%.  The question is, "When?"  With a buoyant labour market, lower inflation, strong corporate balance sheets, and a strong banking sector, the Fed have said that there will be more rate increases but the overall tone last night was positive.

This drove USD weaker to continue the bear run that started in September of last year.  The month started with an attempted bull run, but reversal patterns like double tops and bottoms appeared in the first week of January, signalling that the break was only temporary.  Last night price action on USD went weaker still, based on Powell’s comments.

If you are new to Fundamental Analysis and are wondering why a rate increase would make USD weaker; it didn’t.  What made USD weaker was the attitude that, in the future, the Fed will slow down rate increases, pause, and then lower Interest Rates, maybe by the end of the year.

If you want to know more about the concept, watch our YouTube webinar on Quantitative Easing and Tightening.

A weaker USD is good news as this may alleviate the impending Emerging Market Debt Crisis that could hit us in 2024.  Fingers crossed!

As always, the US Federal Reserve will be driven by the data so keep an eye on your economic calendars and don’t forget to follow Valutrades Market Blast videos every Monday and Tuesday.

Crude Oil 

In last month’s blog regarding crude oil I stated “Then, of course, we have the fear of recession which will definitely drive prices lower.  Watch this space! “

Well, look at what happened during the last week of January!

We started the year with a classic double top, whose neckline was broken by fears of more lockdowns in China.  When the world's second-largest economy gives us any indication of a slow-down, the strong possibility of a lack of demand for crude oil drives prices lower. Then, price action rose, based on better news about the aforementioned Chinese lockdowns, then fell again based on recession fears.

We will keep an eye on this downturn as price action may be forming a falling wedge which, as we all know, is a bullish pattern.

Asian Equities

After November, we quoted some big money managers saying, “Get back into Asia!”  They obviously did but it looks like investors sold their Aussie and Japanese equities to buy in China and Hong Kong.

Price action continued its bull run through January and we see a slight pullback.  Is it time to “Buy the Dip”?  Let’s chat about this in next week’s videos.

EUR and GBP 

If you are reading this on the day of publishing, please be aware that both the European Central Bank and the Bank of England will be announcing Interest Rate decisions later today.  Both banks are fighting inflation and, the chart below shows that EUR is winning out over GBP as the stronger currency.

We will look at the results in Monday’s Market Blast Fundamentals video.

Gold 

As we all know, a weaker USD means that Gold expressed as XAUUSD, will react inversely to the price action of USD. Also, with an impending recession, investors often see Gold as a safe hedge.

Well, that’s what happened last night with Jerome Powell and the FOMC driving the USD lower.  XAUUSD continued its bull run with a big jump!

The question on everyone’s mind is, “How high will it go?”

If we believe the XAUUSD Weekly chart, $2075+ is a key level of resistance.  The stochastic oscillator is in bullish confluence, MACD has risen into bullish territory, and the little dots on our bullish parabolic SAR are spread out quite nicely.  Let’s see!

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