GemForex - weekly analysis

The week starts on negative sentiment as Friday‘s jobs report couldn’t prevent the selloff from

extending in the US. And more importantly for the Europeans, Gazprom didnt restore gas flow to

Europe on Saturday, as planned.

As for Europe, the ECB now faces a more difficult task as divergence among central banks seems to be

increasing again. The ECB's task is far trickier than that of the U.S.: it must juggle multiple nations under

deteriorating fundamentals and is likely to keep the euro under pressure through 2022.

In the other news of the previous week, after the slow realization that the winter ahead will be indeed difficult, people in many countries start feeling the pressure escalating. After the refusal of the EU to fix food security, energy security, and surging prices for people and businesses, apart from throwing money at it every once in a while, some people in nations like the Czech Republic, Netherlands, Germany, and France, already gather in growing numbers on the central public places in their cities, Prague being the highlight with an estimated 70000-100000 people gathering against the government, demanding neutrality and energy solution via their own means, which Czech PM Fiala called as a “Russian-sponsored” gathering. Regardless, the Russians will be the least of the European worries when the situation hits the fan rapidly in the wintertime. According to estimates, 6 out of every 10 factories just in Germany alone, will be forced to shut operations due to insane margins of operation.

On the FX front, the EURUSD continues pushing lower before parity this Monday and is dipping below the 0.99 support at the time of writing, with more chance of breaking this support in the coming hours than the contrary.

This week is important for euro traders, as the European Central Bank (ECB) is expected to announce a sizable rate hike at its Thursday policy meeting. Many traders now expect a 75bp rate hike from the ECB this week, while some continue to bet on a 50bp hike, on the idea that the ECB cannot carry on jumbo rate hikes when the Eurozone is threatened by a deepening energy crisis and a sharp fall in economic activity. But the eurozone is also struggling with skyrocketing inflation, argue the hawks.

And it's also an important day across the Channel, as Britons will find out who their next Prime Minister will be. The polls are pointing more and more in the direction of Liz Truss, unfortunately for the pound, because a Truss victory will plunge the Bank of England's expectations into chaos, as it seeks to abolish inflation as a target for monetary policy and rely on another metric, such as growth for example.

Along with tax cuts and additional spending to freeze energy bills, for example, the UK's sputtering macro numbers could continue to expand under Truss' leadership in the coming quarters. Cable started the week below the 1.15 mark. But we could see some profit-taking and a sell-the-fact rally in the pound if Liz Truss' victory is confirmed. Still, the pound is expected to continue its path to parity against the US dollar as the dollar continues to rise relentlessly. The dollar index is already up more than 0.50% this morning.

In other news, three central banks are expected to raise interest rates this week. The Royal Bank of Australia is expected to raise the policy rate by 50 basis points to 2.35%. While Governor Philip Lowe recently stated that the neutral rate for Australia is at least 2.50%, rates should be close enough to neutral after this week's hike. So markets are eager for further clues as to what will happen next. It is unlikely that the RBA will reveal much about the final interest rate. However, there could be some twists in the statement that set the stage for slower tightening after the neutral period.

The BoC is expected to raise rates another 75 basis points to 3.25%. Rates are then expected to be in the restrictive range, with the BoC setting the neutral range between 2% and 3%. There are some wild cards for the meeting. The BoC could hike as expected, signaling that the path ahead depends on the data and slowing the pace of tightening. Or the BoC could make an even larger hike and signal a pause. The end result would then be of interest.