Weekly market overview January 28 - February 1.

Traders and investors were seeking confidence to continue the recent trends this past week. Besides the ongoing stories in geopolitics such as US government shutdown, the Brexit and US-China trade negotiations, financial markets were focusing on monetary policy update and latest employment report in the United States, as well as important macroeconomic data in other regions. The vast majority of expectations has been confirmed by the headline events this past week, which fueled most asset classes to keep trading with the same tendency as at the beginning of the current year. The volatility was comparatively low though, sharp whipsaws and spikes were almost absent. The combination of those factors made the price action rather predictable, and modest but stable profits were gained as a result.

US equities showed the best monthly performance in 30 years this January which was caused by three main factors. First, the Federal Reserve cooled the market’s cautiousness down regarding the interest rates’ negative impact on the economic growth. The Federal Open Market Committee met last Wednesday for the rate decision and left the financial conditions unchanged in accordance to the markets’ expectations. Moreover, the economic statement underlined the need for a pause in the tightening cycle, painful talks on the balance-sheet reduction were absent and Chairman Powell used more dovish rhetoric. Second, the current corporate earnings season is mostly positive as companies report robust profits in the fourth quarter of 2018, despite investors’ worries about the economic slowdown. Third, the Non-Farm Payrolls report surprised economists with the much stronger-than-expected figure of 304 thousand jobs added in January, despite the government shutdown. The three-month average was updated to +241K, which is a very high gain of the labour market. The lack of earnings growth (+0.1% versus 0.3% month-over-month and 3.2% year-over-year)) would not cause too fast inflation which doe not give any justification for the Fed to hike the interest rates in the nearest future. The only problem was that the unemployment rate jumped back up to 4.0% compared to 3.9% recently, however, that was mainly ignored. Having all those factors in mind, investors were willing to risk, buying high-yield assets last week.

The US dollar index was sliding lower versus its major peers after the FOMC statement as the positive gap in the interest rates should not rise in a sustainable matter in 2019, lowering the attractiveness of the greenback for foreign fixed-income investors and speculators. DXY managed to recover some losses on Friday after the positive NFP report but that rally was short-lived and restricted to several specific currency pairs like Euro and Japanese yen, for instance. The largest greenback’s decline was noticed against commodity currencies (AUD, NZD and CAD) and emerging markets assets, while the British pound was one of the weakest currencies among majors last week. The lack of any crucial macroeconomic reports would not support the greenback next week, so Friday’s price action has to be considered as nothing but retracement.

Euro failed to break through the local round-figure resistance at 1.1500 this past week. There was just a short-term spike above that mark on Thursday as European traders were absorbing the Fed’s dovishness and greenback’s weakness across the board. The single European currency lacks the bullish momentum due to the weakness in the fundamental side of things. The German Manufacturing Purchase Managers Index fell to 49.7, the lowest value in 11 years. The European GDP report came in exactly in line with the market’s expectations, while Consumer Confidence, Retail Sales and the Labour market showed weakness. ECB President Mario Draghi spoke on Monday, repeating the same position to postpone the beginning of the tightening cycle. Those negative reports caused the bearish pullback and EUR/USD slid back toward 1.1450 local support. The upcoming week should bring some light into the current economic situation with Eurozone PPI, retail sales and GDP updates scheduled to release. However, the general direction will be influenced by the greenback’s sentiment across the board.

The British pound failed to hold the last week’s gains, losing more than 100 pips on the back of Brexit uncertainty. British Prime Minister Theresa May did not impress investors with her ‘Plan B’ update. The problem is that changes are quite gentle compared to the deal that has been rejected by the British Parliament earlier in January. Politicians were trying to force May to start a new round of the negotiations with the European Union but Brussels refused. Article 50 was not postponed either, while the Irish backstop issue was not resolved at all. The economic calendar did not bring anything positive as well. British Manufacturing PMI dropped to 52.8 compared to 54.2 in December. BoE Deputy Governor Woods did not support the Sterling bulls during his speech, underlining that it’s too early to talk about the tightening cycle of the monetary policy. The risk is on the downside for the pound in the upcoming weeks unless politicians were able to impress investors with a positive breakthrough in the Brexit saga. Sterling cross-rates are the most vulnerable pairs for more weakness due to the upcoming Parliament vote scheduled for February 13.

Commodity currencies were outperforming the foreign exchange market. The Australian dollar has finally breached the resistance of 0.7200 after two failed attempts. Moreover, AUD/USD tested the weekly high of 0.7293 on positive fundamental events. The main driver of the rally was Australian inflation report as the Q4 Consumer Price Index surprisingly jumped to 0.5% quarter-over-quarter compared to 0.4% previously while the yearly calculation gained strength as well (1.8%). The Manufacturing PMI was also strong and the Business Confidence recovered somewhat. All that data adds pressure on the Reserve Bank of Australia which meets next week for the interest rates decision. Although ‘unchanged’ verdict is widely anticipated, the RBA officials told clearly that future changes of the monetary policy are possible on the upside only and it’s just a question of time for the regulator to start hiking. The Aussie should also gain more strength in case if the economic data remained strong with retail sales, trade balance and services PMI to be released this upcoming week. The New Zealand dollar also gained strength past week but the rally was not so sustainable and NZD/USD was pressured due to the soft consumer confidence, while USD/CAD was falling mainly due to the surging price of oil (WTI Crude closed the week above $55 per barrel, 2-month high), as the Canadian GDP report did not support the Loonie, matching the market’s consensus.

It’s also worth mentioning precious metals as gold and silver are getting ready for a bullish breakthrough, according to the technical and fundamental analysis. Spot gold tested the water above $1320 per ounce last week, the first time since May 2018. That bullish achievement was possible to the Fed’s dovish rhetoric and shifts in the fixed-income markets, especially in the US 10-year Treasury yields. There were also rumours of central banks buying golden reserves across the globe and Asian jewellery-based demand. Friday’s price action was more like profit-taking and technical retracement but the depth of the slide was not large enough to convince analysts in a potential trend reversal. Further upside action is very likely if the fundamental environment remained the same next week. The nearest resistance is placed at $1358.17 per ounce, which is the highest daily close in 12 months.
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