Weekly market overview January 14 - 18

Geopolitics were dominating in past week’s headlines, overwhelming macroeconomic data in the influence on global financial markets. The main story was Brexit again as the UK Parliament voted May’s deal down. US government shutdown kept breaking longevity records with the fourth week of the stalemate as local politicians did not achieve any compromise on the border wall funding, leaving 800000 federal employees without paychecks. Trade war tensions eased between the two largest world’s economies after significant steps made from the Chinese side at the end of the previous week. Global equities reacted with a positive sentiment, US stock indices were leading the gains fourth week in a row. In the currency market, a temporary divergence was noticed for the US dollar index, as the world reserve currency was strengthening versus its major peers despite the lack of any optimism in macroeconomic reports released this week. In commodity market, precious metals were mostly flat, while oil continued the recent uptrend, adding another 4.3% to its value.

Democratic House leader Pelosi had to cancel her overseas trip last week due to the government shutdown issue. Trump’s administration faced a stronger pressure and became more anxious due to the lack of any development in the shutdown situation. Some economists calculated that the negative economic impact of the stalemate could reach 0.5% of the GDP growth due to the slowdown in the consumer spending and investment. US equities ignored the lack of progress in the issue, underlying the rule of ‘no news is good news’. Moreover, the risk appetite accelerated the buying pressure after to key events last week. The first one was related to rumours that anonymous mystery Buffet-like trader made a huge bullish bet on S&P 500 with enormous volume. The second reason to accelerate growth came in from the U.S.-China trade war negotiations. The second largest world’s economy is dependant on exports to the United States and potential rise of import tariffs to 25% from the current 10% level might hurt the economic growth in China. Therefore, the government officials made a huge offer to boost US imports in the country up to 1 trillion dollars, cutting the negative surplus of the trade balance significantly.

The US dollar was in demand across the board with a couple of exceptions though. Several crucial economic reports were published, however, currency traders did not pay enough attention, increasing long positions for the dollar index. So, producer price index declined the first time in 4 months, however, inflation dropped less than it was expected. Philadelphia region improved the recent manufacturing activity, while US consumer confidence hit a 2-year low. The government shutdown played its first positive role, delaying two major reports - Retail Sales and Trade Balance. Anyway, the US economy confirmed the slowdown by recent data, raising questions about the greenback’s long-term attractiveness. USD/CAD was the exception in the list of weakening major currencies due to the speculative flows supported by appreciating oil prices. The crude oil inventories report was positive for the black gold.

The other strong currency was the British pound. A surprising reaction from Sterling traders has been noticed after the failed vote in the British Parliament which refused to support Theresa May’s Brexit deal with the European Union. Nevertheless, she was able to withstand the non-confidence motion, remaining on the position of Prime Minister. Next steps are keen on clarifying further developments of the Brexit saga, as Theresa May should get a Plan B ready my Monday. The most likely scenario is based on an extension of Article 50, prolonging terms of the UK leaving EU. Such an option is not favourable for EU officials, however, a non-deal Brexit would be even worse. There are also talks to cancel Brexit at all, which should be the best option for all sides, in our opinion. GBP/USD tested 1.3000 last week, the first time in two months. The British Pound was also strong versus other majors, including EUR/GBP and GBP/JPY cross-rates. Such a sustainable performance underlines the market’s disagreement with current oversold levels of the cable compared to other currencies.

Theresa May
Source:Sky News

Fixed-income markets were focusing on Italian government bonds which were sold off last week. Those worries spread onto the foreign exchange market, affecting the single European currency decline. EUR/USD failed to hold gains from the previous week, sliding below 1.1400 level again. Economic reports confirmed the recent uncertainty for most of the EU countries, leaving lots of doubts about the possible tightening cycle to begin this year. However, the long-term perspective remains optimistic for EUR/USD as the daily chart still shows a sequence of higher lows, pointing to potential upside spike in the nearest future.

Japanese Yen was also weakening but the reasons were completely opposite. The risk appetite was growing across the board, fuelled by the sustainable rally in global equities, and Japanese stock index was not an exception. USD/JPY recovered a significant part of its latest losses, adding 1.12% to its price. A test of 110.00 psychological and technical resistance was noticed on Friday. Further bullish gains are likely as the Bank of Japan will update its monetary policy outlook next week. Most analysts agree that BoJ will leave the interest rates unchanged, however, a potential downside revision of inflation forecasts and investment activity might lead to more softness in financial conditions in Japan. If that confirmed, USD/JPY would accelerate the uptrend, targeting a range of 111.50/112.00.

Both commodity currencies - Australian and New Zealand dollars - lost the upside pressure last week, charting a retracement on the weekly timeframe. AUD/USD fell below 0.7170 support, while NZD/USD retraced even deeper, erasing almost all of the bullish achievements and ending the trading week at 0.6735. The key fundamental explanation of such a weak performance is in the space of economic growth forecasts which have been worsened lately in the scope of slowing Chinese economy. Retail Sales, Consumer Confidence and exports declined in both countries, adding selling pressure on Aussie and Kiwi.

In other markets, WTI Crude oil price slowed down the bullish momentum compared to two previous weeks this year. However, the weekly close price at $53.81 per barrel is getting closer to crucial technical resistance at $54.54 and psychological round figure of $55.00 The recent appreciation pace of +4.3% forces the bears staying out of the game, removing defensive barriers higher. If US inventories kept declining and OPEC members with Saudi Arabia confirmed the supply cut forecast, then we would see oil prices accelerating the recent uptrend. Otherwise, a healthy retracement might take place this week.
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