Weekly market overview January 21 - 25.

Traders’ sentiment was quite cautious in the financial markets last week. Two major topics were dominating in the news headlines: US government shutdown and Brexit. Both stories seem to have an optimistic outcome, reaching the finishing line. Besides that, two major central banks had meetings - ECB and BoJ, influencing financial markets with monetary policy updates. Several macroeconomic reports were also in market focus as investors were trying to understand how deep potential global economic slowdown could become in 2019. World’s leading stock indices traded with a mixed bias, having a healthy retracement and charting local bottom and technical support levels. The second part of the trading week brought more risk appetite and global equities rallied, finishing the week with moderate gains. The foreign exchange market was also vulnerable to changes noticed in capital flows. The US dollar index was generally weak as the greenback failed to develop its mid-week gains further. The leading currency was the British Pound among majors, which posted the largest bullish rally in eight months. Risk currencies including New Zealand dollar and South African Rand were also buoyant, closing the trading week with significant gains versus the greenback. In other markets, WTI Crude oil was consolidating around crucial technical resistance as traders were expecting to get more clues on the supply issue. Precious metals led by gold gained strength, breaking through psychological levels, the first time since May 2018. The upcoming week should clarify many aspects of recent price action, confirming the main direction of the financial instruments in the medium-term perspective.

Market players were mainly focusing on the British Pound last week as Premier Minister Theresa May presented her Plan B, trying to find ways for a soft deal with the European Union. The vote in Parliament has potentially more chances to be successful as most of the UK politicians, as well as voters, are not interested in a hard non-deal Brexit. The EU officials also agreed to give a couple more weeks to Britain before leaving the Union. Therefore, the overall fundamental environment was in favour of the Pound. Economic reports were also positive. Labour Market confirmed the strength with Employment Change and Average Earnings published at stronger-than-expected levels. As a result, GBP/USD soared more than 2.5%, testing 1.3200 resistance. The Sterling was also strong versus many major currencies including Euro, Japanese Yen, Swiss Franc, Canadian and Australian dollars. Friday’s political rumours forced traders even to accelerate the bullish rally, as DUP party seemed to agree with Theresa May’s Plan B and support the vote in Parliament. All those events underlined that the cable has been oversold recently and latest gains are just a fraction of previous losses in 2018, so, more strength might come in the nearest days and weeks for GBP/USD.

The US government shutdown reached a final stage as Trump’s administration had to hold requirements back in the confrontation with House and Senate. President Trump signed the bill on Friday to open the government and release the 35-days shutdown without any achievements on border wall funding. The only exception, and possibly a risk-factor, was that story would continue if Republicans and Democrats failed to agree on funding a Homeland Security Package. Politicians have three weeks to do that, otherwise, the shutdown issue will continue. On the macroeconomic side, there was a temporary supportive factor from weekly Jobless claims falling below 200K for the first time in 49 years. However, most of the data is still delayed due to the shutdown and next week will be much more volatile for the greenback. The Federal Reserve will release the monetary policy statement next week and Chairman Powell agreed to host a press conference after every FOMC meeting in order to calm down the markets. Moreover, the Non-Farm Payrolls report will influence the price action with even more impact than usual as the Labour market remains the strongest driver of the US economy so far. There are predictions that January figures will be strong despite the economic slowdown and government shutdown, however, it would be hard to beat the previous reading of 310K jobs created in December. Anyway, the greenback finished the trading week slightly weaker than major currencies, while risk currencies of emerging markets were among the leaders.

European Central Bank did not support EUR/USD, as it’s been widely expected. The regulator left the interest rates unchanged together with the same level of additional liquidity injected into the financial statement. ECB President Mario Draghi was telling market players the same story of uncertainty in the economic growth and the lack of inflationary pressure. The period of the new tightening cycle could be postponed due to those reasons, and currency traders failed to lift EUR/USD despite the greenback’s weakness. The pair touched water slightly below technical and psychological support around 1.1300 right after the ECB meeting. But Friday’s price action was completely opposite as EUR/USD jumped back above 1.14000, paring all of the mid-week losses and entering into the positive zone as the weekly result. Technically speaking, that was a bullish engulfing candlestick pattern, and we might see further gains for the most popular currency pair next week. Especially in the scope of positive shifts from political side in France and Germany, as well as positive news from Brexit saga.

European Central Bank
Source:Oil Price

In other markets, WTI Crude oil failed to continue the bullish rally, staying below significant technical resistance below $55.0 per barrel. US Crude oil inventories reported a sharp spike on the upside (+7M barrels versus -0.04M expected) after three weeks of decline, which caused some profit-taking in speculative flows. However, the story with US ban for Venezuela oil exports balanced the negative impact and limited losses. The black gold price finished the trading week almost flat. That also caused the inverse correlation in the USD/CAD daily chart. The loonie was gaining strength despite weaker-than-expected Retail Sales in Canada, but the bulls failed to hold the pair above 1.3300 and USD/CAD slid back to 1.3200 support. In contrast, the gold price managed to chart a bullish breakthrough, closing the trading week above $1300.0 psychological mark for the first time since May 2018. The key fundamental driver was related to the shift of traders’ sentiment in the fixed-income market and disappointment of the US government shutdown, as the agreement gave just a temporary resolution. Silver was also trading on the upside with more strength eyed in the week ahead.
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