Weekly market overview February 18 - 22.

The past week was consolidative for most of the financial instruments as global investors were trying to get a clue of several geopolitical events taking part. The first and the main ongoing event attracting traders' attention was the latest U.S.-China round of trade talks. The two largest world's economies are closer to the deal than ever before and that fact was rather optimistic for the risk appetite in the financial markets. Global equities continued gaining strength, although the speed of them lowered. The absence of volatility was the main issue for foreign exchange traders. For example, USD/JPY was hovering in a tight range of 50 pips, while EUR/USD fluctuated for 1 cent only. Nevertheless, the news environment was positive for high-yield currencies (and negative for the US dollar though). US President Donald Trump is considering an extension of the deadline for the U.S-China trade negotiations process. He clearly stated that the March 1 date is not something crucial and the implementation of new import tariffs for Chinese goods can easily be postponed. There is a direct relation between the risk appetite and the terms of that period. The longer the period will be extended for, the faster global equities and other high-risk assets will soar. Having that in mind, the upcoming week is crucial for major asset classes. If the U.S.-China talks period was postponed, then we would see stock indices surging rapidly. Otherwise, a sharp drop of equities might take place.

With Dow Jones Industrial Average closing the trading week at the highest level since October last year, the US dollar lost its attractiveness overseas. There are several reasons for that. First, the US Federal Open Market Committee published the latest meeting minutes on Wednesday and the main impression was that the regulator officials are not completely sure about the monetary policy perspective and necessary actions for this year. Meantime, forex traders and fixed-income speculators continued pricing in a rate cut rather than more tightening by the Fed in 2019. The macroeconomic data was also in favour of a deeper-slowdown scenario as the Philly Fed survey, manufacturing activity and the Housing market reports were all negative last week. Another reason for the greenback to keep weakening was the carry-trade flow, which is based on lowering attractiveness of US Treasury yields compared to Emerging Markets and developing countries. That's another confirmation of the importance of the U.S-China trade deal. As long as the headlines will keep the optimistic tone, the risk appetite will continue rising across the board. As a result, the US dollar index could extend losses in the foreseeable future.

Asian stock indices were among leaders last week, especially in Japan. Nikkei 225 benchmark gained more than 2.5% on the back of optimistic global sentiment and local macroeconomic reports, as well as rumours about the Bank of Japan, to extend supportive measures, making the monetary policy conditions even softer than currently. However, the Japanese yen seems to have a lag with Asian equities as currency traders are still expecting confirmations from US and Chinese officials. Therefore, a delayed reaction might happen this week with USD/JPY rallying as high as 111.70/112.0. Such an optimistic scenario could create a strong background for even more impressive bullish run in Japanese yen cross-rates such as EUR/JPY, GBP/JPY, AUD/JPY, NZD/JPY and even CAD/JPY. Anyway, despite the fact that the yen traders failed to breach crucial resistances so far, there are no deep pullbacks South, which only confirmes the previous suggestion.

The single European currency printed modest gains versus the greenback last week after a sharp drop to the local bottom of 1.1234. The Euro bulls managed to lift EUR/USD toward the technical and psychological resistance of 1.1400 last week, however, failed to sustain the bullish momentum. As a result, the pair slipped towards 1.1334 handle. The main issue is still the European Central Bank which seems to change plans for the interest rates strategy in 2019. The ECB account of monetary policy meeting was published on Thursday and regulator's officials (especially those who were well-known hawks) changed their rhetoric on the back of weak macroeconomic data. Most of the reports coming out of Europe this past week failed to support optimistic hopes and the slowdown issue is still weighing on investors' sentiment. Therefore, it's hard to expect the Euro to gain much strength despite even the greenback's weakness. So, again, the price action will be mainly determined by the overall risk appetite this week rather than fundamental shifts.

Source: PrivatFinance

The British Pound was surprisingly strong recently. Although the Brexit saga did not bring any significant improvements in the scope of the UK-EU deal, currency traders were optimistic about a potential postponing of the divorce period. European officials were also considering some steps back in negotiations with British Prime Minister, while several UK lawmakers created a fraction in the Parliament to support the idea of staying in the European Union (which is the best-case scenario for the Sterling bulls). Moreover, the macroeconomic environment was positive for GBP/USD, as the UK employment and earnings figures managed to surprise investors. If all conditions mentioned above confirmed this upcoming week, and if the idea of Article 50 extension spread in headlines and rumours, then we would see the Sterling accelerating the bullish rally with GBP/JPY testing the level of 150.00 yen per pound much earlier than some of the bears might think of.

Commodity currencies were trading in different directions. The Australian dollar was sold off after dovish comments by the Reserve Bank of Australia, which increased expectations of a rate cut in 2019. The New Zealand dollar was the most volatile currency, dipping below 68 cents versus the greenback and recovering losses later. The Canadian dollar was the strongest currency among all of them. There were three reasons for that. First, the macroeconomic environment is much more positive for the Loonie in Canada than for both its counterparties in Australia and New Zealand. Second, the Bank of Canada’s officials were much more hawkish on the economic perspective. Third, the WTI Crude oil price kept climbing higher, despite some sort of slowdown in US inventories’ decline. As a result, USD/CAD lost almost 1% of its exchange rate, finishing the trading week below 1.3150 support. We would not be surprised to see USD/CAD testing 1.3000 handle this week.

In other markets, gold and silver prices pulled back after the test of record-high prices for the first time since April 2018. Gold was trading above $1340 per ounce on the back of softer-than-expected FOMC minutes and lowering US Treasury yields. If such a rapid rally continued, the highest forecasts for the price of gold should be shifted towards $1380 and even $1400 per ounce in 2019.
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