FX Week Ahead: Brexit Progress; NZ CPI; Aussie Jobs; BOJ & ECB Rate Decisions

Talking Points:

– Ongoing Brexit deliberations will be the main focus of market participants during the week as key deadlines approach and no clear deal has emerged – two-way volatility in the British Pound should remain high.

– The US government shutdown has sidelined many key economic data releases, including Friday’s December US Durable Goods Orders, and it’s possible that the Q4’18 US GDP report the following week is delayed as well.



– The European Central Bank meeting on Thursday could bring about a slight dovish adjustment to policy in light of the destabilization in inflation expectations.

Join me on Mondays at 7:30 EST/12:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

All Week | — GMT | GBP Brexit Negotiations Ongoing Ahead of January 29 Deadline

UK Prime Minister Theresa May has presented her ‘Brexit Plan B’ to parliament and reactions have been tepid at best. It seems that the prime minister’s renewed effort to get her deal through the House of Commons differs little than her first attempt, and by judging from the reaction of parliamentarians, it seems doubtful that ‘Plan B’ will pass muster either if a vote is held by the January 29 deadline. Reports over the weekend indicated that UK PM May might attempt to renegotiate the Good Friday Agreement, a politically fraught endeavor that would undoubtedly add a new matrix of complexity to an already overbearing Brexit problem.

At this point, if a no deal, ‘hard Brexit’ is to be avoided, it would appear that an extension beyond the March 29, 2019 deadline may be necessary. However, with the European parliamentary elections due up in July, it’s doubtful any extension to the Brexit deadline would go beyond there. Late on Monday, cross-party talks produced a bill designed to thwart a no-deal, ‘hard Brexit’ scenario by forcing PM May to postpone Brexit if no deal were reached by February 26.

Pairs to Watch: EUR/GBP, GBP/JPY, GBP/USD

01/22 Wednesday | 21:45 GMT | NZD Consumer Price Index (4Q)

Q4’18 New Zealand inflation data are due to reflect the prevailing trend across the developed economic world, where the late-2018 energy market crash has had a significant negative effect on topline inflation figures. Quarterly price pressures are expected in flat after having gained +0.9% in Q3’18, while the yearly reading is due in at +1.8% from +1.9%. As such, inflation is set to remain below the RBNZ’s medium-term target of +2%,leaving little opportunity for 2019 rate hike expectations to tighten in any meaningful way. Currently, rates markets are leaning more towards a rate cut than a rate hike this year: there is a 30% chance of a 25-bps rate cut by June 2019.

Pairs to Watch: AUD/NZD, NZD/JPY, NZD/USD

01/23 Wednesday | –:– GMT | JPY Bank of Japan Rate Decision

Continuing its three-decade battle with deflationary pressures, the Bank of Japan has yet to find success with getting topline inflation readings back to its medium-term target of +2%; the December National Japanese CPI report came in at +0.7% (y/y). After the decline in energy prices since the start of October, disinflation is likely to persist in the near-term; per the most recently made available data from 2013, Japan imports 96% of the energy it uses (prior to the nuclear reactors being brought back online post-Fukushima).

Overall, Japanese economic data has started to turn the corner, with the Citi Economic Surprise Index running higher for the past four weeks (currently +6.6 from -15.7 on December 21, 2018). Even though the Bank of Japan isn’t the source of market indigestion right now – traders can thank the US government shutdown, Brexit, the US-China trade war, among others – it’s still going nowhere fast with its monetary policy. The resulting impact on the Japanese Yen should be minimal.

Pairs to Watch: AUD/JPY, EUR/JPY, USD/JPY

01/24 Thursday | 00:30GMT | AUD Employment Change & Unemployment Rate (DEC)

After a strong November (+37K), Australian employment is due to have increased by +18K in December. With the unemployment rate set to hold at 5.1%, the Reserve Bank of Australia is simply looking for more evidence that the labor market remains a source of stability, particularly as wage growth remains weak and topline inflation pressures are starting to come down all over the developed world (see: energy market collapse). Like its antipodean counterpart, the RBA is very much stuck in neutral when it comes to policy expectations for the first half of the year: according to overnight index swaps, there is only a 13% chance of a change in policy by June 2019 and a 28% chance of a 25-bps cut by December 2019.

Pairs to Watch: AUD/JPY, AUD/NZD, AUD/USD

01/24 Thursday | 12:45 GMT | EUR European Central Bank Rate Decision

The latest batch of inflation data from the Eurozone proved to confirm concerns that the sharp decline in energy prices since the start of October was having a significant negative impact on price pressures. With the final December Eurozone CPI report showing topline inflation of +1.6% y/y, it’s difficult to think that ECB President Draghi and the Governing Council will be of the mindset that their four criteria for ending their ultra-loose monetary policy will be met. In particular, reality has disappointed the expectation that “inflation will be durable and stabilize around those levels with sufficient confidence.”

There are two sides to the inflation debate when the ECB meets this Thursday. As mentioned earlier, inflation expectations have been destabilized over the past few months, but the trend is especially pronounced over the past year: the 5-year, 5-year inflation swap forwards peaked in January 2018 at 1.774%; they finished last week at 1.553%. However, with energy prices rebounding in recent weeks – Brent Crude is up by +16.5% over the past month – inflation expectations have stabilized in tandem (the 5-year, 5-year inflation swap forwards are only down by -1.5-bps over the past month).

On balance, we expect these developments to give the ECB reason to soften its tone this coming Thursday. Whereas ECB President Draghi has previously suggested that a rate hike could materialize sometime around “summer 2019,” there is ample evidence to suggest that this event horizon will be pushed back by a few months. It seems doubtful that the Governing Council would want to make any prognostications beyond the end of this calendar year, it still being the first month of 2019 but also due to the fact that Draghi’s term expires in October. The ECB may very well keep a rate hike for 2019 on the table – for now.

Pairs to Watch: EUR/GBP, EUR/JPY, EUR/USD

Read more: Weekly Fundamental Forecast: Trade Wars, Chinese GDP and Rate Decision Bridge Themes and Event Risk

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX

Weekly Fundamental Forecast: Trade Wars, Chinese GDP and Rate Decision Bridge Themes and Event Risk

Weekly Fundamental Forecast: Trade Wars, Chinese GDP and Rate Decision Bridge Themes and Event Risk

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Fresh data prints coming out the Asia/Pacific region may drag on AUD/USD as China is expected to grow at the slowest pace since the Great Financial Crisis (GFC).

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed



Crude oil price gains slowed despite OPEC output cuts. The commodity is at risk to slowing Chinese GDP. With US in shutdown, oil eyes Brexit news and ECB for sentiment-linked moves.

British Pound Forecast –Bulls Taking Control of Sterling

Sterling rallied after PM May’s contentious Brexit bill was shot down in flames in the House of Commons and that leaves a No Deal Brexit increasingly unlikely.

US Dollar ForecastMay Find Support as Global Outlook Worries Mount

The US Dollar may continue to find support in haven-seeking capital flows as key data from China, the EU and the IMF darken the outlook on global growth.

Gold Forecast – Will USD Gains and Returning Optimism Fade?

Gold price action faltered last week due to returning optimism in the markets, but is the reversal in trader sentiment here to stay?

Equities Forecast – Dow Holds on to Trade War Hopes and Earnings, Others to China GDP

The US stock market will look to trade war developments and earnings season while other global equity markets will keep an eye on Chinese GDP figures.

Weekly Fundamental Forecast: Trade Wars, Chinese GDP and Rate Decision Bridge Themes and Event Risk

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.

Dow Holds on to Trade War Hopes and Earnings, Others to China GDP

Dow Holds on to Trade War Hopes and Earnings, Others to China GDP

S&P500

Equity Fundamental Forecast: Mixed

  • The first week of earnings was a boon for US equities as bank stocks dragged the broader indexes higher throughout the week
  • Chinese GDP will offer insight to the ‘Chinese slowdown’ that investors have been wary of
  • If trade war false flags prove legitimate, the economic show-down could become the main equity driver

Trade Wars and Earnings Season Will Drive US Stock Markets



Last week was filled with talks of trade war truces and new trade deals between the US and China. Unfortunately, they proved to be false flags, an occurrence becoming all too familiar. Still, US equities enjoyed a bump on each news release, only to eventually retrace. If a trade deal is truly cemented, expect equities to enjoy a rally given that a major headwind is removed from the fray. Unfortunately, clinging on to such hopes is ill-advised with few concrete steps toward a deal being announced.

Think the stock market is headed for a crash? Learn some bear market trading strategies and techniques.

On the other hand, palpable progress has been made in the fourth quarter earnings season. Last week kicked off the season in earnest with the largest banks and the first FANG member Netflix. Thus far, earnings seem to have generated some positive sentiment despite some mixed performances. Bank stocks like Bank of America (BAC) and Goldman Sachs (GS) dragged the financial sector higher and provided some buoyancy for the larger market this week which was likely boosted further by dovish commentary from Fed Chairman Powell.

S&P 500 Price Chart Daily, March 2018 – January 2019 (Chart 1)

S&P500

Learn about the differences between the Dow, Nasdaq, and S&P 500.

Next week, earnings will continue with giants like Proctor & Gamble (PG), Comcast (CMCSA) and AbbVie (ABBV). Positive results from these or any of the other large corporations reporting next week can spur positive sentiment and, in some cases, single handedly drag an index higher. Follow me on Twitter @PeterHanksFX for commentary and updates on specific corporate earnings and the season overall.

Given the laundry list of conflicting themes in the equity theatre, the fundamental outlook for the S&P 500 is mixed. However, the weekly equity technical outlook may suggest otherwise.

See the other economic events in the week ahead with our Economic Calendar.

The final broad theme facing the S&P 500 and global stock markets in the week ahead is China’s GDP. The data is due Monday and will offer insight to speculators and investors around the globe as to the degree of China’s economic production which is widely believed to be slowing. As the world’s second largest economy, a slowdown in China has rattled equity sentiment and could have a knock-on effect on the US economy. If GDP is substantially above or below expectations, expect sentiment and equities to act in lockstep globally.

Brexit Risk Proves Incessant

FTSE 100 Price Chart, March 2018 – January 2019 (Chart 1)

FTSE 100

As for the FTSE 100, Brexit will continue to dictate price action. Last week was chocked full of important votes for the nation and the FTSE performed admirably as each result met expectations. Still, not much has changed for the Brexit situation other than the rejection of May’s deal. Parliament could vote to take control of the process on January 21st.

Brexit Timeline – The Path Ahead and How it Affected Markets

If it comes to fruition, the development would have a mixed impact on the FTSE. Some speculators believe Parliament could successfully achieve concessions from Brussels and therefore a deal MPs would agree on. On the other hand, some analysts believe Parliamentary control would increase the chance of a no-deal Brexit. Therefore, the fundamental outlook for the FTSE is mixed.

Read more: Will the Stock Market Crash in 2019?

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact Peter on Twitter at @PeterHanksFX

DailyFX forecasts on a variety of currencies such as the US Dollar or the Yen are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introduction to the Forex market, check out our New to FX Guide.

Other Weekly Fundamental Forecast:

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed

British Pound Forecast –Bulls Taking Control of Sterling

US Dollar Forecast– May Find Support as Global Outlook Worries Mount

Gold Forecast – Will USD Gains and Returning Optimism Fade?

Euro Forecast: Dour Mood Expected at ECB Meeting; PMIs on Wednesday

Euro Forecast: Dour Mood Expected at ECB Meeting; PMIs on Wednesday

Euro Forecast: Dour Mood Expected at ECB Meeting; PMIs on Wednesday

Fundamental Forecast for the Euro: Bearish

The Euro struggled in the second half of the week, with EUR/USD and EUR/GBP proving sensitive to US-China trade war and Brexit headlines, respectively.

– A deterioration in inflation expectations over the past several months will keep the ECB’s ultra-loose monetary policy intact for the foreseeable future; it’s possible that President Mario Draghi pushes back the timeline for a “summer 2019” rate hike.

– The IG Client Sentiment Indexshows that traders have increased their long EUR/USD positioning during the latest turn lower.



See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

The Euro may have only lost ground against four of the major currencies last week, but amid a surge in risk appetite, it’s gains against the Japanese Yen and the Swiss Franc are hardly impressive. Instead, amid elevated political concerns from France’s “gilet jaunes” to Italy’s “anti-EU axis” to Greece’s prime minister surviving his no-confidence vote by a single vote, investors have been feeling a bit more on edge. Yet the most important factors of the past week did not come from continental Europe; instead, the US-China trade war headlines helped sink EUR/USD by -0.93% while Brexit developments weighed on EUR/GBP by -1.15%.

External Factors will Still Play a Role

Although the coming week features the January European Central Bank meeting (more on that shortly), EUR/GBP will still be guided by Brexit as key deadlines approach and EUR/USD by the US-China trade war. Only EUR/USD is likely to see the headlines continue along their current track: both China and the US appear to have the desire and willingness to get a deal done.

Brexit is an issue unto itself, unlike any other. As UK Prime Minister Theresa May seemingly closed off options at the end of the week – including canceling Brexit, a second referendum, and a general election – EUR/GBP reversed some of its earlier losses in a significant manner. If the headlines continue to develop in a manner suggesting that a no-deal, ‘hard Brexit’ outcome is rising in likelihood, EUR/GBP could easily decouple from the rest of the EUR-complex and trade to the topside – regardless of what the ECB does on Thursday.

ECB Attitude to Soften as Inflation Remains Constrained

The latest batch of inflation data from the Eurozone proved to confirm concerns that the sharp decline in energy prices since the start of October was having a significant negative impact on price pressures. With the final December Eurozone CPI report showing topline inflation of +1.6% y/y, it’s difficult to think that ECB President Draghi and the Governing Council will be of the mindset that their four criteria for ending their ultra-loose monetary policy will be met. In particular, reality has disappointed the expectation that “inflation will be durable and stabilize around those levels with sufficient confidence.”

There are two sides to the inflation debate when the ECB meets this Thursday. As mentioned earlier, inflation expectations have been destabilized over the past few months, but the trend is especially pronounced over the past year: the 5-year, 5-year inflation swap forwards peaked in January 2018 at 1.774%; they finished last week at 1.553%. However, with energy prices rebounding in recent weeks – Brent Crude is up by +16.5% over the past month – inflation expectations have stabilized in tandem (the 5-year, 5-year inflation swap forwards are only down by -1.5-bps over the past month).

On balance, we expect these developments to give the ECB reason to soften its tone this coming Thursday. Whereas ECB President Draghi has previously suggested that a rate hike could materialize sometime around “summer 2019,” there is ample evidence to suggest that this event horizon will be pushed back by a few months. It seems doubtful that the Governing Council would want to make any prognostications beyond the end of this calendar year, it still being the first month of 2019 but also due to the fact that Draghi’s term expires in October. The ECB may very well keep a rate hike for 2019 on the table – for now.

Economic Data Momentum Remains Weak

Outside of the ECB meeting this week, the initial January Eurozone PMI readings are due in on Wednesday, and should be a center of attention on the economic docket. At the end of 2018, Eurozone economic data was clearly weakening, a trend that has continued thus far into the New Year: the Citi Economic Surprise Index is still deep in the red at -81.7, slightly improved from -88.6 at the end of last week, but still lower than where it was one month ago at -77.5. The preliminary January Eurozone Composite PMI is due in at 51.4 from 51.1, a modest improvement but nothing that should inspire much confidence. If anything, given the backdrop of consistent data disappointments over the past month (per the Eurozone Citi Economic Surprise Index), the risk is for the PMI readings to disappoint.

Net-Short Euro Positioning…Still Unknown

Finally, in terms of positioning, the CFTC’s COT report for the week ended January 15 showed…nothing. The US federal government shutdown means that the CFTC has shuddered its doors; no reports have been released since December 21 (per cftc.gov). The most recent figures we have available are three-weeks old at this point. For the week of December 18, speculators had decreased their net-short Euro positions to 53.1K contracts, a drop from 56.3K net-short contracts held previously. Positioning had become interesting once more, but this is not a reliable source at present time. Instead, traders may want to look to the IG Client Sentiment Index for insight as to positioning.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.

Gold Weekly Fundamental Outlook: Will USD Gains and Returning Optimism Fade?

Gold Weekly Fundamental Outlook: Will USD Gains and Returning Optimism Fade?

Gold

Gold Fundamental Forecast: Bullish

Talking Points:

  • Gold price notches its first weekly decline in over a month
  • US-China trade war developments boosted risk-on sentiment
  • Strong US manufacturing data pushed the USD higher despite Fed turning Dovish

The price of Gold has stumbled lower over the last week as risk-on sentiment caused fading investor demand for the precious metal. Since Gold is often looked at as a safe-haven asset that investors can turn to during times of heightened uncertainty, recent stock market optimism and a strong US Dollar contributed to the shiny metal’s 0.5 percent decline since last Friday.

GOLD PRICE CHART: 30-MINUTE TIMEFRAME (JANUARY 11, 2019 TO JANUARY 18, 2019) (CHART 1)

Gold Price Chart

The drop in Gold’s price over the last 5 trading days snapped the commodity’s streak of 4 consecutive weeks of gains. While Gold was trading sideways for most of the last week, price action on January 18 saw a sizeable 0.8 percent dip in XAUUSD wiping out all gains made over the prior few days.

The decline in Gold was attributable to risk assets rejoicing on reports that China may eliminate its trade deficit with the United States in the latest ploy to decelerate the US-China trade war and boost market confidence. The news comes after an interesting week in the financial markets surrounding Brexit drama, the US government shutdown, and mixed economic developments around the world.



Most notably, weaker than expected data out of China led to the country’s leaders stepping up its willingness to support its worsening economy. Chinese officials announced record-breaking liquidity injections and a lowering of the USDCNY fixing from 6.9709 at the end of last week to 6.7560 on Monday when the poor data was released. Due to the strong correlation between XAUUSD and CNYUSD, this initially helped push Gold higher.

USDCNY, DXY, XAUUSD PRICE CHART: 15-MINUTE TIMEFRAME (JANUARY 11, 2019 TO JANUARY 18, 2019) (CHART 2)

USDCNY,DXY,XAUUSD Price Chart

However, this development was negated throughout the week as positive readings on economic data on US housing, jobless claims, business outlook and manufacturing sent the DXY marching higher despite more dovish remarks from Federal Reserve officials.

Looking ahead to next week, the forecast for Gold remains bullish as the fundamental thesis for potential advances remains in tact. If positive trade talk developments further materialize, this could add support to a faltering Chinese economy and bolster its domestic currency. In turn, this could position Gold for further upside. Moreover, the lingering risks that lower GDP poses to stocks in addition to the risk a dovish Fed poses to the Dollar – both a primary result from an extended US Government Shutdown – is increasingly prevalent. Downside risks to the forecast highlights additional gains in the USD or devaluation in the CNY in addition to further risk-on sentiment resulting in traders overlooking Gold.

Written by Rich Dvorak, Junior Analyst for DailyFX

Follow on Twitter @RichDvorakFX

Other Weekly Fundamental Forecasts:

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed

British Pound Forecast –Bulls Taking Control of Sterling

US Dollar Forecast– May Find Support as Global Outlook Worries Mount

US Dollar May Find Support as Global Outlook Worries Mount

US Dollar May Find Support as Global Outlook Worries Mount

USD

US DOLLAR FUNDAMENTAL FORECAST: BULLISH

  • US government shutdown sidelines data critical to Fed policy outlook
  • China GDP, Eurozone PMI, comments from Davos may spook markets
  • Beijing attempting breakthrough in US-China trade war negotiations

Gain confidence in your US Dollar trading strategy with our free guide!

US Dollar price action has mostly reflected broad-based sentiment trends rather than homegrown fundamentals since November. The currency has been remarkably resilient despite the collapse in Fed rate hike bets.It hit a 20-month high amid a vicious late-2018 market rout before pulling back as risk appetite steadied. That speaks to a strong anti-risk appeal, which is likely rooted in USD’s unrivaled liquidity.

The Fed has been tinkering with its messaging in the meanwhile, dispending with the kind of longer-term guidance that defined policy in the aftermath of the Great Recession and pivoting to a nimbler, data-dependent approach. The markets initially saw the shift as dovish – small wonder that, considering the prior regime’s hawkish bias – but seemed to finally on-board the central bank’s intent ahead of last week’s trade.



While that might have set the stage for greater directional clarity, this was not to be as the US government shutdown derailed the release of critical pieces of economic data that ought to have informed policy speculation. What did arrive from private-sector sources looked ominous. The University of Michigan said its consumer confidence gauge unexpected dropped to a 26-month low in January.

CHINA AND EUROZONE DATA, IMF FORECASTS MAY SPOOK MARKETS

With the US government seemingly no closer to resuming key statistical reporting, the week ahead will probably keep the spotlight on macro-level forces. Monday’s release of Chinese GDP data as well as an updated set of economic forecasts from the IMF will inform worries about a global slowdown. Thursday’s Eurozone PMI surveys will expand investors’ view of the global business cycle further.

If data out of China and the Euro area echo deepening disappointment relative to consensus forecasts over recent months while the IMF update mirrors an analogous release from the World Bank earlier this month, the cumulative message will be worrying. That might trigger another round of broad-based liquidation across financial markets, lifting the Greenback on the back of haven-seeking capital flows.

Soundbites emerging from the annual World Economic Forum gathering in Davos, Switzerland may likewise prove to be market-moving. The policy and financial market bigwigs in attendance will offer a slew of opinions on the state of the global economy, the various macro forces in play, and the outlook going forward. If the overall tone appears to have darkened, anti-risk moves across the markets may be amplified.

MARKETS EYE BREAKTHROUGH IN US-CHINA TRADE WAR TALKS

A breakthrough in US-China trade war negotiations might offer something of a reprieve. Markets cheered Friday amid reports that Beijing has offered their counterparts in Washington DC to boost imports of US goods such that the bilateral trade deficit is closed over six years. Sentiment may find a lifeline if there is meaningful progress along this track next week.

This need not be USD-negative. Indeed, the benchmark unit rose alongside stock prices and bond yields while the priced-in rate hike outlook implied in Fed Funds futures steepened as Chinese officials’ overture made the rounds. This ability to deftly switch from a haven- to a yield-based appeal implies that the Dollar may gain ground even if risk appetite returns in earnest.

— Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

US DOLLAR TRADING RESOURCES

OTHER FUNDAMENTAL FORECASTS:

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed

British Pound Forecast –Bulls Taking Control of Sterling

Gold Weekly Fundamental Outlook: Will USD Gains and Returning Optimism Fade?

Gold Weekly Fundamental Outlook: Will USD Gains and Returning Optimism Fade?

Gold Fundamental Forecast: Bullish

Talking Points:

  • Gold price notches its first weekly decline in over a month
  • US-China trade war developments boosted risk-on sentiment
  • Strong US manufacturing data pushed the USD higher despite Fed turning Dovish

The price of Gold has stumbled lower over the last week as risk-on sentiment caused fading investor demand for the precious metal. Since Gold is often looked at as a safe-haven asset that investors can turn to during times of heightened uncertainty, recent stock market optimism and a strong US Dollar contributed to the shiny metal’s 0.5 percent decline since last Friday.

GOLD PRICE CHART: 30-MINUTE TIMEFRAME (JANUARY 11, 2019 TO JANUARY 18, 2019) (CHART 1)

Gold Price Chart

The drop in Gold’s price over the last 5 trading days snapped the commodity’s streak of 4 consecutive weeks of gains. While Gold was trading sideways for most of the last week, price action on January 18 saw a sizeable 0.8 percent dip in XAUUSD wiping out all gains made over the prior few days.

The decline in Gold was attributable to risk assets rejoicing on reports that China may eliminate its trade deficit with the United States in the latest ploy to decelerate the US-China trade war and boost market confidence. The news comes after an interesting week in the financial markets surrounding Brexit drama, the US government shutdown, and mixed economic developments around the world.



Most notably, weaker than expected data out of China led to the country’s leaders stepping up its willingness to support its worsening economy. Chinese officials announced record-breaking liquidity injections and a lowering of the USDCNY fixing from 6.9709 at the end of last week to 6.7560 on Monday when the poor data was released. Due to the strong correlation between XAUUSD and CNYUSD, this initially helped push Gold higher.

USDCNY, DXY, XAUUSD PRICE CHART: 15-MINUTE TIMEFRAME (JANUARY 11, 2019 TO JANUARY 18, 2019) (CHART 2)

USDCNY,DXY,XAUUSD Price Chart

However, this development was negated throughout the week as positive readings on economic data on US housing, jobless claims, business outlook and manufacturing sent the DXY marching higher despite more dovish remarks from Federal Reserve officials.

Looking ahead to next week, the forecast for Gold remains bullish as the fundamental thesis for potential advances remains in tact. If positive trade talk developments further materialize, this could add support to a faltering Chinese economy and bolster its domestic currency. In turn, this could position Gold for further upside. Moreover, the lingering risks that lower GDP poses to stocks in addition to the risk a dovish Fed poses to the Dollar – both a primary result from an extended US Government Shutdown – is increasingly prevalent. Downside risks to the forecast highlights additional gains in the USD or devaluation in the CNY in addition to further risk-on sentiment resulting in traders overlooking Gold.

Written by Rich Dvorak, Junior Analyst for DailyFX

Follow on Twitter @RichDvorakFX

Other Weekly Fundamental Forecasts:

GBP Fundamental Forecast: Bulls Taking Control of Sterling

GBP Fundamental Forecast: Bulls Taking Control of Sterling

GBP

Sterling (GBP) Talking Points:

  • Important week ahead may keep Sterling in check.
  • A Soft Brexit or no Brexit at all are now being priced into Sterling.

The DailyFX Q1GBP Forecasts are available to download including our short- and medium-term look at Sterling.

Fundamental Forecast for GBP: Neutral

A very, very close call not to change our Sterling forecast to bullish this week after market sentiment took a marked shift towards a Soft Brexit or no Brexit at all, both GBP positive. On Tuesday PM May’s Brexit bill took a hammering in the HoC with the PM losing the vote by a record margin of 230 votes although the PM did win the subsequent no confidence vote, mainly due to the DUP vote. As a result, PM May must present her plan B to Parliament on Monday, a bill that is likely to look like Plan A. This plan B will be debated all next week. While the option of a No Deal Brexit is now highly unlikely, the PM has yet to say this and is unlikely to ahead of any further discussions with the EU.



Sterling (GBP) Price: Brexit Vote Impact on GBPUSD and EURGBP

Brexit Roundtable Webinar: Outlook for Sterling and Other UK Asset Classes

Sterling took this week’s votes to heart and began re-pricing all GBP-crosses pushing them higher. These moves also made Sterling technical set-ups look more positive, providing another uplift. While I think that Sterling will continue to make weekly gains, next week may well throw out negative headlines which will dampen any rally, although losses should be limited and contained within recent trading ranges. From a technical point of view, sell-offs should now be viewed as potential buying opportunities.

It is likely that we have already made the lows in most if not all Sterling crosses, although the last 2+ years has taught us that nothing can be taken for granted where Brexit is involved. Remain patient and disciplined when looking for entry points.

GBPUSD Daily Price Chart (May 2018 – January 18, 2019)

GBPUSD

IG Client Sentiment data show 52.0% of traders are net-long GBPUSD. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests that GBPUSD prices may continue to fall. However, the combination of recent daily and weekly positional changes gives us a mixed trading bias.

— Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1

Other Weekly Fundamental Forecast:

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed

USD/JPY Extends Flash-Crash Rebound, RSI Threatens Bearish Formation

USD/JPY Extends Flash-Crash Rebound, RSI Threatens Bearish Formation

Japanese Yen Talking Points

USD/JPY extends the rebound following the currency market flash-crash as there appears to be a mild improvement in risk-taking behavior, and the recent series of higher highs & lows raises the risk for a larger correction as the exchange rate breaks out of a narrow range carried over from the previous week.

Image of daily change for major currencies

USD/JPY Extends Flash-Crash Rebound, RSI Threatens Bearish Formation

Image of daily change for usdjpy rate

USD/JPY climbs to a fresh weekly-high (109.60), with U.S. Treasury yields exhibiting a similar behavior even as the Federal Reserve changes its tune ahead of the next interest rate decision on January 30.

It seems as though a growing number of Fed officials are becoming reluctant to implement higher borrowing-costs amid the weakening outlook for global growth, and the central bank may continue to drop the hawkish forward-guidance as New York Fed President John Williams, a permanent voting-member on the Federal Open Market Committee (FOMC), argues ‘the approach we need is one of prudence, patience, and good judgment.’

Image of fed fund futures



In turn, changes in risk sentiment may largely influence USD/JPY over the coming days as members of the FOMC observe the quiet period ahead of the policy meeting, and it seems as though the central bank will continue to tame bets for an imminent rate-hike especially as the partial government shutdown clouds the economic outlook. In turn, Fed Fund Futures may continue to show the FOMC on hold throughout the first-half of 2019, and it remains to be seen if the committee will taper the $50B/month in quantitative tightening (QT) asChairman Jerome Powell sees the balance sheet to returning to a ‘more normal level.’

With that said, changes in risk sentiment may continue to influence USD/JPY over the interim as the FOMC tames bets for an imminent rate-hike, but the flash crash appears to have shaken up retail interest as traders continue to fade the sharp rebound in the exchange rate.

Image of IG client sentiment for usdjpy

The IG Client Sentiment Report shows 58.6% of traders are now net-long USD/JPY compared to 55.3% earlier this week, with the ratio of traders long to short at 1.42 to 1. Despite the flash-crash, traders have been net-long since December 18 when USD/JPY traded near 112.50 even though price has moved 3.4% lower since then.The number of traders net-long is 4.2% lower than yesterday and 6.9% higher from last week, while the number of traders net-short is 0.8% higher than yesterday and 10.2% lower from last week.

Keep in mind, the ongoing tilt in retail sentiment provides a contrarian view to crowd sentiment as traders remain net-long, and the recent accumulation in net-short position appears to be unraveling as USD/JPY breaks out of the narrow range carried over from the previous week.

In turn, the broader outlook remains tilted to the downside as both price and the Relative Strength Index (RSI) snap the bullish trends from the previous year, but future developments in the momentum indicator may foreshadow a larger correction as the oscillator comes up against trendline resistance. . Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Daily Chart

Image of usdjpy daily chart

  • Broader outlook for USD/JPY remains tilted to the downside as both price and the RSI snap the bullish trends from 2018, but the failed attempt to test the 2018-low (104.63) may fuel a larger correction in the exchange rate as the flash-crash rebound appears to be gathering pace.
  • Will keep a close eye on the Relative Strength Index (RSI) as it starts to threaten the bearish formation from October, with a break of trendline resistance raising the risk for a further appreciation in the exchange rate.
  • In turn, waiting for a break/close above the 109.40 (50% retracement) to 110.00 (78.6% expansion) region to open up the Fibonacci overlap around 111.10 (61.8% expansion) to 111.80 (23.6% expansion), with the next region of interest coming in around 112.40 (61.8% retracement) to 113.00 (38.2% expansion).

For more in-depth analysis, check out the Q1 2019 Forecast for the Japanese Yen

Additional Trading Resources

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— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

FTSE 100 Eyes Brexit Plan B, Record Chinese Stimulus Raises Alarm Bells

FTSE 100 Eyes Brexit Plan B, Record Chinese Stimulus Raises Alarm Bells

Equity Analysis and News

  • China Attempting to Cover the Cracks
  • Brexit Continues to Dictate

China Attempting to Cover the Cracks



Concerns are continuing to mount over a slowdown in China, particularly in a week where the PBoC has thrown a record amount of daily liquidity injections (CNY 1.16trillion) into the system with the Shanghai Composite showing very little for it. Of course, this is happening at a time ahead of the Chinese New Year, which tends drain liquidity. However, Chinese data continues to disappoint, most recently highlighted following the plunge in China’s imports and exports. As such, eyes will on Chinese GDP, which is expected to drop to its lowest level since the financial crisis at 6.4%. Although, despite this, improving trade relations between US and China may see sentiment dictate and lift Chinese bourses in the near term.

FTSE 100 Eyes Brexit Plan B, Record Chinese Stimulus Raises Alarm Bells

Brexit Continues to Dictate

Another week and focus yet again falls on Brexit for UK assets. The beginning of next week will see Theresa May lay out her Plan B to the house, as such, headline risk will continue to dictate sentiment. Given the recent performance in GBP following the meaningful vote, expectations are now for a somewhat of softer Brexit, while no-deal risks receding. FTSE 100 is back at crucial resistance, which coincides with the psychological 7000 level.

FTSE 100 Price Chart: Daily Time Frame (May 2018 – Jan 2019)

FTSE 100 Eyes Brexit Plan B, Record Chinese Stimulus Raises Alarm Bells

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Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

— Written by Justin McQueen, Market Analyst

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