Financial markets were influenced by many factors during the trading week ending January 24th; doubts surfaced regarding how much further USA equity market indices can rise during 2020, the Trump impeachment trial has begun, the ECB have issued forward guidance suggesting they’ll look to move away from a negative and zero interest rate monetary policy and the Davos meeting of global political and business influencers was held. However, it was arguably the breakout of the Coronavirus in Asia with its potential to rapidly spread, which caused global Investors to reassess risk and consider their market positions.
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Forex Traders take refuge in the safe haven status of JPY
The various doubts and emergence of risk-off sentiment proved to be a stimulus for forex market volatility, as institutional level Traders quickly reassessed their overall levels of exposure. ZuluTrade’s Traders and Investors witnessed a sharp rise in JPY during the trading-week, as forex traders took refuge in the safe haven status of Japan’s yen. USD/JPY closed the week out down circa -0.80% and EUR/JPY closed the week down -1.37%. The fall of USD/JPY was in direct contrast to the rise of the dollar index, the DXY, which closed out the week up 0.25%. EUR/USD falling by -0.58% was also indicative of overall USD market strength, other then versus JPY.
As can be clearly seen on the 4hr time-frame of USD/JPY, bearish sentiment was dominant as illustrated by the trend line. Whether this trend and direction will continue throughout this week depends on the containment of the virus, which emanated from China. There is also the theory that the virus threat is over exaggerated and has simply provided a ready made excuse to bank profits after the recent period of exuberance.
Several respected market commentators are suggesting gold and yen may prove to be profitable, safe haven trades over the coming months, irrespective of the virus progression;
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How corporate credit might burst the equity bubble
Many Investors and Traders in the ZuluTrade community will be familiar with the ratings agency Moody’s. Their note this week concentrated on the subject of corporate credit (debt) and how it may become the black-swan event that causes a domino-effect to take place. For members of ZuluTrade with intellectual curiosity, who want to engage in self-education during the times when they’re waiting for their trading set-ups to trigger, this research provides a fascinating rebuttal to the continual optimism that USA equity market indices can continue to print record highs, without consequences being felt elsewhere. It’s worth analysing figure 1 in the research, while considering previous historical patterns.
The direction sterling takes over the coming weeks will be illustrative of Brexit sentiment
On January 31st the U.K. will finally exit the European Union. The country and its economy will remain in the common trading area and enjoy the four free movement principles until December 2020, as part of the transition period agreement. Prime Minister Johnson wants Big Ben in Westminster to chime in celebration, while 48% of the population who voted to remain are ignored as the U.K. government appears committed to leave the single market and customs union, while ending free movement. Voters had their chance to vote for a people’s vote and forfeited the opportunity during the general election, therefore, the U.K. general populace has to live with the consequences of its collective decision.
GBP/USD has traded in a range of approximately 340 pips during January 2020 as Investors and Traders have attempted to decipher the social and economic impact of the U.K. leaving the E.U. Over recent weeks forex market focus has shifted away from GBP/USD as analysts weigh up the overall impact of the general election result, twinned with the imminent Brexit. The U.K. pound is likely to experience increased speculation this week as the clock counts down to the 31st exit date.
As can be seen in the above daily time-frame of GBP/USD, the narrowing Bollinger Bands are indicative of decreasing volatility, the trading range has reduced during last week’s sessions, as illustrated by the major currency pair trading close to the 50 DMA. The RSI close to 50 is neither oversold or overbought.
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The issue of Brexit and its never ending dialogue, is not over yet
Sentiment regarding the U.K. economy experienced a boost on Friday after several Markit PMIs beat the forecasts by some distance. The services PMI for the U.K. came in at 52.9, above the 50 level separating contraction from expansion. Manufacturing also improved to 49.8. The PMIs are considered leading not lagging fundamental indicators, therefore, they could suggest that various U.K. sectors are undergoing a dramatic improvement in sentiment now the certainty of government and Brexit has been secured.
However, the alternative viewpoint is that the PMIs are simply over-optimistic, sentiment, readings, responding to current, heightened, expectations. Fact; the U.K. government is determined to leave both the customers union and single market, which is a hard Brexit by any other definition. The impact of losing frictionless trade with your largest trading partner, can only be evaluated in early January 2021. Therefore, anyone attempting to determine the precise outcome and price of sterling versus its peers (during the interim period) would be irresponsible.
A recent article printed on Reuters ponders if the recent rise in U.K. economic optimism, which some journalists are referring to as the “Boris Bounce” will actually last. Accountants Deloitte reports that 53% of chief financial officers in the U.K. were more optimistic about their companies’ prospects than three months previously, the highest share since records started in 2008.
Investors and Traders in the ZuluTrade community will still have to remain vigilant during the Brexit transition period up to December 2020. Analysis of the leader board will reveal which Traders prefer to trade sterling currency pairs and who has experienced success, trading the movements within the circa 340 pips range so far witnessed in 2020. The ZuluGuard feature can prove to be extremely useful in determining the level of risk you which to apply to all your Investor trading decisions.
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The upcoming economic calendar events likely to impact on forex markets this week
Monday 27 January begins in the European session at 9:00am U.K. time with the latest German IFO readings, metrics which can move the market in the euro, if the readings miss or beat the forecasts. In the New York session the latest new home sales for the USA are forecast to reveal a rise.
Tuesday 28 January is a relatively quiet day for news that could impact on forex markets, durable goods orders for the USA economy are predicted to show a significant rise when the latest figures are published at 13:30pm. Consumer confidence readings from the conference board are expected to improve.
Wednesday 29 January begins with the latest QoQ CPI reading for the Australian economy. The forecast is for a marginal rise to 0.6% from 0.5%, a reading which (if met) is unlikely to have much impact on the value of AUD versus its currency peers.
Pending home sales are predicted to show a seasonal fall to 0.5% MoM, thereafter, attention quickly turns to the interest rate decision from the FOMC. The widely held consensus is for a hold at 1.75%. As always it’s the statement and press conference accompanying the rate setting announcement, which is more likely to impact on the price of USD.
Thursday 30 January sees the publication of the latest German unemployment figure, the prediction is for a modest improvement in unemployment numbers and jobs added. The U.K. Bank of England will publish its latest inflation report and reveal its interest rate decision at 12:00pm, the minutes for the meeting will also be published. Mark Carney will speak in one of his final press conferences. This is the time period during which GBP is likely to come under intense speculation depending on the content of his forward-guidance narrative, in light of the U.K. leaving the E.U. the following day.
In the afternoon the latest GDP reading for the USA is published, the forecast is for no change at 2.1% QoQ annually. If the forecast is missed or beaten USD could react. In the late evening a raft of Japanese data is published; CPI, industrial production and retail sales are all predicted to reveal modest improvements.
Friday January 31 begins in the Asian session with the publication of various Chinese PMI economic metrics, analysts will scrutinise the readings to establish if sentiment had improved now the USA and China have reached a potential trade accord. French GDP is published before the opening of the London-European session, a reading which could affect the price of EUR. A slew of further French data, including inflation readings is also published during the session.
The levels of credit in the U.K. economy could reveal if consumers have confidence that exiting the E.U. will be relatively pain free, and at 10:00am the latest E.Z. CPI figure could affect the value of EUR if analysts deduce an interest rate rise away from zero is imminent. At 13:30pm the latest Canadian MoM GDP reading is forecast to show a modest rise to 0.1%. At 15:00pm a raft of Michigan data regarding consumer sentiment is published.
Disclaimer
The views expressed do not constitute investment or any other advice /recommendation /suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in the report do not represent the opinion of ZuluTrade Copy Trading Platform and do not constitute an offer or invitation to anyone to invest or trade.