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US Dollar Fundamentals (based on dailyfx article)
Fundamental Forecast for Dollar: Neutral
Top event risk is the week-ended January NFPs. The net change in payrolls isn’t nearly as important as the ‘qualitative’ figures. The jobless rate has already touched past year milestones for rate hikes – a few years ago, then Chairman Ben Bernanke tied a first rate hike to an unemployment rate of under 6.5 percent. It is currently 5.6 percent. Perhaps the inflation aspect of the labor data is the lynchpin. Wage growth has struggled to catch traction. A particularly weak showing here, on the other hand, could reinforce the more distant timeline the market has on hikes and instead lead to a downgrade in FOMC forecasts at the March meeting.
Monetary policy is the engaged fundamental driver at the moment, but it is important for Forex traders not to take their eyes off of systemic investor sentiment. In the ‘risk on’ position, progress is slow and struggles to draw in the entire market. However, should full scale ‘risk aversion’ strike, conviction will span the financial system. As momentum picks up, the Dollar will see its haven appeal swell. Yet, in the early stages of such a dynamic shift, the same yield curve appeal the currency cultivated these past months could lead to capital outflow. Should sentiment turn, the Greenback’s bearing will depend on how hot the fire is.
USDJPY Fundamentals (based on dailyfx article)
Fundamental Forecast for Japanese Yen: Neutral
A highly-anticipated US Nonfarm Payrolls data print could ultimately provide the spark necessary for a larger Dollar break versus the Japanese Yen, and current signs favor the downside on the USDJPY and broader JPY pairs. Indeed we recently highlighted heavily one-sided retail FX trader positioning as a key reason the Dollar could break lower against key counterparts. A sharp drop in US interest rates and Treasury Yields may likewise keep downside pressure on the yield-sensitive USDJPY absent a material reversal of trends. Thus all eyes turn to the highly-market-moving NFPs print as it could potentially set the stage for a larger USD correction.
There is comparatively little foreseeable economic event risk out of Japan and as such eyes will remain on the US economy and broader market sentiment. The correlation between the USDJPY and the Nikkei 225 index has weakened notably as of late; recent gains in Japanese equities have not been enough to lift the exchange rate. Yet a further rise in equity market volatility would likely restore said link, and we’ll keep a close eye on global equity markets as the US S&P 500 registers its second-consecutive monthly decline. Continued losses could be enough to send the USDJPY through key support.
GBPUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for GBP: Neutral
The Bank of England (BoE) interest rate decision may have a limited impact on GBP/USD as the central bank is widely expected to preserve its current policy at the February 5 meeting.
According to a Bloomberg News survey, all of the 41 economists polled anticipate the Monetary Policy Committee (MPC) to retain a wait-and-see approach, and the central bank may once again refrain from releasing a policy statement as it remains in no rush to normalize monetary policy. Even though BoE Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs, the committee may further delay its normalization cycle especially as price growth undershoots the 2% target.
With that said, the BoE may curb its economic assessment while delivering the quarterly Inflation report on February 12, but we may see a growing number of MPC officials show a greater willingness to raise the benchmark interest rate over the medium-term as the central bank anticipates a stronger recovery to take hold in 2015. In turn, the ongoing improvement in the labor market may continue to encourage expectations for faster wage growth, and the central bank may sound more upbeat this time around as it sees weaker energy prices as a net positive for the U.K. economy.
Nevertheless, GBP/USD may continue to carve a string of lower-highs in the week ahead as market participants speculate the Federal Reserve to normalize monetary policy ahead of its U.K. counterpart, and the pair remains at risk for a further decline over the near-term as the Relative Strength Index (RSI) largely preserves the bearish momentum carried over from the previous year.
AUDUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for Australian Dollar: Neutral
The Australian Dollar descended to the lowest level in nearly six years against its US counterpart last week. A deteriorating monetary policy outlook looked like the leading culprit behind the move: traders are now pricing in 61 basis points in easing over the coming 12 months (according to OIS-based estimates compiled by Credit Suisse), making for the most dovish lean in traders’ expectations since early May 2013.
Furthermore, investors seem increasingly convinced that the start of the easing cycle is already at hand, with the implied probability a 25 basis point reduction at next week’s RBA meeting swelling to 65 percent. That is the first central bank sit-down to carry a greater-than-even chance of a reduction in borrowing costs in 18 months.
Fading realized and expected inflation readings seem to be behind building rate hike bets. Data published last week showed the benchmark year-on-year CPI growth rate slowed to 1.7 percent in the fourth quarter, the weakest since mid-2012. Meanwhile, Australia’s one-year breakeven rate – a measure of expected inflation derived from bond yields – has tumbled to project prices will be expanding at a pace of less than 1 percent by early 2016. That is a far cry of the RBA’s 2-3 percent objective.
The likelihood that the central bank validates the markets’ pro-stimulus posturing depends on its view of the forces bearing down on inflation. Not surprisingly, a formative factor has been the sinking price of oil. Indeed, the aforementioned CPI report showed the “transport” sub-group of index accounted for the largest downdraft in the fourth quarter, of which the most significant contribution was made by a 6.8 percent slide in the price of automotive fuel.
Faced with similar circumstances, some central banks have appeared sanguine. The Federal Reserve and the Bank of England have both chalked up recent disinflation to transitory forces that don’t necessarily have a strong bearing on medium-term price stability. Others have gone the other way: the RBNZ conspicuously backed off the hawkish rhetoric on display as recently as December in last week’s policy announcement.
Leading surveys of activity growth in the manufacturing and services sectors point to some loss of momentum since the second half of 2014 but the economy’s overall trajectory seems to remain positive. Realized data outcomes have also increasingly outperformed relative to consensus forecasts since the last RBA outing in December. If this encourages the RBA to look through near-term price declines and fall in with the Fed/BOE side of the argument – catching markets off-guard with another neutral policy statement – a swift Aussie Dollar rebound is likely in the cards.
Nikkei forecast for the week of February 2, 2015, Technical Analysis
The Nikkei as you can see rose during the course of the week, we continue to be consolidative, and as a result we need to get above the ¥18,000 level in order to continue to buy this market. We believe that there is plenty of support at the ¥16,500 level, and that the Bank of Japan will continue to push down the value of the yen, which of course should continue to bring up the value of the Nikkei given enough time. We are buyers of dips, and most certainly buyers of the aforementioned move above the ¥18,000 level.
DAX forecast for the week of February 2, 2015, Technical Analysis
The German index tried to rally initially during the course of the week, but as you can see the €10,800 level offered enough resistance to turn things back around and form a shooting star. This suggests that the market could fall, but ultimately we believe that there is enough support below to turn things back around as well. This simply looks like it’s going to be a pullback that should offer a buying opportunity, not some type of meltdown. With that being the case, we think that the DAX is going to offer value here soon, which of course is exactly what we want to see in order to push the market higher.
Keep in mind that the falling euro is of course good for stocks in general, as it should expand exports and also is in theory supposed to increase velocity of money in the European Union. That being the case, a lot of traders will avoid bonds in the European Union, as the ECB is buying them, driving yields down. This forces money into the stock markets and we cannot think of a better place to put your money in the European Union than Germany. After all, it is the engine that drives the European economy overall, so of course it makes sense that the DAX of all indices should be the strongest and most reliable. That’s typically the case, and most certainly will be in this particular circumstance. It may not be where the “hot money” resides, but it is where the stable and longer-term money is. Because of that, we believe that the longer-term move higher should continue, continuing to grind towards the €12,000 level.
We simply look at this pullback as a “heads up” that we can pick up the index cheaply, as we believe that there is so much noise near the €10,000 level that it’s almost impossible to break down at this point in time. Ultimately, with a soft central bank, this market should continue much higher over the longer term, offering plenty of buying opportunities every time it falls.
NASDAQ forecast for the week of February 2, 201 find, Technical Analysis
The NASDAQ as you can see fell during the beginning part of the week, finding the 4600 level for support. We bounce from there, and as a result we ended up forming a hammer, and it now looks as if the market is trying to build up enough pressure to break out to the upside. The 4800 level above should be broken eventually, but at this moment in time it’s been a bit resistive and therefore we may have to take some time. With that, if we can break above that level we believe that the market will then head to the 5000 handle.
S&P 500 forecast for the week of February 2, 2015, Technical Analysis
The S&P 500 fell during the course of the week, testing the 2000 level as a supportive area. That being the case, it appears of the market is ready to go back and forth and eventually go higher. The 2100 level of course is a target, but once we get above there we feel that the market to continue the uptrend that we have seen for so long. However, this week is of course the nonfarm payroll number, so we feel that the market should react to that but ultimately is in an uptrend for a reason.
US Dollar Index forecast for the week of February 2, 2015 Technical Analysis
The US Dollar Index initially fell during the course of the week, testing the 94 handle for support. We found enough support back there to bounce and form a hammer, and as a result it looks like the markets ready to go higher. This is a bit surprising though, considering how massively parabolic this contract seems to be. Nonetheless, what this means is that the US dollar should continue to strengthen against most spot Forex pairs as well. With that, we look at pullbacks as potential buying opportunities.
Gold forecast for the week of February 2, 2015, Technical Analysis
The gold markets fell during most of the week, but found the $1250 level to be supportive enough to turn things back around and form a hammer. That being the case, it looks like the market is fairly well supported and as a result should continue to go higher over the longer term. Because of that we are buyers of gold for longer-term moves, and believe that it’s only a matter of time before we break out to the upside and perhaps head as high as $1400 going forward.