Forex Market Outlook Central Banks Coming Back Into Focus

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Forex Market Outlook: Central Banks Coming Back Into Focus

Easy Money Policy, It’s Back

To say easy money policy is back is a misstatement. Easy money policy never really went away. Policy has been tightened in a few countries, specifically the U.S., and some other countries had been on target to tighten, but by no means is or was global monetary policy “tight”. That said, easy money policy is about to get easier. The FOMC, the ECB, the BOJ, and the BOE (among others) are slated to hold their next policy meetings within the next two to three weeks and they are all expected to cut rates or stimulate their economies in some other fashion. What this means for traders is volatility. None of these banks will issue their statements at the same time which means there is a lot of opportunity for news to pull the market one way, and then push it another.

The biggest risk might be in the dollar. The dollar has been rallying and is now approaching the most recent high because the FOMC has not been as dovish as the market wants them to be. The FOMC did not aggressively cut rates last month, they did not adopt a dovish stance, and in the end still view the economy as strong, the policy cycle to be one of tightening. The last rate cut was a mid-cycle adjustment, giving back the 1-cut too many enacted last fall, and a means to reinvigorate economic activity.

The Fedwatch Tool is still showing a high probability for two more cuts by the end of the year and that my friends is just too many. The July Income and Spending data shows wages are still rising and consumer spending is hot. Spending rose 0.6% in the month, better than the 0.5% that was already expected, and is a foreshadowing of what will come later this fall. The experts are forecasting as much as 5% growth in retail sales this holiday season, I think the figure may be a little light. Basically, I don’t think traders should be dovish on the Fed, I think the Fed will disappoint the market and the dollar will shoot to new highs.

The indicators on the DXY are still a little weak but they are bullish and rising so higher prices are expected. Stochastic and MACD both have plenty of room to move higher so the rally could be substantial if it materializes. Resistance is near the $99 level which is my next target. A move above that would be bullish and likely take the index above $100.

DAX 30 Price Outlook: 2009 Trendline in Focus as Index Aims Higher

DAX 30 Forecast:

  • Last week the DAX 30 enjoyed support from a trendline drawn off the index’s 2007 high
  • Now, risk appetite has reemerged as investors assess implications of the various fiscal responses
  • Should bullishness continue, maintaining price action above the various trendlines may prove crucial in a prolonged recovery attempt

DAX 30 Price Outlook: 2009 Trendline in Focus as Index Aims Higher

Stocks continued to rebound on Wednesday following massive fiscal stimulus packages to combat the coronavirus and its adverse economic impact. In the case of the DAX 30 and Germany, officials have expressed a willingness to do whatever it takes to keep the economy afloat. Coupled with the $2 trillion package from the United States, price action would suggest investors have begun to wade back into the market. As a result, the DAX 30 has moved off the lows it established last week as it aims higher – for now.

DAX 30 Price Chart: Weekly Time Frame (2007 – 2020)

In turn, the index will have to surmount nearby resistance if it is to continue higher. The first barrier to an extension is an ascending trendline derived from the index’s 2008 lows – currently existing around 9,640. That being said, a daily close above the level on Wednesday is an encouraging sign moving forward and may provide the DAX with a base from which it can attack the psychologically significant 10,000 mark slightly higher. If both are successfully breached, an ascending trendline from the 2020 and 2020 lows may be the next major area of resistance for the German equity index.

Either way, traders will have to sustain price action above the ascending line in the coming days for it to regain some semblance of its influence prior to the bearish break. Further still, lingering volatility should make consistent directional moves more difficult to establish. That, coupled with persistent uncertainty, could see the DAX 30 turn lower in the coming days. Should bearishness return, maintaining price action above last week’s low near 8,000 will be critical in warding off a deeper retracement.

Despite trading comfortably within a bear market, short-term rallies are not unheard of. While governments and central banks have made a substantial effort to buoy their respective economies, it seems illogical to suggest equity valuations should return to levels prior to the crash.

Change in Longs Shorts OI
Daily -6% 6% 1%
Weekly -26% 26% 1%

Then, economic outlooks were being revised upward and global travel was flowing steadily. Now, an average citizen in most developed economies cannot go to a bar, restaurant, book travel or even go outside without the goal of fulfilling an essential need. Thus, I suspect bearishness to resume in the days ahead for the DAX and overhead resistance offers an attractive opportunity to reduce long exposure or explore bearish trading opportunities. In the meantime, follow @PeterHanksFX on Twitter for updates.

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

Contact and follow Peter on Twitter @PeterHanksFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Week Ahead – Central Banks Back to the Fore

Coronavirus developments closely monitored

What a start to the year it’s been. There was so much that could have gone wrong in the opening weeks of 2020 and yet, it’s been the completely unexpected that’s rocked the markets.

This week it was the spread of Coronavirus that’s making investors nervous. We’re not in full panic mode just yet but there’s clearly tensions building and the near-3% declines in China on the final day of trading before the new year holiday is a prime example of that.

Central banks come back to the fore next week with a possible rate cut from the Bank of England and first Federal Reserve meeting of the year the standout events. The meeting marks a end to a messy tenure for BoE Governor Mark Carney and he could be going out with one final rate cut.

Country

UK

The Brexit bill as received royal ascent, which means that – in case it wasn’t already clear – the UK will leave the EU on 31 January and enter into the 11-month transitional period. This is subject to EU lawmakers passing the Brexit deal on Wednesday but there’s not expected to be any complications there. Although it would be very Brexit if there was one last twist.

There may be no big ben bong for Brexit – if you’ve not heard this story, I envy you – but the trade negotiation phase can now get underway. Not only is the UK keen to agree a new relationship with the EU in that time, it also has admirable ambitions to strike one with the US as well. That may be less complex but at the same time, it doesn’t make for an enjoyable 11 months for UK civil servants.

Thankfully this coming week the topic of conversation will instead focus around the Bank of England. Thursday’s meeting has gone from a fond farewell to Mark Carney (although Brexiteers may remember him less fondly) to an actual live meeting. Carney leaves the BoE in mid-March, before the next meeting later that month. It’s become a coin toss for a rate cut which typically means it will be unchanged but odds have fluctuated quite dramatically over the last couple of weeks so that could change as we get closer to the vote.

US

The Fed is on hold and while no one expects any changes to the target range, policymakers could tweak the IOER and provide some clarity on how they will end their purchases of Treasury bills next quarter. The January FOMC meeting will likely see limited changes as the data since the December meeting has been slightly softer but countered by improved optimism following the US-China phase-one deal.

The dollar will stubbornly remain strong on safe-haven flows, but long-term Fed policy should provide a backdrop for weakness, as the Fed seems set for a path to see further balance sheet growth.

Mexico

The Mexican peso will look to see if it remains one of the best performing currencies in LATAM. The focus for peso traders will fall on preliminary fourth quarter GDP reading. Mexico is likely to see a boost from the USMCA deal and while we could see a soft GDP reading raise calls for one more easing, we may only see one or two more cuts by the Banxico. Mexico has one of the best outlooks in LATAM and if the central bank maintains a high overnight rate, carry traders may find the peso very attractive in 2020.

Hong Kong

Coronavirus is front and centre of concerns as Chinese New Year starts tomorrow on the Mailand. Hong Kong is off from Monday to Wednesday. A SARS-like induced economic slowdown could be a body blow to Hong Kong economy already in a protest induced recession.

One silver lining is that protests will likely be muted by coronavirus fears. An escalation in the coronavirus emergency could see Hong Kong stocks collapse next week on their return to work.

China

Coronavirus concerns are increasing with more cases and deaths and the complete quarantining of Wihun city and its 11 million people. Chinese stock markets fell 2.75% today. China is now on holiday until the 30th of January.

A serious escalation of coronavirus emergency could see China stockmarkets collapse on Friday 31st and the risk of a recession come very quickly. The yuan could depreciate quickly, upsetting the United States.

India

India’s Supreme Court to release judgement on the legality of Modi’s citizenship law. Protests are possible and if Supreme Court backs Modi, foreign direct investment could dry up, deepening India’s slowdown. Some parts of the financial sector are still on life support. Potentially very negative for the the rupee and Indian equities.

Market

Oil

Oil prices have been quite volatile this week, not to mention one area that’s been particularly sensitive to the breakout of Coronavirus. Fears about the economic impact of a more severe outbreak appear to have hit oil prices at a time when demand dynamics are already a point of concern.

This is a very different response to what we saw in the aftermath of the Libya outage, which says a lot about where the concerns really lie in these markets. Brent has sold off quickly though so may be less sensitive to modest increases in the spread of the virus. Support may start to come in as it approaches $60.

Brent Daily Chart

Gold

Gold prices have been relatively stable over the last couple of weeks since events in the middle east settled down. Rallies are being sold into at the moment which signals weakness but the breakout of Coronavirus could complicate things.

We’re not seeing any significant safe haven moves right now but as the close in China on Thursday, prior to the weeklong new year holiday, risk aversion is creeping in. That could become more pronounced as the virus spreads and be supportive for gold prices.

Gold Daily Chart

Bitcoin

Bitcoin is as volatile as ever and enthusiasts are desperate as ever to attribute any market event that impacts regular instruments to the cryptocurrency market. We saw it earlier this year with the escalation in the middle east but they’ve gone a little quiet this week.

Bitcoin has been paring gains even as investors become a little more cautious, once again raising huge question marks over its haven status. Still, enthusiasts are relentless and that keeps the market volatile.

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