The trading week was dominated by two major themes. One was the ongoing weakness in the U.S. dollar. As such, the AUDUSD currently trades close to 0.78, close to 2021 highs, the EURUSD is back above 1.21 after it almost reached 1.20 earlier in the week and the GBPUSD hovers close to 1.40.
Another is the ongoing strength in the equity markets. Most likely, the first (i.e., the dollar’s weakness) explains the second (i.e., higher stocks), so we can talk about a direct correlation between the two. Unless the correlation changes, market participants should expect more of the same.
In the United States, the extremely harsh weather that affects Texas and neighboring states did not affect the stock market. The Dow, for instance, traded in the following pattern for the entire week. First, the stock market futures climb. Second, shortly after the cash opening, the Dow declined, often making a new low. Finally, bulls stepped in into the second half of the trading session, and the Dow bounced, threatening the highs toward the end of the trading session. Rinse and repeat, Monday through Thursday, this was the pattern of the week.
European markets remained bid as well. The common currency, the Euro, is strong against the JPY and the USD, but weak against commodities currencies such as the AUD and CAD, despite the fact that the price of gold remains depressed. However, commodities are more than gold, and the commodity indices are up double digits so far in the trading year. Hence, the strength in the commodity currencies is likely here to stay unless we see a sudden reverse in this trend.
Crude oil sparked the move lower in the dollar and higher in the equity markets. It gapped higher at the opening last Monday and reached close to $62 before giving up some gains. Today is decisive for the price of oil – a close above $60 on a weekly basis is a big milestone for crude oil.
The first half of the trading week was poor in economic releases. Even the FOMC Minutes on Wednesday were largely ignored by market participants. After all, they did not bring anything new to the market and therefore were considered a non-event.
Things got interesting on Wednesday. The Retail Sales in the United States for the month of January have reached the highest since 2011, a proof that the stimulus, both fiscal and monetary, does help economic recovery. Yet, the data did not trigger a higher dollar as a response – just the opposite. Why? As explained at the start of this article, the stock market drives the price action. The good news was seen as positive for stocks, and stocks move higher, triggering a move lower in the dollar.
It is not the same with similar data in other countries. For example, by the time this article is written, the German flash manufacturing PMI data came out. It reached above 60, triggering a sharp move higher on the Euro pairs, with the EURUSD reaching 1.2130. Hence, positive economic news triggers a stronger currency. That is correct, but not when we talk about the world’s reserve currency. This is just one of the anomalies created by various monetary policies in different jurisdictions, but it reflects the challenges of trading the currency market.
The rest of the trading day is light from an economic release point of view, with only the services PMI in the United Kingdom and the Canadian Retail Sales as potential market-moving events.
Markets to Watch
The end of the trading week looks interesting, to say the least, with the following markets posing setups worth watching – FTSE 100, Dax, and GBPUSD.
FTSE 100 did bounce at the start of the trading week, but only to meet dynamic resistance during the right shoulder’s formation of an head and shoulders pattern. The rest of the trading week should be interesting because a move and close below the neckline should trigger more weakness.
The Dax was unable to hold above 14,000 despite flirting with the level for quite some time. The inability to do so opens up the possibility of a triple top, a reversal pattern. As such, the closing today may have repercussions at the next week’s opening.
The star of the week and of the last half a year is, without a doubt, the GBPUSD pair. It trades very shy off 1.40 and will likely trigger some stops above. How much more upside we will see, and what is the size of those stops, we are about to find out sooner rather than later.
Winners and Losers
The dollar remains on its knees, while the GBP and the AUD are top-performing as their bullish trends continued throughout the week.