The trading week was poor in terms of relevant economic data that had the potential to move markets. As such, the price action followed in the same direction as last Friday’s closing – a lower USD due to a weaker than expected NFP report.
The U.S equity markets remain elevated on the expectations of further stimulus from the new administration in Washington. The so-called “Biden” stimulus is expected toward the end of the month, and we might say that it is already priced in. However, no one knows how the market may react to the news, so the feeling is that this is what keeps the market afloat and close to all-time highs.
In Europe, the Euro bounced back from last week’s lows. It rose close to two hundred pips against the dollar, as other G10 currencies did too. However, it trades mixed against other currencies; for example, the EURJPY is only marginally higher, while the EURGBP cross continues its bearish move. Dax in Germany still struggles at the highs, and it looks for direction, just like other European indices do.
Moving to commodities, oil is the star of the week. It moved close to $59, and one can feel the importance of the psychological $60 level. Gold, on the other hand, was unable to overcome horizontal resistance and was rejected yesterday in a fresh sign of dollar strength. Will that strength spill over to other dollar pairs?
Inflation in the United States remains subdued. The data for the month of January revealed that the core inflation for the month of January, the one that excludes food and energy prices, remained flat for the month. However, the headline CPI increased by 0.3% on a monthly basis, following another increase by 0.4 in the previous month. Yet, the market is not worried about inflation at this point because the Fed only cares about the core data.
Speaking of the Fed, Jerome Powell held a speech on Wednesday. While he did not move the markets, he did mention that the real unemployment rate in the United States is likely close to the 10% level rather than what the latest data showed.
From Europe, the European Commission downgraded the Euro area GDP for 2021 but keeps an upbeat tone for 2022 and remains optimistic. Unsurprisingly, this supported the Euro pairs as the EURUSD reached a high of the week close to the 1.2150 area.
However, the week is not over yet, although there are no significant events left in the London and New York sessions. After the U.K. data, mostly positive, came out earlier today, one can simply ignore the rest of the events on the economic calendar.
Markets to Watch
This week traders and investors followed some major themes in the market. First, the Dax’s index inability to distance itself from the 14,000 level raises eyebrows regarding future strength. Second, the AUDUSD pair marched higher all week despite the RBA’s dovish tone and forward guidance. Third, the gold price lost the fight against horizontal resistance, something that may affect other dollar markets soon.
The Dax index struggles at the 14,000 points, and the more it does so, the weaker it looks. Unless we see a move above recent highs in 14,140, the German index may form a double top pattern. A double top resembles the letter M and after completion it still has some more room to go to the downside.
While it is too early to say that a double top is in place, the 14,000 level, the round number, is pivotal. On a failure to hold above, the pressure will build to the downside.
It is not by chance that we have the Aussie pair here as the second market of choice today. The price action from the lows started on the Election Day, November 3rd, 2020, in the United States. That is the moment the move higher in the U.S. stocks began as well, and the AUDUSD chart shows just how closely correlated the markets are.
Just like the Dax is in danger of putting a double top, the same goes for the AUDUSD pair. Only here, the pivotal level is not a round number, but the 0.76 area that acted as both resistance and support in the past.
The star of the week, gold, failed at resistance. It struggled for days at it, and failed. If this rejection leads to the price of gold reaching the bearish flag’s measured move, then more USD strength lies ahead. Considering that the dollar was sold for the entire week so far, we should not be surprised to see a squeeze higher in the last trading day of the week.
Winners and Losers
The USD is the definite loser so far, but, as mentioned earlier, the week is not over yet. It lost ground, though, on all markets, after last Friday’s weaker-than-expected NFP report. The price of oil remains the winner of the week, even though it shows signs of weakness on its attempt to break above $60.