An interesting week in financial markets is about to end today with a huge divergence of opinion among market participants. The fact that today is the NFP day comes to further fuel the pressures on both dollar bulls and bears.
The week started on a high note for the dollar, as it constantly gained against all rivals. In Europe, the Euro and the CHF were major losers. Commodity currencies (i.e., AUD and CAD) lost ground against the greenback as well.
At the same time, the name of the game this week on the equity markets was a sharp reversal when compared to last Friday’s close. The Nasdaq 100, Dow Jones, and the S&P 500 all marched higher, fueled by better than expected earnings and by further stimulus from the U.S. Congress.
European markets followed suit, helped by a lower Euro. This theme may continue beyond this week, should the Euro continue to lose ground against rivals. Still in Europe, the Bank of England delivered a hawkish statement by ruling out negative rates from now. As such, the pound rallied across the board and against all rivals.
Commodities traded with a mix tone. On the one hand, oil had a great week, continuing its bullish trend in a week when OPEC did not surprise the market. On the other hand, silver and gold traded with a bearish note, albeit silver rallied at the start of the week on the back of some retail traders trying to corner the market. They failed.
Today’s trading day focuses on the stock market and the dollar. Besides that, traders may want to wait for the daily/weekly fix later in the London session to have an idea about the flows at the end of the first trading week of February.
Jobs data in the United States and Canada is the highlight of the end of the trading week. Because both releases are out at the same time, it makes it difficult to trade the USDCAD pair. For example, if the U.S. data is bullish on the USD, but the Canada data is bullish on the CAD, which way the USDCAD will eventually move? That is one of the trickiest pairs to trade on an NFP day, and so many traders prefer to wait for the data and see the initial market reaction before going long or short.
The Ivey PMI rounds up the week for the CAD traders and the Bank of England’s (BOE) Governor Bailey is set to deliver a speech at the Monetary Policy Report National Agency Briefing. Judging by the GBP pairs rally seen yesterday, GBP traders will keep a close eye on what Bailey has to say.
Markets to Watch
The EURUSD was the star of the week as it fell below 1.20, a magical, psychological round number with huge implications for both bulls and bears. Dow Jones in the United States traded with a big tone the entire week so far, and today’s focus is on its ability to still rise after the NFP report. Finally, the USDCAD is a must during the NFP day, as data from Canada may easily reverse the initial market reaction.
The move of the week in the FX market was the decline in the EURUSD exchange rate. Sure, some other currency pairs, like the GBPUSD, for example, were more volatile, but this is exactly what makes the EURUSD decline more remarkable. It fell despite huge divergences across the financial markets, both on the stock market and the FX.
The focus today is to see if the falling channel seen above manages to hold the price action in the pair, giving the volatile NFP report. If it does, the chances are that the pair will end up the week at the lows.
A remarkable week for U.S. equities and for other stock markets around the developed world that move in a correlated fashion with the U.S. indices, is about to end. Dow Jones started the week with a bullish tone and kept rising ever since. The brown horizontal line shows a previous triple top formation – a reversal pattern, if it holds.
However, traders are familiar with the saying that triple tops rarely hold. In fact, most of the time, when a triple top appears on a chart, the market prepares or a so-called non-limiting triangle. It means that the market builds energy to break the area, and the Dow looks like it is doing exactly that.
Another bullish sign appeared when the pennant, the triangle in the chart above, broke higher. Its projected measured move points to new all-time highs, and the NFP-related volatility might be just the one that the Dow needs to reach that level.
As mentioned earlier, trading the USDCAD pair during the NFP day is tricky as tricky can be. Nevertheless, the technical picture looks compelling enough – even bullish.
The USDCAD formed a falling wedge that took two months to complete – December 2020 and January 2021. A falling wedge acts as a reversal pattern and by the moment the price breaks its upper edge, the bearish trend ends.
At this point, bulls may want to consider two scenarios – one aggressive and one conservative. Aggressive bulls may decide to trade the pennant formation, depicted in brown above. Effectively, it means that by the time the price breaks the triangular pattern, a new leg higher starts as traders focus on the measured move. Conservative bulls, though, may decide to wait for the rising wedge to be retested. While this is not a mandatory requirement, the price tends to do so more often than not.
Winners and Losers
The GBP pairs were the absolute winners this week. The Bank of England’s decision not to engage in negative rates at this point sent a flurry of buying orders into the GBP pairs.
Moving forward, the U.S. equities outperformed when everyone looked for a downturn. Strong earnings made it possible for the stock market to remain close to all-time highs.
Finally, the USD. While the week is not over, the dollar’s index move higher was nothing short of impressive considering the stocks bullish run too.
Heads up for the NFP report in a few hours – it has the power to change everything that happened so far in the trading week.