Macro: Sandcastle economics
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NY Open: Soundbites and headlines keep traders on their toes
Michael O’Neill
FX Trader, Loonieviews.net
Summary: FX markets are skittish. Top-tier US economic data is hard to find, and lingering effects from the late December equity market melt-down has seen currencies test both sides of recent ranges in the past week
GBPUSD is the posterchild for headline and soundbite-driven price action, although USDJPY is giving it a run for its money. The commodity currency bloc gave up overnight gains since New York opened, while sterling added to them. EURUSD is flat, with traders awaiting Thursday’s European Central Bank meeting.
GBPUSD is probing (and poking through) resistance from the downtrend line from May. It is at 1.3030 The 50% Fibonacci retracement resistance from May 2018-January 2019) is at 1.3040, which if decisively broken targets the 61.8% level of 1.3170. Short GBPUSD positions are getting squeezed by headlines suggesting that UK politicians finally realise that a “no-deal” Brexit may not be a good thing.
Traders are starting to believe that this gaggle of MPs will succeed in achieving in just 65 days, what two- plus years of negotiations failed to accomplish – a workable Brexit. EU chief negotiator Michel Barnier is ramping up the pressure. He said that the EU is open to several models of future trade while warning that time is running out. He also said that the UK is still on the hook for a sizable breakup fee, even if it is a non-deal.
USDCAD rallied on the back of weaker than expected retail sales data and the drop in WTI oil prices.
USDJPY climbed in a choppy fashion since January 14. The uptrend line from 108.00 is intact while prices are above 109.20. Today’s move above 109.64 snapped the mid-December downtrend with a move above 110.00 opening the door to a retest of 110.60. The Bank of Japan’s downgrade of 2019/2020 inflation expectations opened the door to possible easing at some point this year, although most economists believe such a move is unlikely.
Wall Street’s yo-yo-like price action continues. The three major US equity indices are well on their way to recouping yesterday’s losses. The DJIA is almost there, but the S&P 500 and NASDAQ still have a long way to go. Traders are optimistic that US politicians will shortly put an end to the government shutdown. White House Economic Advisor Larry Kudlow’s affirmation that US/China trade talks are continuing, helped sentiment.
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