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The Week Ahead – Stay focused

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EURUSD consolidates as recession fears ease

Chart of EURUSD

The euro steadies as the eurozone economy could be more resilient than expected. A smaller-than-expected PMI contraction in December may ease concerns that the bloc is over the edge of a deep recession. This could give the ECB, which has been unusually hawkish, more leeway to tighten its policy.

On the dollar side, traders have shifted their focus to the terminal rate, which means the Fed is nearing the end of the hike cycle. Meanwhile, with at least another 150 bp by the ECB on the table, the single currency may gain momentum as the rate gap narrows. The pair is testing 1.0750 with 1.0450 as the immediate support.

AUDUSD rallies as market goes risk-on

Chart of AUDUSD

The Australian dollar recovered over improved risk appetite. The new year kicked off on a risk-on note and an uptick in general sentiment set the bullish tone for assets from down under. As a proxy for the world’s second largest economy, the aussie benefits from the optimism over China’s reopening, with the market pricing in recovery beyond the immediate surge in Covid cases. As good things may also come in threes, reports that China is considering lifting its ban on Australia’s coal offer support to the commodity-linked currency. The pair is heading to August’s high of 0.7130 with 0.6650 as the closest support.

UKOIL slides on prospect of weak demand

Chart of UKOIL

Brent crude plunged over a gloomy demand outlook. The IMF has warned of a challenging year for major economies. Signs of economic slowdown in the world’s two biggest oil consumers weigh on the commodity. In the US, the weakest manufacturing PMI reading since the pandemic reinforces the Fed’s willingness to induce a recession. In China, an increase of export quotas for refined products reflects a slump in domestic demand. Additional exports could mitigate supply constraints such as the ban of Russian oil. The supply and demand imbalance could continue to depress the price. 70.00 is the next support and 89.00 the first hurdle.

NAS 100 struggles as Fed to stay assertive

Chart of UUS100

The Nasdaq 100 slips as resilient US job data would allow the Fed to stay hawkish. A main takeaway from the Fed minutes is that policymakers are not only striving to stop inflation from getting entrenched, but also to prevent the belief of rate cuts later this year from being ingrained. A still-tight US job market would nip in the bud any speculation of a dovish pivot. This means a grim outlook for the growth-focus index which has been underperforming compared to the S&P and Dow Jones, while its constituents’ higher betas would exacerbate moves in any direction. A fall below 10600 would expose 10000. 12100 is a key resistance.

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