The ECB is back on the spotlight – Weekly Analysis 18 – 24 January 2015
Skerdian Meta • 5 min read
This week, the market continued in the footsteps of last week when investors didn´t feel like taking on risky trades. As a result, the stock market declined further and dragged down the commodity dollars and the GBP, while the Yen and Euro both benefited. This lasted until Thursday when the ECB president Draghi announced that more monetary stimulus is to be inducted in the market on March. That turned the risk sentiment positive and everything reversed, even the petrol prices. The change was in the market was sudden and the moves that followed were pretty big – which made it tough to trade but we still closed the week with a 143 pip profit.
Mario Draghi saved the stock markets on Thursday
This was another strange week. The stock market was driven by the investor sentiment, which was negative during the first half of the week and the stock markets around the globe declined. But by Thursday, the sentiment turned positive and the stock markets pared the losses. The forex market has been heavily affected by the risk sentiment and the stock markets so it was like trading forex based on the stock market this week. The commodity dollars and the British Pound declined when the stocks went down while the Yen and the Euro went up. Then, on Thursday, these two groups switched places when the sentiment improved and the stock market recovered, so trading hasn´t been easy. Yet, we managed to close another week in profit with 143 pips more in our account.
Our long-term USD/JPY buy forex signal is looking good and up 300 pips from the bottom
The US had a national holiday on Monday, so it was a quiet day; we only had one closed forex signal worth 61 pips. On Tuesday, we had four winning signals which made us 103 pips. On Wednesday, we opened five forex signals – three of which hit stop loss and the other two hit take profit targets, so we had to hand over 70 pips back from our profit. Thursday wasn´t a good day either, because the sentiment turned around immediately and pushed up the commodity dollars and the Pound Sterling without any little correction, so by Thursday evening we were at breakeven. All of the 143 pip profit we have this week is from the four forex signals, which were closed on Friday, bringing our monthly total to exactly 500 pips. We had seven losing forex signals out of 22 which gives us a win/loss ratio of 69:31.
The market this week
What a rollercoaster week this has been. Last week, the sentiment for risk assets turned sour translating into weakness in the commodity currencies and the British Pound and as strength for the safe haven currencies (like the Japanese Yen and the Swiss Franc). The Euro used to be a risk currency, meaning that it would decline during such times when the market sensed trouble. But now it has shifted into the safe haven group of currencies. As we explained on the daily blog article on Wednesday, the reasons for this change are as follows:
The Euro has probably the lowest interest rates of the developed nations/economic zones so there isn’t much room for further rate cuts.
Since it is one of the cheapest to borrow, a lot of Euros have been used to fund assets with high risk. This means that when the market is in a ‘risk-off’ mode and these assets are sold… the currency the investors receive is the Euro, so the demand for the Euro increases.
Since the US and UK have been the first to get out of the global financial crises, many risky assets have been bought with Euros and other currencies in these two countries, so obviously EUR/USD and EUR/GBP rise up during turbulent times.
Finally, the FED is more likely to delay rate hikes than the ECB is to cut during volatile times, and this adds extra strength to EUR/USD.
Following last week’s risk-off mode, this week started in the same way and the commodity currencies (together with the Pound) got hammered, breaking long-term support/resistance levels. USD/CAD got close to 1.47, partly affected by the decline in the price of oil which has reached as low as $28/barrel, GBP/USD broke below 1.41 while AUD/USD broke below 0.69. This continued until Thursday afternoon, when the ECB president appeared in a press conference. He said that the ECB will take additional monetary easing actions and the Euro dropped about 150 pips. That was the turning point and since more money will be thrown in the market the stock market will benefit greatly, which reflected in the market sentiment. The oil returned above $30/barrel finishing the week around $32/barrel and USD/CAD lost about 600 pips in 48 hours. The other risk currencies found bids as well while the Yen and the Euro declined.
On Monday, the US was off and the economic data from other areas was light. We can mention the Japanese monthly industrial production for December which declined by 0.9%. On Tuesday, the yearly Chinese GDP and industrial production missed the expectations by 0.1% while the fixed assed missed the expectations by 0.2%. In the European morning, the British inflation numbers came out and all the components came out above the expectations. About an hour later the German ZEW economic sentiment published above the consensus but the overall European ZEW sentiment missed so we can say that the economic sentiment in other parts of Europe is much lower. On Wednesday, the British unemployment rate declined to 5.1% from 5.2% but the wage growth missed the expectations so the balanced out each other. On the other hand, the US inflation numbers missed the expectations later that day. Thursday was all about the ECB and Draghi as he promised for additional measures regarding the QE program. The US Philly manufacturing index came out above expectations but the number was still negative. On Friday, the European flash manufacturing and services PMI missed the expectations
After a long-term uptrend and a consolidation period between 120 and 125, USD/JPY has made a meaningful retrace in the last two weeks triggered by risk aversion sentiment. It briefly dipped below 116, but on Thursday everything turned around, the sentiment improved and this pair closed the week nearly 300 pips above the lows. The support line at 116 (seen on the weekly chart) proved to be too strong and the 20 simple moving average on the monthly chart added additional strength. On top of that, the stochastic and RSI indicators on the weekly chart reached the oversold area and now they are headed back up, so we can say that the retrace is over now. However, you can never be too sure in forex, and if the sentiment turns sour again we might see this pair have another go at the 116 support level.
The 20 MA added strength to the support level
With the referendum about a possible Brexit from the EU next summer, GBP/USD would obviously decline. So, this pair has declined about ten cents (1,000) in the last 6-7 weeks, reaching the lows at 1.4080. But when the risk sentiment turned around on Thursday, this pair made an impressive comeback, and it isn´t over yet. During the downtrend, the price has leaned against the 20 and 50 MAs in the H4 chart, but on Thursday the price moved above the 20 MA. It moved above the 50 MA as well on Friday but dipped back below before the market closed. On the monthly chart, we see that the price moved below the long-term support at 1.47 in the beginning of the month and below the other support level at 1.4230 this week. This week the price closed above it, so the second break is not valid yet unless the month is closed below.
The price moved above the 20 and 50 MAs
The first support level is gone and we´re very close to the second
January is probably the coldest month of the year in the northern hemisphere, but this week was a hot one for the financial markets – with elevated volatility which made it hard to trade forex. We still managed to close the week in profit even though we had some ups and downs. After weeks of declines the stock market finished the week slightly up and the risk related currencies benefited from this. Even petrol closed the week about 3 cents up after bottoming at $28/barrel. We hope that next week remains in the same mode because it is easier to trade when there´s no drastic changes in sentiment.