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US Session Forex Brief, Jan 23 – Risk Sentiment is Back On

Yesterday the sentiment was leaning towards the negative side in financial markets as GOLD retraced higher while USD/JPY retraced lower. Stock markets were also retracing lower yesterday which was the second day of pulling back after trending higher since the beginning of the month. Commodity currencies were also on a downtrend which had been going on for more than a week. Today though, everything has reversed as the sentiment improves in forex and other financial markets. What could have reversed the sentiment today?

Well, last night the inflation report from the Statistics Office in New Zealand for Q4 of 2018 was expected to fall flat at 0.0%, but it ticked a point higher, coming at 0.1% for that period. The year-on-year CPI (consumer price index) was expected to cool off to 1.8%, but it remained unchanged at 1.9% as previous. The core CPI report from the Reserve Bank of New Zealand (RBNZ) also came as previous at 1.7%. The market was expecting some figures I suppose, because the NZD saw a relief rally after that, with NZD/USD climbing around 100 pips.

There were other reasons for the improvement in the sentiment today. The UK opposition Labour Party is said to back an amendment which gives the British Parliament the right to find a plan B for Brexit if Theresa May fails to do so, which would remove the risk of a no-deal Brexit. Later on, Christine Lagarde of the IMF commented that the global economy is not heading into recession. With the current direction of major global economies apart from the US, one can’t rule out recession, but I guess the market wanted to hear some comforting words and traders feel a bit better now.

The European Session

  • EU’s Barnier on Brexit – The EU chief Brexit negotiator Michel Barnier commented early in the morning in an interview with Le Monde, saying that the Brexit accord is the only divorce deal. No change from the EU then.
  • Irish Backstop is the Tumbling Block for UK Trade Secretary – These were the headline comments made by Liam Fox. He continued saying that Theresa May understands strength of feeling on backstop, and that she is talking to EU to find an alternative to the backstop. Fox hopes that technology could be a way to avoid hard border in Ireland. Why didn’t they implement technology before reaching the deal then?
  • Risks of No-Deal Brexit Have Increased for Moscovici – The head of the European Commission Pierre Moscovici commented from Davos this morning, although he hasn’t been following UK politics I reckon. It is up to the Brits to tell the EU where they want to go because the EU is ready and waiting, he continued. Nobody wants a no-deal outcome; we need to explore all options.
  • Japanese PM Abe Speaks in Davos – Shinzo Abe is in Davos with all world leaders apart from the US President Donald Trump. He said in a speech that the fundamentals of the Japanese economy are robust. Although the US-China trade frictions, Brexit, and the slowdown in China are among risks to global economy. Japan remains committed to enhance free, open, rules-based international order. He believes that the Japanese economy is in a condition for raising sales tax in October.
  • UK Labour Party Keeps Pushing for the No-Deal Scenario to be Removed – Reuters had a report earlier citing a source from the Labour Party saying that they would back Yvette Cooper’s amendment. That amendment lays out the option for the British Parliament to take over from Theresa May in case she fails to get Brexit going and find a plan B which leaves out the option of the UK crashing out without a deal.
  • UK CBI Industrial Order Expectations – CPI industrial order expectations declined to -1 point today against 5 points expected and down from 8 points last month. The CBI business indicator for manufacturers declined to -23 points which is the lowest in 2.5 years.
  • IMF’s Lagarde Feeling Positive At the Moment – The head of the International Monetary Fund Christine Lagarde commented earlier today saying that the global economy is not heading towards recession, even after the really weak economic numbers we have seen recently. Although, she added that the increase in trade risks would change their outlook, so they are keeping a close eye, not that they can do anything.
  • EU Commission Will Do Whatever it Takes to Avoid A Hard Irish Border – This was the headline comment by the European Commission a while ago. They added that the EU has full solidarity with Ireland. The Irish backstop is of fundamental importance. So, it’s all up to May to come up with something now.

The US Session

  • US MBA Mortgage Applications – US MBA mortgage applications for last week declined by 2.7% after the 13.5% jump we saw the week before. Purchase index came at 272.5 vs 278.5 prior, market index 400.6 against 411.8 in the previous week, and the refinancing index declined to 1,110.5 from 1,172.4 prior.
  • Canadian Retail Sales The retail sales were expected to turn negative again and decline by 0.6%, but they fell by 0.9% in November. Core retail sales also posted a really bad number. They were expected to come negative at -0.4%, but the figure was worse, coming at -0.6%. October’s retail sales number was revised lower to 0.2% from 0.3% previously. The core retail sales number for October was also revised lower to -0.2% from 0.0%. Terrible numbers.
  • BOC Governor Poloz Speaks in Davos – The Bank of Canada Governor Poloz is also speaking at the moment in Davos. He said that the decline in Oil prices will knock off 0.4% from last year’s GDP. He added that markets are understandably concerned about the US-led trade war. If that’s resolved, then it will be an extra lift. Otherwise, it would be a disaster if it escalated. The trade situation is crucial. Poloz says that they’re watching how the economy responds to oil, which is bouncing back. They’re monitoring developments in the housing market. He concluded saying that the Canadian economy is in good shape for Poloz. The pace of future rate hikes in Canada will be data dependent. I suppose he hasn’t seen the retail sales report released just now.
  • US HPI – The US house price index has been growing by 0.2% on average, although it tiked higher to 0.3% in October. Today’s report is for November and it is expected to remain at 0.3% again.
  • Eurozone Consumer Confidence – The consumer confidence turned bearish in the Eurozone since May and it has been getting worse. In December it deteriorated further coming at -0.6% from -0.4% previously. Today, the consumer confidence indicator is expected to come at -0.6% again.

Trades in Sight

Bearish AUD/USD

  1. The trend continues to be bearish for this pair
  2. The retrace higher is complete
  3. The 50 SMA provided resistance
AUD/USD still remains on the bearish trend

A while ago we went short on AUD/USD after our buy signal in EUR/CHF hit take profit. AUD/USD was retracing higher during the Asian session today, being dragged up by NZD/USD. But, the trend is still bearish for this pair and the retrace higher seemed complete since the stochastic indicator was overbought. Besides, the 50 SMA was providing resistance, so we decided to sell this pair and now we are already 15 pips in profit.

In Conclusion

The positive sentiment that we saw during the Asian and the European session might be over now as risk currencies turn bearish, apart from the GBP. The terrible retail sales report from Canada has had some impact on the markets and the CAD continues to slide lower. Perhaps we can get a trade on the long side in USD/CAD.

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Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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