Markets have quietened down a lot since the last attack from Iran on UIS military bases last Wednesday, but particularly this week. The US didn’t retaliate on the attacks, thus de-escalating the tensions, so no WW3 for what we know. As a result, the sentiment has improved, although traders are waiting on the sidelines for the Phase One deal between US and China to be signed off later this afternoon.

Now one knows what direction markets will take after that; we might see a relief rally in risk assets initially, as optimism after the deal is singed. But, traders might also turn to fundamentals, which are not good with the global economy still weakening. So, there’s uncertainty in the air, hence the sideways price action in most pairs. Although, we saw some decent price action in GBP pairs today, with GBP/USD losing around 60 pips after UK inflation report came softer then expected and the BOE keeps turning even more dovish now.

The European Session

• Iran’s Rouhani Want the EU to Continue the Nuclear Deal Agreement – Yesterday we heard European leaders say that they are concerned about the nuclear deal with Iran. Today, Iranian president, Hassan Rouhani said that the EU should fulfill its commitment on JCPOA deal. All steps Tehran has taken to distance itself from the deal are reversible. EU has failed to act as an independent bloc, should apologize to Tehran. He rejects UK PM Johnson’s idea of a ‘Trump deal’ on nuclear program.

• BOE’s Saunders Turns Dovish Too – The Bank of England has been neutral in 2019, despite a deteriorating economy, but they have turned dovish recently and Saunders comments points at that. Comments from BOE policymaker, Michael Saunders:

  • Would not say that a rate cut now is precautionary
  • Aggressive steps needed given limited monetary policy space
  • It probably will be appropriate to maintain an expansionary monetary policy
  • And also to possibly cut rates further
  • Monetary policy space is limited
  • Risk considerations favour a relatively prompt, aggressive response to downside risks
  • Most likely outlook is a further period of subdued growth
  • Economic growth is sluggish, spare capacity is rising, inflation is subdued
  • Brexit uncertainty may continue, weigh further on the economy
  • Neutral level of interest rates may have fallen further over the last year or two
  • Risk management is an extra argument for a rate cut
  • But the case for one also stands without this
  • Economic data justifies a rate cut during the last couple of meetings
• UK CPI Inflation Report – Inflation was holding up well in Britain during most of last year, despite the weakening. But, it has cooled off in recent months and today’s report showed further softening in December. Below are the figures:
  • UK December CPI +1.3% vs +1.5% y/y expected
  • Prior +1.5%
  • CPI 0.0% vs +0.2% m/m expected
  • Prior +0.2%
  • Core CPI +1.4% vs +1.7% y/y expected
  • Prior +1.7%
• ECB’s Holzman Speaking on Low Rates – ECB governing council member, Robert Holzmann was speaking earlier today, saying that ECB strategic review will start next week. Low, negative rates may have long-term impact. Possible negative impact is on productivity, banks and financial stability.

The US Session

• Positive Comments on US-China tariffs From Mnuchin – US Treasury secretary, Steven Mnuchin, said a while ago that there will be additional tariff rollbacks in Phase Two of China trade deal. Phase One trade deal has very thorough enforceable mechanism. China has agreed to put together very significant laws to follow through on its commitments. Certain tech and cyber security issues will be in Phase Two of the trade deal. Phase One trade deal is a very complicated agreement. It is worth it even if there is no Phase Two agreement. Huawei is not a ‘chess piece’ in US-China relationship.
• US PPI Inflation – US PPi inflation report has been released. Headline and core PPI were expected to have increased by 0.2% in December, but instead came at 0.1%. CPI excluding food, energy and trade also came at +0.1% against +0.2% expected. Headline PPI YoY moved to +1.3% as expected, up from +1.1% in November. But, core PPI which excludes food and energy remained at 1.1% against +1.3% expected. PPI YoY excluding food energy and trade jumped to +1.5% from +1.1% prior, so trade has been the drag here.
• US Empire State Manufacturing index – The manufacturing index has been weakening in the US, but it seems to be making a reversal, as it has improved in the last few months.
  • Empire manufacturing index 4.8 versus 3.6 estimate. . The index is the highest since August 2019 when it also came in at 4.8.
  • The December index was revised to 3.3 from 3.5 previously reported
  • new orders 6.6 in January versus revised 1.7 December
  • shipments a .6 versus 9.5 in December
  • prices paid 31.5 in January versus 15.2 in December
  • prices received 14.4 versus 4.3 in December
  • employment 9.0 in January versus 10.4 in December
  • average employee workweek 1.3 versus 0.7 in December
  • unfilled orders -2.7 versus -13.8 in December
  • delivery time -2.7 versus -5.8 in December
  • inventories -0.7 versus +2.2 in December

Trades in Sight

Bearish GOLD

• The trend has changed
• The 50 SMA has turned into resistance
• Fundamentals have turned bearish

The 50 SMA is acting as resistance yesterday

Gold has been bullish for a long time, as the global economy has weakened, the trade war escalated and major central banks turning dovish. So, traders turned into safe havens and in particular Gold, which has been surging. Geopolitical tensions in the first week of this year between US and Iran have helped keep Gold bullish.

But, the tensions have decreased in the Middle East, as US didn’t attack back to keep its reputation, after Iran attacked US military bases in Iraq. Tensions have de-escalated now and safe havens have retreated lower. Gold has lost around $75 from top to bottom and moving averages have now turned into resistance.The 100 SMA (green) did a great job as resistance yesterday during the retrace higher on the H1 chart and today the retrace seems to have ended below the 50 SMA (yellow) on the H4 chart, as seen above. That shows that the pressure is on the downside in Gold. The Phase One deal will be signed soon, which will improve the sentiment further, so Gold should remain bearish for some time. We opened a sell signal easrlier today in Gold and might do so again, after booking profit in the first trade.

In Conclusion

The sentiment has improved in financial markets, but it can bee seen that there is some tension. The trade deal between US and China will be signed off in a couple of hours, but it remains to be seen what direction markets will take after that, so stand ready folks.