Daily Roundup – Markets review 31/01/2019

powell

Daily Roundup – Markets review

January 31st

There was always an expectation that yesterday’s FOMC meeting would deliver some meaningful volatility for the dollar and Jerome Powell’s team certainly didn’t disappoint. Acknowledging lacklustre inflation at home and the deteriorating global economic situation, the message was one of patience when it comes to making the next rate hike. Downside pressure on the dollar was further exacerbated by news that Central Banks globally were dumping the reserve currency of choice and instead buying up gold at a pace that hadn’t been seen in 50 years. The DXY index has slipped to three week lows and with expectations over any quick progress being seen in the US – China trade talks seemingly limited, the theme of USD weakness may prevail for a while.

The Euro largely brushed off yesterday’s disappointing German inflation data, but downside pressures could build in the near term with the flash Q4 GDP print for the currency bloc expected shortly. There’s a real risk that the Eurozone could slide into recession before the year is out and talk of fresh ECB stimulus measures is starting to surface. A shortfall in the 0.2% growth which is forecast has the potential to rattle the common currency – and potentially apply pressure on politicians in Brussels to take a more accommodative stance when it comes to ensuring the UK doesn’t crash out of the EU without a deal. Economically, such a situation is seen as being bad for the continent as a whole, not just the UK.

The combination of that dovish message from the Fed last night, plus some not-too-bad PMI readings from China have served to lock in recent gains for the Aussie Dollar, although until there’s meaningful progress in the trade talks, gains could prove difficult to lock in over the longer term. The private Caixin PMI data due overnight tonight may provide some further direction here and in the event that it does manage to exceed expectations and break the 50 level, risk appetite could be renewed across the board heading into the weekend break.

Technicals

USD/JPY is under some sustained downside pressure having broken below the 38.2% retracement of the post flash-crash rally. Look for a move down to the 50% retracement around 108.35.