European Open Preview – Dollar loses ground as US Treasury yields retreat further; focus on Powell

European Open Preview – Dollar loses ground as US Treasury yields retreat further; focus on Powell

Here are the latest developments in global markets:

  • FOREX: The dollar index which tracks the strength of the dollar against a basket of six major currencies opened lower in Asia, touching a session-low of 81.67 (-0.25%). Dollar/yen slipped to a one-week low of 106.43, while aussie/dollar and kiwi/dollar were the best performers, with the former peaking at 0.7880 and the latter surging to 0.7336. Pound/dollar bounced back up to 1.4015 and euro/dollar managed to pare Friday’s losses, returning to 1.2327.
  • STOCKS: Asian stock markets advanced on Monday following Friday’s Wall Street rally and news that the Chinese President Xi Jinping was planning to remove a constitutional clause limiting presidential service to two terms. This would allow him to stay in office indefinitely. Japan’s Topix and Nikkei 225 closed 0.80% and 70% higher respectively, while Hong Kong’s Hang Seng rose by 0.74%. Shanghai’s SE composite index was up by 1.25%. In Europe, equities were also in the green.
  • COMMODITIES: Oil prices headed towards three-week highs after the Saudi Arabian Energy Minister said on Saturday that Saudi Arabia will manage to hold its crude oil production well below its output caps in the first quarter of the year, while he also mentioned that OPEC members would be able to relax their production curbs next year when the deal expires, under a permanent framework that would stabilize oil markets. Meanwhile in Libya, the El feel oil field was shut after guards of the field protested to demand higher payments, giving further support to oil prices. WTI crude and Brent were last seen at $63.65/ounce (+0.14%) and $67.35/ounce (+0.07%) respectively. In precious metals, gold posted significant gains, jumping to $1340.90/ounce (+0.79%) on the back of a weaker dollar.

Major Movers: Dollar weakens but all eyes on Powell

The dollar started the week on the backfoot as the US Treasury yields extended their losses from a 4-year high of 2.975 percent reached on Wednesday, falling to 2.866 percent on Monday. Investors, however, held a cautious on the currency as all eyes are now on the new Federal Reserve chief, Jerome Powell, who is expected to make his first major appearance before the House Financial Services Committee on Tuesday.

Discussing the Fed’s Semi-Annual Monetary Policy Report and making comments on the state of the economy, Powell is anticipated to have similar views with his predecessor Janet Yellen, signaling that further monetary tightening is on the way this year, but any rate hikes would come on a gradual pace. Besides, on Friday the Fed’s Washington-based Board of Governors stated in its semiannual report to Congress on monetary policy that despite the recent stock sell-off and the subdued inflationary pressures, it sees “steady growth continuing and no serious risks on the horizon that might pause its planned pace of rate rises”. Note that Fed policymakers project three rate rises this year. Powell will also testify in front of the Senate committee on Thursday.

Meanwhile, the Bank of Japan’s Governor, Haruhiko Kuroda, speaking in Parliament on Monday, dismissed any plans to review monetary policy amid elusive inflationary pressures, saying that the central bank will maintain its current ultra-easy monetary policy as “Japan’s economy is no longer in a state that can be described as deflation”.

In other news, the Bank of England’s Deputy Governor, David Ramsden, argued that interest rates might have to rise faster than previously thought if wage growth rises sooner this year according to the Sunday Times newspaper. This comes in contrast to his stance in November, when he held a dovish stance, opposing the BOE’s decision to raise rates for the first time in a decade.

Day Ahead: Numerous speeches could dominate attention in absence of data

Monday’s calendar is a light one, with the focus possibly remaining in several speeches during the day, while the US dollar started the week with steep losses. Investors are waiting the New Fed chair Jerome Powell’s testimony that will take place tomorrow.

In other data releases, in the UK, gross mortgage approvals will be available at 0930 GMT. Analysts anticipate the figure to stand at 37.2K in January compared to 36.1K in the preceding month. Also, later in the day, January’s new home sales will be released out of the US.

At 1000 GMT the ECB Executive Board member Benoit Coeure will deliver a welcome address at the first meeting of the Working Group on Euro Risk-Free Rates. Later, at 1300 GMT St. Louis Fed President James Bullard will give a presentation on the US economy and monetary policy before the National Association for Business Economics conference titled “Promoting Sustained Growth: Policy Tensions and Risks”. At the same event, Fed Vice Chair for Supervision Randal Quarles will give a speech on “A View From the Federal Reserve Board”. ECB President Mario Draghi is scheduled to give a speech to the European Parliament’s ECON committee at 1400 GMT. In the afternoon, at 1800 GMT BOE Deputy Governor Jon Cunliffe is expected to speak at Warwick University.

In politics, the leader of Britain’s opposition Labour Party, Jeremy Corbyn, will clarify the party’s position on Brexit today, in a move that could lead to a major parliamentary defeat for Prime Minister Theresa May.

One of the major events this week is the Fed Chair Jerome Powell’s speech in his first outing to testify on the economic outlook before the House Financial Services Committee in Washington. The market is not expecting to say anything new, with inflation forecasted to hold around 2% for the rest of the year, although several rate hikes are on the agenda.

Technical Analysis: USDJPY remains under pressure; maintains bearish short-term bias

USDJPY retreated during today’s European session, holding below the 23.6% Fibonacci retracement level of 107.45 of the downleg from 113.70 to 105.50.

From the technical point of view, in the daily chart, the stochastic oscillator seems to have halted its advance as well, lending support to a mostly bearish short-term picture. Also, the MACD oscillator is moving slightly lower in the negative territory after it posted a bearish crossover with its trigger line in the previous sessions, suggesting a downside tendency in the near-term.

In the absence of economic data, the pair is expected to remain negative and continues its previous tendency. The next level to have in mind is the 105.50 support barrier, taken from the inside swing high on October 2016.

On the flip side, in case of an upside retracement, the price could hit the 23.6% Fibonacci mark at 107.45. A jump above the aforementioned obstacle could open the door for the 107.90 – 108.00 resistance area.