The new earnings season has started in the United States…
Forex market in January
The start of the new year is a great time to set new goals and develop new skills. It would be wise to begin with developing mindfulness and strategic thinking. To do that, I propose you to prepare for trading in advance. In this article, we’ll analyze the strengths and weaknesses of major currencies in January, as well as the main Forex events of the month.
Note that January is typically a very volatile month. The first days of the month can be especially volatile as the amount of liquidity will be lower than usual with many traders on holidays. In addition, many major pairs have been consolidating in triangles – a move that usually precedes rapid breakthroughs.
The Federal Reserve delivered a long-awaited rate hike in December, and the market doesn’t expect more hikes until March.
The main events of January will be the release of labor market data on January 5 (nonfarm payrolls, unemployment rate, and average hourly earnings), the publication of CPI and retail sales on January 12 and advance GDP for Q4 on January 26. Reconstruction from three hurricanes may have boosted growth in the fourth quarter. Note that as the market is currently pricing in only one rate hike fully, improvements in American economic indicators can revive demand for the USD and help it recover.
When Donald Trump’s tax reform was finally signed, it failed to move the USD much. We think that the market will once again get interested in the impact of this legislation on the US economy, but later in 2018. In January tax reform is not likely to be of much help for the greenback.
The US dollar index is about to quit 92.00/95.00 range. A slide below 92.00 may lead to a deeper selloff of the US currency (91.00 and 90.00 for a start). On the upside, resistance is located at 94.00 and 95.00.
So far, the euro hasn’t been able to fall substantially versus the US dollar as buyers used its declined to increase their positions. This buying on the dips led to the situation when downside corrections in EUR/USD seemed only shallow. At the same time, the pair needs to overcome the psychological resistance at 1.20 to resume the general uptrend of 2017, which has stalled since August. 50-month MA at 1.1745 will act as support.
Traders continue to expect policy normalization from the European Central Bank. The ECB will meet on January 25. The market’s attention will be focused on the press conference of the ECB president Mario Draghi at 15:30 MT time. Mr. Draghi usually has his way with words: he is always able to turn the market’s sentiment round during his speech. As a result, his pressers lead to big swings in the euro. In December, the ECB remained committed to asset purchases, although starting from January the regulator will be buying fewer bonds (in line with the decision made in October).
Europe is doing fine economically, although inflation could be higher. On the political front, there are some minor risks. Germany will enter 2018 without a government as Angela Merkel failed to form a coalition nearly 90 days after the general election. Her party will begin talks with the Social Democratic Party (SPD) on January 7. The Catalan separatist parties won 70 seats in a regional parliament consisting of 135 seats prolonging political tensions in Spain.
Some market-moving headlines from the world of politics are possible, but the main scenario is that the situation will remain calm and the euro will manage to continue its fight with the greenback from a rather favorable position. Watch EUR/JPY for ideas – the pair seems ready to explore higher levels.
Prime Minister Theresa May managed to move Brexit negotiations onto the questions of a transitional period and trade. This should have a positive impact on the pound. At the same time, political uncertainty hasn’t entirely vanished from the UK. Members of May’s own conservative party seem eager to complicate the talks. As a result, traders seem to be in the situation of indecision. When you try to estimate the impact of the incoming news from Britain, remember that the ‘softer’ the Brexit, the better for the pound.
On the economic front, we propose you to focus on the release of British manufacturing production on January 10, CPI on January 16 and preliminary GDP for Q4 on January 26.
On the daily chart, GBP/USD is still supported by the moving averages. Yet, the uptrend of 2017 has a small slope. Bullish momentum exists but is not strong. The pair firstly needs to overcome a major obstacle at 1.3600 (September highs). The uptrend’s support is at 1.3220.
The actions of the Bank of Japan continue to hurt the yen, although some analysts think that the Japanese currency has already become undervalued. The nation’s economic figures for November came out strong. The regulator’s meeting will take place on January 23. Japanese central bank will release the Outlook Report containing its view on economic conditions and inflation.
The USD ended the year on the weak foot. This may change if America releases strong economic figures. In particular, we think that the US GDP may come out strong.
A decline below 112.50 will open the way down to 111.70 and 110.00. We’ll witness negative scenario if the US data seriously disappoint or if global risk aversion increases (for example, if we get news from North Korea). Resistance is at 113.50 and 114.00.
There will be no meeting of the Reserve Bank of Australian (RBA) in January. The most important events of the month, thus, will be the releases of retail sales on January 11, labor market figures on January 18 and inflation data on January 31.
The main fuel for higher AUD/USD comes from the weaker US dollar. Low inflation, weak wage growth and a relatively high debt burden on households make rate hikes in Australia not very likely. As a result, fundamental analysts will concentrate on the economic news coming from the United States.
Resistance for pair lies at 0.7865 (200-week MA) ahead of 0.8045 (200-month MA). A strong support is just above 0.7500, where we find a support line from the start of 2016.
The Bank of Canada will meet on January 17. In December, comments of the central bank’s management sounded hawkish, although the economic picture in the country remains mixed. As a result, traders will eagerly await the BOC press conference to see whether the regulator remains optimistic and plans to keep raising interest rates in the foreseeable future. No doubts that we’ll see the CAD move a lot during the event. Canadian employment figures will come out on January 5 and retail sales and CPI will be out on January 25 and 26 respectively.
By the end of 2017, Canadian dollar got a boost as WTI oil rose above $60 a barrel for the first time since 2015. CAD traders should monitor the dynamics of oil in January as well.
A fall below 200-week MA at 1.2600 will open the way down for USD/CAD to 1.2450/00. Resistance is at 1.2850 and 1.2900.
In this article, we have gathered the main things you need to know about the US central bank and the USD.
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