It’s the fourth trading week of the year and it seems the gap between the positive and negative market sentiments is widening.
Last week was mixed, with the first half showing signs of growing optimism until the latter half choked the market to shed some of these wins. The bull-bear battle is getting more intense with none overwhelming the other as we are about to end the first third of the first quarter of the new year. FOMC will be eyed this week. However, it is expected to be uneventful. The market risk-tone remains the major driver.
Last Week Recap
Last week, the dollar plummeted across the FX market. The dollar index (DXY) descended from the first day of the last week and was down by over 0.6% by Friday. There was a sustained DXY restraint above 90 on Friday which might be the framework for the bulls this week. The S&P 500, however, started last week upbeat and slapped a fresh record high before it plunged almost a third of it before the week ended. Oil and commodity FX were also ravaged by the bears in the second half of the last week. It’s safe to say the market mood was hoisted by Biden’s stimulus hopes in the first half of the last week.
Banks’ monetary policies overshadowed the second half of the week. While they signified some level of optimism, they also reckoned that quick economic recoveries will very much depend on how fast the vaccines are able to neutralize the virus. Therefore, they kept the status quo and won’t alter their current policy plan in spite of the vaccine hopes. Meanwhile, there is also the negative side of inflation with most of the banks not being able to meet up with their inflationary targets.
The week ahead – risk drivers
Covid-19 & Vaccines
Since the central banks’ policies and economic forecast going forward will be dependent on how soon the world subdues the virus, it’s important to note the development on covid new cases and vaccine doses rolled out.
Global vaccine roll-out is increasing fast. According to Ourworldindata, about 64.02 million doses of vaccines have been distributed globally. The rate of vaccine roll-out has risen significantly compared to the start of the year. This is positive for the market mood. However, it’s important to relate the speed of vaccine roll-out with the rate of spread of the virus. There has been some positive improvement in this regard as well.
The chart above shows the week by week change of confirmed reported cases of the virus up to January 23. Since January 9, the chart has been declining, which is very positive. With new levels of restrictions, especially in the countries close to the new variants of the virus, and the vaccines going side by side, it’s quite likely that this chart has peaked on January 9. Nevertheless, market participants and policymakers will continue to observe how much and quickly the gap is closing. So far, the data coming out has been encouraging and could drive the sentiment toward risk-on sometimes this week.
Central Banks – Fed’s FOMC
The US Federal Reserve will publish the outcome of its two day-day meeting on Wednesday. Market consensus looks forward to the Fed holding rate at the current range of 0-0.25%. However, investors and traders will look forward to the press conference for hints. In its last meeting in December, the banks reemphasized its commitment, if need be, to extend its QE programs or use whatever tools it takes to support the US economy in the face of this uncertain time. In one of his most recent speeches, Fed Chair Powell said the bank is not planning to tighten its QE program and neither is it raising rates any time soon.
Banks are closed in Australia on Monday for Australia Day. However, the market might weigh on ECB President Lagarde’s speech on the same day. The calendar is light on Tuesday with no high-impact indicator. On Wednesday, the spotlight will be on the Aussie inflation CPI data before the FOMC later in the day. US GDP and unemployment claims will come on Thursday before the week closes on Friday with CAD GDP.
What to expect this week
We will most likely see another diverse week with either of the risk sentiment dominating the first half of the week and the other neutralizing in the second half. The dollar looks bearish and should continue downside if the DXY breaks below the 90 support. Otherwise, a break above the 90.31 bullish technical neckline should set the greenback for further rallies to 90.7 and 91. EURUSD can then plummet to the 1.2 psychological level and USDJPY accelerates up to 104.5. GBPUSD should plunge toward 1.35 if the dollar finds its way up, while AUDUSD and NZDUSD could falter to 0.764 and 0.714 respectively. The second half of the week could reverse the market direction.
In the commodities market, Gold could correct below 1850 before the next surge above the 1870-1875 resistance zone. Meanwhile, oil prices are also suspected to resume the upside move with WTI and Brent eyeing $55 and $57.5 respectively.
In the crypto market, Bitcoin is establishing the bottom of the current corrective phase at $28,760. A surge above $34,000 could bring back the bullish phase toward $60,000. Ripple could break upside to 40 cents. Ethereum should flow to a new all-time high at $1,500.
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