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Yields dropped quite a bit on Friday closing to 1.75% (down 8 basis points) but this didn’t translate into USD strength. The indication is that the markets believe the Fed has to tighten their policy and, because of the inflation, tighten perhaps much more than they themselves have expected. Our view is that the inflationary pressures are going to subside over the course of this year. Exactly how this will impact the Fed policy remains to be seen but the fact remains that the more the Fed tightens their policy (hikes the rates) the bigger the financing cost of the massive debt burden the United States has. This is why there’s a strong incentive for the Fed to keep the rates low and inflate at least some of the debt away. This week the focus is therefore solidly on the FOMC rate decision and the accompanying press conference. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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EURUSD chart 8h 01 24

EURUSD rally attempt was thwarted just like we expected. It was our view on Friday that the slow drift lower in EURUSD doesn’t indicate there’d be immediate upside rewards available in this market. We pointed to 1.1369 as being a key threshold level above which there’d be more upside while continued weakness below the level would lead to either further consolidation or testing of the next key supports at 1.1227 and 1.1284. The lower reactionary high at 1.1360 is a sign that the red team is stronger than their green counterparts until we see a decisive break above the bearish channel high and the 1.1360 – 1.1369 range. Heads up for the European and the US PMI data releases that are due starting with the French PMI at 08:15 GMT.

GBPUSD chart 8h 01 24

GBPUSD is trending lower after we said (here) that the probability of corrections taking place in Cable has increased. On Friday, in the TIOmarkets.com Twitter feed, we said that the demands for Prime Minister Boris Johnson to resign have increased and technicals in GBPUSD point to the 1.3490 – 1.3520 range. This far the lowes low since then has been 1.3538 and the bearish trend hasn’t changed this analysis is still valid. The nearest key support and resistance levels in Cable are 1.3490, 1.3572, 1.3630 (channel high) and 1.3662.

AUDUSD chart 8h 01 24 1

AUDUSD has been weak since a rally to 0.7276 failed. Our view on Friday was bearish on AUDUSD and we said there could be more downside ahead. We hope You took the advantage of this made some pips! Now the pair is trading below the bull channel low and possibly trading to the January 7th low at 0.7130. The nearest resistance level above is at 0.7170. Heads up for the Australian CPI numbers in the Asian session tomorrow!

NZDUSD chart 8h 01 24

NZDUSD traded once again lower and is now approaching the December 2021 low at 0.6702. If this level doesn’t hold the next important support is some way off at 0.6590. This week, we will get some inflation data from New Zealand (on Wednesday) so Asian session traders, make a note of this and prepare to trade the potential higher volatility. The nearest key price levels for NZDUSD are 0.6702, 0.6733, 0.6787 and 0.6890.

Macro Drivers for the USD As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed has started tapering and expects it to end in the summer of 2022. The central bank was forced to change its views on inflation being transitional inflation traders expect the first hike in June 2022 (the probability of a hike is 80.9% at the time of writing this).
StimulusThe US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US Congress has passed a $1.2 trillion infrastructure spending plan.
YieldsIn Q3 and Q4 2021 the benchmark 10-year US Treasury yield ranged between 1.1720% and 1.6830%. The hottest inflation readings since 1982 have pushed the 10 yr. yield higher as bonds have been selling off.
EmploymentThe December non-farm payrolls increased by 199K instead of 400K expected by the analyst consensus while the unemployment rate was a positive surprise at 3.9% (4.1% expected). Average hourly earnings came in at 0.6% (0.4% expected) moving the annual rate to 4.7% (4.2% expected).
InflationThe annual headline inflation reading for December at 7% (6.8% previous) is the highest CPI print in almost 40 years. The core CPI (all items less food and energy) moved to 5.5 per cent y/y (4.9% previous) This was the biggest annual increase in CPI since 1982.

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 The Next Main Risk Events

  • EUR – French Flash Manufacturing PMI
  • EUR – French Flash Services PMI
  • EUR – German Flash Manufacturing PMI
  • EUR – German Flash Services PMI
  • EUR – Eurozone Flash Manufacturing PMI
  • EUR – Eurozone Flash Services PMI
  • GBPU – UK Flash Manufacturing PMI
  • GBPU – UK Flash Services PMI
  • USD – US Flash Manufacturing PMI
  • USD – US Flash Services PMI
  • AUD – CPI & Trimmed mean CPI
  • EUR – German Ifo Business Climate
  • USD – CB Consumer Confidence

For more information and details see the TIOmarkets economic calendar here

 Market News & Facts 

  • Canada Retail Sales 0.7% (1.2% expected)
  • UK Retail sales -3.7% (-0.6% expected)
  • Canada December CPI y/y 4.8% (4.8% expected)
  • UK December CPI 5.4% y/y (5.2% expected)
  • Empire Fed manufacturing -0.7 (25.0 expected)
  • BOJ leaves monetary policy unchanged
  • New Zealand business confidence -28% (-11% previous)
  • China GDP for Q4 2021 1.6% q/q (4.0% y/y)
  • US December retail sales -1.9% (0.0% expected)
  • ECB Lagarde: monetary accommodation needed still
  • US GDP growth expected to be in 3% – 4% range

Trade Safe!

Janne Muta
Chief Market Analyst

Open a VIP Black account now at TIOmarkets.com. We want you to be able to exploit trading opportunities in financial markets with 0 commission and tight spreads. Take advantage of the best trading account in the industry: Tiomarkets VIP Black. For more details on this truly exceptional offering see here. For more analysis and commentary, visit our YouTube channel where you can find market commentary videos to support your learning and growth as a trader. 

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DISCLAIMER TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with any legal requirements for financial analyzes and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval. FX and CFDs are leveraged products. They are not suitable for every investor, as they carry a high risk of losing your capital. Please ensure you fully understand the risks involved. All the prices in this report are CFD prices based on price charts provided by TIOmarkets unless otherwise stated. 

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