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Risk aversion has pushed the stock indices to support levels created in the second and third quarter last year. At the same time bitcoin is deeply oversold and commodity currencies (NZD & AUD) are losing ground. The increasing threat of larger-scale war in Ukraine, the worries that the Fed raises rates seven times this year and the worries related to inflation have driven the investors to cash. Portfolio managers have reduced their market exposure (risk) ahead of the FOMC rate decision and press conference. This week’s price action and reactions to Fed’s comments on Wednesday are a key indicator of how bullish or bearish the investors are likely to be. 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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DJ chart Weekly 01 25

DJ (Dow Jones Industrial Average CFD) is now deeply oversold. Yesterday’s low at 34144.10 was first traded in March 18th 2021. In other words, the index lost almost one-year worth of gains. This fact isn’t lost to bottom fishing investors who look for opportunities to capitalize on the opportunities created by the recent decline. The strong rally from this level indicates that there is buying interest around the 33028 support. The market, however, is trading below a recent bull channel and thus has some technical weakness that needs to change if the bulls are going to take this market higher again. 

A move above the next key resistance level at 34662 would be bullish and could move the market to the next key level at 35640. A higher low above yesterday’s low (33144) would help the bulls in convincing the sellers that the market is going to push higher again. However, we are not there yet. Should there be a continued weakness and a decisive break below the 33028 support level, the market would have created a medium-term top between 33028 and 36684. Then we could see the support at 29528 coming into play.

EURNZD chart 8h 01 25

EURNZD breakout idea (see the analysis here!) worked out really nicely! The pair closed above the 1.6827 resistance and rallied over 150 pips before hitting some supply. The pair is trading near the upper end of the bull channel now and some loss of momentum in the pair and if we now get a lower reactionary high (below the 1.6987 high) it’s likely that the pair will retrace back to levels that are near to the 1.6827 support. An alternative scenario: If the 1.6987 is penetrated decisively, the market is likely to move to the 1.7067 – 1.7164 range.

AUDCAD chart 8h 01 25

AUDCAD has been consolidating above the 0.8676 support. As a result, the pair has moved out of a bear channel and could become a candidate for long trades if these early signs of strength continue.Look for a decisive break above the 0.9072 resistance to confirm the bullish indications. If the price breaks out the AUDCAD pair would be likely to move to the 0.9128 – 0.9155 range. This is an area where a recent swing high, the 50% retracement level and a level that support the pair in December coincide. This would be the likely first phase move but the market could move higher than this. An alternative scenario would be that there is no break above the 0.9072 resistance.Then the market  would be likely to test and break the 0.8676 support level.  Under this scenario, a decline below the support level could be steep.

EURUSD chart 8h 01 25

EURUSD continued to drift a little lower as traders didn’t see any movement in the yields (closed at 1.75% vs. 1.75% the previous day) and they wait for the FOMC press conference. It’s been our view that EURUSD wouldn’t be likely to provide immediate upside and indeed the pair has been consolidating (or drifting lower) below the 1.1369 level. This kind of market provides trading opportunities to range traders so it should not be ignored even though the moves aren’t that big. The next key supports are at 1.1227 and 1.1284 while the nearest key resistance levels are at 1.1335 and 1.1389.

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 – German Ifo Business Climate
  • USD – CB Consumer Confidence
  • CAD – BOC Overnight Rate and Rate Statement
  • USD – Crude Inventories
  • CAD – BOC Press Conference

For more information and details see the TIOmarkets economic calendar here

 Market News & Facts 

  • Australian CPI q/q 1.3% (1.0% expected)
  • GermanFlash Manufacturing PMI 60.5 (56.9 expected)
  • UK Flash Manufacturing PMI 56.9 (57.7 expected)
  • 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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