Risk sentiment was surprisingly positive in the first week of the year. The stock markets ended on a high note after slowing wage growth in the US and faster cooling in Eurozone inflation. After some flip-flopping, Dollar selling re-emerged in the last session. It might take a week or two more to confirm the overall sentiment. If risk-on sentiment is too persist, the greenback would likely be pressured ahead.
Overall, Yen was the worst performer of the week, followed by Euro and then Dollar. Aussie was the strongest one on risk sentiment, and rumor of easing trade restriction by China. Canadian Dollar was second best as support by its own strong job data. Others ended mixed.
Dow rose as bad news became good news
Apparently, bad news is now good news for the markets. In the US, traders initially hesitated to act on stronger than expected non-farm payroll growth, even though unemployment rate also dropped back to five-decade lows. Slower than expected wages growth was the factor pulling traders back. Then, investors cheered the worse than expected ISM services data which indicated contraction and hit the worst level since 2009.
The net result could be slower tightening by Fed ahead, with possibility of a lower than 5% terminal rate. Indeed, fed fund futures are now pricing in 76% chance of just a 25bps hike at the February 1 FOMC meeting, up from 37% a month ago. But of course, there is still another set of inflation data before the meeting, and thus, the expectations could still change.
Anyways, DOW closed up 700.53 pts or 2.13% on Friday. Pull back from 34712.28 might have completed at 32581.97, after drawing support from 55 day EMA, as well ass 55 week EMA. Further rebound is now in favor in the near term for retesting 34712.28 high. It’s still early to call for upside breakout. But even if the corrective pattern would extend with another fall leg, the range could be set already by 38.2% retracement of 28660.94 to 34712.28 at 32400.66.
FTSE hit 3-year high, DAX ready for upside breakout
Meanwhile, it should be emphasized that risk-on sentiment was seen in Europe too. FTSE 100 has indeed closed at a 3-year high, with boost from ONS data that UK gas prices fell -20% in the final week of December. Meanwhile, Halifax reported that house prices fell -2.5% in Q4, the worst decline since 2009. Home construction activity fell at the sharpest rate since May 2020.
For the near term, outlook in FTSE will remain bullish as long as 7302.81 support holds. It’s probably now heading through record high at 7903.50 to 61.8% projection of 5525.52 to 7687.27 from 6707.62 at 8043.58.
DAX also closed strongly last week, with help from Eurozone CPI data, which indicated quicker than expected slowing in headline consumer inflation. DAX drew notable support from 55 day EMA and 55 week EMA, which are bullish signs. Immediate focus is now on 14675.84 resistance. Sustained break there will resume whole rally from 11862.84 towards 16290.19 high.
Dollar index recovery capped, slim chance for a bounce
Dollar index’s recovery last week was capped below 105.82 resistance, as well as 55 day EMA (now at 106.23). The condition for a near term bullish reversal is there, with DXY pressing 55 week EMA (now at 104.04), as well as 102.99/103.82 long term support zone. However, if risk on sentiment is going to persist, or even intensify, there is little chance for a sustainable bounce in DXY.
Indeed, break of 103.39 will resume the fall from 114.77 to 50% retracement of 89.20 to 114.77 at 101.98, or further, before bottoming. On the other hand, break of 105.82, followed by sustained trading above 55 day EMA, will turn near term outlook bullish for a stronger rebound.
Gold resumed near term rally, heading to 1900
Dollar’s sluggishness was accompanied by rally resumption in Gold last week. For the near term outlook will stay bullish as long as 1824.90 support holds. Next target is 100% projection of 1616.51 to 1786.63 from 1728.48 at 1898.80. Firm break there could prompt upside acceleration towards 161.8% projection at 2004.05.
Also, it should be noted that long term consolidation pattern from 2074.84 (2020 high) could have completed with three waves down to 1616.51, after drawing support from 55 month EMA. If that’s the case, retest of 2074.84 would be seen in the medium term. That could correspond to more downside in Dollar.
EUR/USD dropped to 1.0482 last week as consolidation from 1.0733 extended. But downside was contained by 1.0481 resistance support. Initial bias stays neutral this week first. On the upside, firm break of 1.0733 will resume whole rally from 0.9534. Nevertheless, sustained break of 1.0481 will extend the correction to 1.0289 support and below.
In the bigger picture, focus stays on 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Rejection by 1.0609 will suggest that price actions from 0.9534 medium term bottom are developing into a corrective pattern. Thus, medium bearishness is retained for another fall through 0.9534 at a later stage. However, sustained break of 1.0609 will raise the chance of trend reversal and target 61.8% retracement at 1.1273.
In the long term picture, as long as 1.0635 support turned resistance holds (2020 low), long term down trend from 1.6039 (2008) could still extend through 0.9534 at a later stage. However, sustained break of 1.0635 will confirm bottoming and at least turn long term outlook neutral.