FTSE +7 points at 7265
DAX +6 points at 11673
CAC +9 points at 4837
Euro Stoxx 50 +5 points at 3275
Japanese stocks started the week upbeat despite a slightly softer than expected 4Q preliminary GDP read (0.2% quarter-on-quarter vs. 0.3% expected). Cheaper yen fueled exports in the fourth quarter, yet domestic consumption remained weak.
It is the good news on the political front that revived enthusiasm in Japan, as the US President Donald Trump and Japanese PM Shinzo Abe agreed upon a new economic dialogue after a two-day visit. Nikkei (+0.41%) and TOPIX (+0.49%) gained, as the yen (-0.54%) lost the most against the greenback in Tokyo. The USD/JPY broke above the 114.00 level and extended gains to a two-week high of 114.17. Buyers are presumed above 112.80/113.00 for a further push toward 115.05, the 50-day moving average. Solid resistance is eyed at this level given that leveraged funds and macro managers trimmed their short yen positions last week, suggesting that tactical sellers could dent the upside potential in the USD/JPY in the short-run.
The US dollar firmed against the majority of the G10 currencies, except the kiwi and the British pound. FOMC Chair Janet Yellen’s testimony due on Wednesday will be the major highlight for the US dollar this week. Will Janet Yellen bring forward the fiscal uncertainties due to the Trump administration? How concerned is the Federal Reserve (Fed) and what would be the implication in terms of the US monetary policy? Is it time for the Fed doves to fight back the Trump-flavoured rise in the hawks’ camp?
On the other hand, all eyes are still on Trump’s tax cut plans. But the lack of detail is irritating and either way, the market expectations for another US monetary action in March are very low. Therefore, we expect Janet Yellen to remain muted to avoid any wave of unnecessary panic in the financial markets. Traders cut their net long USD positions for the 5th consecutive week, to the lowest levels since mid-October.
The kiwi bounced to recover last week’s sharp sell-off, which has limited the upside potential in the Aussie crosses in Sydney despite a 5.62% rally in iron ore futures and a steeper AUD yield curve. The trend and momentum indicators hint at a solid positive view in the AUD/USD. Clearing the 0.77 offers would shift the attention to 0.7778 (Nov’16 high), whereas a failure to clear the 0.77 offers could mean an eventual pullback to 0.7490 (major 38.2% retracement on Dec-Feb rise).
Cable hovered around the 1.25 handle, given that the Bank of England (BoE) Governor Carney’s assessment of an additional slack in the UK’s economy failed to revive the BoE doves this Monday. According to a Bloomberg survey, 87% of analysts think that the BoE’s next move will be an interest rate hike, up from 65% a month earlier. Of course, the BoE will more likely remain neutral in the medium term as the Britain exits the European Union, yet the leading macro-metrics are the major motives for the short-term shift in expectations.
In this respect, the inflation is an important data to watch. Due on Tuesday, the UK’s inflation may have retreated 0.5% month-on-month in January, yet the yearly inflation is forecasted at 1.9% (vs. 1.6% in December). Faster inflation is good news for the BoE hawks, so for the pound. Rising inflationary risks should keep the pound sellers contained before the data. The key GBP/USD support stands at 1.2410 (100-day moving average). The EUR/GBP is offered below 0.8565 (200-day moving average).
The FTSE rolling index extended gains to 7278p, yet the stronger pound quickly dented the appetite and pulled the index back below the 200-hour moving average level, 7267p. The FTSE is expected to begin the week 7 points higher at 7265p. Mining stock could help the FTSE higher, while the stronger pound may be the main challenge for the foreign buyers at the London open.