With the goldilocks global economy set to roll on for another year, the current environment should remain supportive for risk markets and assets. This cyclical environment – broadening growth with low and benign inflation – will also be helped along by lower political uncertainty. The world has seemingly learned to live with President Trump’s tweets (“My nuclear button’s bigger than yours” barely moved the FX markets) and Eurozone political uncertainty has subsided from the days of fearing about a populist revolution and a Le Pen French President.
Of course, we will see tailwinds from monetary stimulus ease this year though it is noteworthy that the aggregate major central bank balance sheets will still grow in 2018. Additionally, an easing in Chinese growth may weigh on global growth and a ‘new’ Fed may take time to bed in. And yet, the synchronized global growth backdrop is giving a skip to most market observers as we kick off the year.
In that light, let’s take a look at the major FX pairs in this first week of 2018, which culminates with Friday's US employment data.
EUR/USD remains firm, up five sessions in the last six as prices drifted lower on Wednesday having retested the September peaks just under 1.21. We have to go back to early 2015 for the last time we revisited these levels.
Firmer fundamentals are helping the EUR bulls with the final PMI Manufacturing data confirming December’s record print on Tuesday.
A close above last year’s highs targets the 50% retracement of the 2014/2017 decline at 1.2167, which is the next major resistance. However, we note that momentum oscillators are stretched and the pair has pushed above the upper Keltner channel.
Sterling’s December wobble was well supported by the 20-day MA and we’ve seen gains from the low 1.33s pushing cable toward last September’s highs.
The bullish backdrop is enhanced by the series of higher swing lows and prices holding above previous highs around 1.3550.
Longer term, we are beholden to Brexit Phase II but for now, the trend is solid and we may push toward 1.40.
USD/JPY has been stuck in a well-worn range over the last 12 months between 108 and the high 114s.
In the current dollar weakness environment, we look to this broader tone, which means that prices look to be heading toward the lower part of the range.
The aussie has been ripping higher over the past few weeks, advancing 16 out of the last 17 days!
After breaking the descending channel from the September highs, prices coiled near 0.7650 in mid-December before bursting higher. We now see support around 0.78 and so any consolidation around here would create a buying opportunity.
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