Global markets responded positively to the Federal Reserve’s indication that it may take a pause in hiking rates for now. A more cautious stance by the central bank encouraged risky assets across the globe and dumped the dollar quite aggressively. Against this backdrop, European stocks opened on a strong footing but trimmed gains afterwards as investors continue to worry about global growth and closely monitor another round of trade talks between the US and China. There is little indication that Beijing will bend to Trump’s demands to deepen economic reforms but markets hope to see some progress towards a deal anyway.
As such, Britain’s FTSE 100 adds 0.53 per cent to 6,978, France’s CAC 40 is flat at 4,975, while German DAX 30 sheds 0.55 per cent to 11,120 amid a strong euro demand. US stock index futures hold steady, pointing to a mixed start to the trading session on Thursday.
The dollar continues to digest the Fed’s dovish message and remains under the selling pressure that took EURUSD to three-week highs above 1.15 earlier in the day. Interestingly, the euro bulls mostly ignore the dismal data from the euro zone. In particular, the 4Q GDP grew at the lowest rate in four years, the same as in Q3. Meanwhile, the Italian GDP contracted by 0.2% q/q after a 0.1% fall in Q3, which means the economy slipped into a technical recession. The common currency was almost unfazed by the numbers however, which may signal that traders are focused on the Fed and political risks in the US for now. But in the longer term, further weak economic data from Europe could undermine euro’s appeal and push back the ECB rate hike expectations further.
The next major event for EURUSD and other dollar pairs is the all-important US job report due on Friday. As the ADP data showed, the economy created over 200K jobs in January. Should the key report confirm strong growth in employment and wages, the greenback may trim weekly losses. On the other, any disappointment in the release could encourage a new sell-off in the American currency and thus help the euro to confirm a bullish breakthrough.
USDJPY accelerated the decline in Thursday after failed attempts to retarget the 110.00 barrier earlier in the week. The pair hit two-week lows around 108.50 and holds close to the lower part of the range, threatening the intermediate support. The yen remains on the offensive despite a relatively positive investor sentiment as the Fed’s dovishness outweighs now. A risk for the current yen’s ascent is some progress in trade talks as it will encourage risk trades across the board. On the downside, a break below 108.50 will open the way to 108.00.
Crude oil prices are subdued on Thursday as the market receive mixed signals and struggles to find a clear direction. Brent climbed above $62 earlier in the day on the back of a widespread optimism, fueled by Fed’s “flexible” message. But as the euphoria abated, traders refocused on the trade talks and refrain from taking investment decisions awaiting the details from Washington. The statements and comments by the US and China trade representatives will set the tone for energy markets at the end of the trading week. As long as Brent stays below the $63 handle, the downside risks remain.
Nathan Lambert, Head of Global FX Analytical Department