Weekly Trading Update for 31 Jan - 4 Feb

The last week was a good one for dollar bulls and volatility traders. What’s next?

The prospect of higher interest rates to combat economically-damaging inflation continues to hurt sentiment, with earnings season so far not providing any boost to the markets.

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The week in review

The biggest event of the last trading week was the FOMC meeting. Jerome Powell implied there would be a rate hike at the next in March, but markets apparently heard what they wanted to hear. Analysts point to the market now pricing in up to five rate hikes during the year after Powell said every meeting will be "live". 

Meanwhile, US GDP for last quarter came in well above forecasts, but so did the GDP price index. Both factors contributed to the sense that the Fed needs to raise rates more than already indicated to control inflation and has plenty of room to do so, given faster economic growth. 

Geopolitics continues to strain risk appetite after the US provided a written response to Russia over the Ukraine crisis that didn't appear to satisfy Moscow. Several meetings are planned for next week on the issue. While the situation affects risk sentiment, the issue of energy prices across Europe remains elevated. The German Econ Minister said that the nation needed to diversify its gas purchasing portfolio but gave no more details. Nord Stream II remains suspended until at least March.

Market events coming up

More tech earnings 

Earnings are expected to be the central theme for next week. By Friday, the bulk of major US companies should have reported. This week's big reports are Meta, Amazon and Alphabet.

Apple reported record earnings in the holiday season, helping lift the stock and broader sentiment, a caveat being a lack of clear guidance moving forwards. Tesla too beat expectations but its guidance was soft. 

Is a sigh of relief on the line for the SPX then? A short-term resistance lies at 4420 while support can be seen at 4220.

BOE meeting

On the data front, we have the BoE and ECB meetings on Thursday. Speculation that the UK central bank will raise rates has become the consensus. Interestingly it would be the first time the bank raised rates in two consecutive meetings since the start of the century. 

A hike could be the catalyst for cable's reversal for big declines over the last week, possibly offering a helping hand towards $1.345 as a start. However, signaling no further hikes or leaving rates unchanged might worsen its descent towards $1.33 and perhaps lower.

ECB meeting

The language of Christine Lagarde and the European Central Bank turned more hawkish at the December meeting but as of yet, that has not turned to a change of plans. While the PEPP bond-buying programme is set to expire in March, the ECB plans more bond buying throughout 2022 to help the ‘transition’ to tighter policy. This is creating a huge divergence in policy with the Fed.

EUR/USD plummeted below 1.12 last week, which now turns into resistance. The 1.10 psychological level is the next major support.

Non-farm payrolls

Come Friday, we close out the week with the much anticipated NFP data, which could be pivotal given the Fed's dual mandate. How would the Fed reconcile its mission if jobs numbers continue to disappoint while inflation rises? In what could be a ‘good news is bad news scenario’ relief rallies could take hold if the US labour market shows evidence of continued weakness. 

That could mean USD/JPY falling to get past 116. The 115 support is the first level to remark with 114.60 the next. On the flip side, good NFP numbers could send the pair to fresh multi-year highs.

Chinese New Year 

Notably, China will be closed for the Lunar New Year and the start of the Olympics. During the week, many Asian bourses will have holiday closures.

Happy trading!

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