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FED becomes flexible with balance sheet runoff, Euro unlikely to profit

February 04, 2019 12:00

This week's market outlook will provide insights on the markets following the FED's recent statement, Brexit developments, and the ongoing trade talks between the US and China. In particular, we will be focusing on the DAX30 CFD, the Euro, US dollar, GBP, and gold.

Economic Events Calendar February 4 – 8

Source: Economic Events Calendar February 4 – 8, 2019 - Admiral Markets' Forex Calendar

DAX30 CFD

There were high hopes among DAX30 CFD bulls for any signs of the end of the 'auto-pilot' runoff of the FED balance sheet (which was communicated precisely that way last Wednesday in the FED statement, stating that it is prepared to adjust the balance sheet runoff 'in light economic and financial developments') or of a trade deal between the US and China.

After an initial bullish reaction, and a re-test of the region of the pre-weekly highs, the DAX30 CFD sold off on Thursday after China trade negotiators proposed a February meeting between US president Trump and the Chinese Prime Minister Xi. This development suggests that the US and China are still indeed "miles and miles apart on trade resolution" as Wilbur Ross, US commerce secretary, warned in a CNBC interview on January 24.

With rising fears starting to weigh on equity markets, it seems likely for the DAX30 CFD to drop back below 11,000 points in the days to come. If this happens, further losses are very likely and a drop towards 10,800 points becomes a serious option.

In general, the DAX30 CFD stays bearish on a daily time-frame as long as we trade below 11,700 points.

DAX30 CFD Market Movement

Source: Admiral Markets MT5 with MT5SE Add-on DAX30 CFD daily chart (between September 2, 2017 to February 1, 2019). Accessed: February 1, 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%.

Check out Admiral Markets' most competitive conditions on the DAX30 CFD and start trading on the DAX30 CFD with a low 0.8 point spread offering during the main Xetra trading hours!

US Dollar

It was only a rumour when we pointed out in our last weekly market outlook that the FED decision would result in a drop and weak weekly close in the US dollar. Then last week it became a fact: Wednesday's FED statement declared that it would be prepared to adjust the balance sheet runoff 'in light economic and financial developments'.

While the non-farm payrolls could only slightly help to stabilise the USD going into the weekly close, we saw the eventual closing land above 95.00 points. An attempt to break this region in the coming days still seems very likely.

We could find a bearish trigger in weak economic readings such as a disappointing ISM non-manufacturing data set on Tuesday.

Further losses seem likely with a break below 95.00 points, with a first target around 93.80/94.00 points.

US Dollar Index

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2016 and December 2018). Accessed: February 1, at 10:00pm GMT.

Don't forget to register for the webinar "Admiral Markets' Weekly Market Outlook" with Jens Klatt, every Friday at 12pm London time. It's your opportunity to follow Jens as he explores the weekly market outlook in detail, so don't miss out!

Euro

The EUR-USD daily chart does not paint a very promising picture. The currency pair is still range-bound between 1.1200 and 1.1600.

But, with the bearish outlook for the US dollar in response to the dovish FED rate decision announced last Wednesday, and the majority of market participants (>95%) not expecting to see a single FED rate hike in 2019, chances are increasing that the EUR-USD will try to break out of the trading range on the upside and above 1.1600 despite the still-dovish ECB rate decision on January 24.

Nevertheless, we remain very cautious around long engagements in the Euro since official data from Italy's Istat reveal that Italy's economy fell into a recession during Q4, as economic output shrank 0.2% in the three months through December, following a 0.1% decline during the previous quarter.

In combination with the near-standstill around the Brexit deal (further details in the GBP analysis below), the Euro is currently not the ideal currency to trade against the US dollar in the days to come. At least, not with the intention to profit from USD weakness and a rather weaker attempt to break above 1.1600.

EUR-USD Market Index

Source: Admiral Markets MT5 with MT5-SE Add-on EUR-USD Daily chart (between October 23, 2017 and February 1, 2019). Accessed: February 1, 2019 at 10:00pm GMT. - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR-USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017 it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.

GBP

Uncertainty remains for the Pound Sterling due to Brexit, and will most likely continue until shortly before the Brexit deadline on March 29.

Even though UK Prime Minister May faced some initial headwinds in regards to the re-opening of the Brexit-deal negotiations with a focus on the Irish border question, there are still hopes that a solution will be found and concessions from the EU will be made.

In this context, the focus lies on a last-minute summit set for March 21 and March 22, just a week before the day when the UK is due to leave the EU on March 29. During these two days, a final deal may be struck - but until that happens, no significant bullish stints in the GBP should be expected.

If the GBP-USD continues with its recent bullish move, it will most likely be initiated through USD weakness, not Pound Sterling strength. That said, the short-term target on the upside around 1.3270/3300 USD stays active, but a sustainable break above that target by the end of March doesn't seem likely.

GBP-USD Market Index

Source: Admiral Markets MT5 with MT5-SE Add-on GBP-USD Daily chart (between October 2, 2017 to February 1, 2019). Accessed: 01 February 2019 at 10:00pm GMT. - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the GBP-USD fell by 5.9%, in 2015, it fell by 5.4%, in 2016, it fell by 16.3%, in 2017, it increased by 7.4%, in 2018, it fell by 5.6%, meaning that after five years, it was down by 22.9%.

Gold

The speculation that the FED would end their Quantitative Tightening on January 25 (in order to be more flexible instead of letting it run on 'auto-pilot') allowed for Gold to close above 1,300 USD and made further gains likely.

Last Wednesday, with the FED rate decision, these speculations became fact when the FED statement declared that it would be prepared to adjust the balance sheet runoff 'in light economic and financial developments'.

The result on the upside is that Gold accelerated on this headline and pushed to its highest levels since May 2018. It nearly reached our first target of around 1,330 USD on the upside, as stated in our last weekly market outlook.

Though, from a technical perspective, the mode on a daily time-frame seems a little extended; further gains in Gold seem likely and a coming test of the 2017/2018 highs of around 1,360 is a serious option.

The mode stays bullish above 1,275 USD, solid support and potential long-trigger can be found around 1,295/299 USD:

Gold Index Prediction

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between December 6, 2017 to February 1, 2019). Accessed: February 1, 2019 at 10:00pm GMT. - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.

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