USD/JPY and Gold – correlation, where are you?
Economic Events February 25 – March 1, 2019
Source: Economic Events Calendar February 25 – March 1, 2019 - Admiral Markets' Forex Calendar
DAX30 CFD
Over the last few days, the DAX30 CFD outlook hasn't substantially changed. The DAX30 CFD closed the second week of February with a sharp rally, and over the last days the German index consolidated at an elevated level and reached new yearly highs on Friday. Despite this, it didn't take on significant momentum and will possibly go for a re-test of the December highs around 11.550/600 points.
After Wednesday's Fed Minutes underlined that there was widespread consensus to end the reduction of the 4 trillion USD balance sheet by the end of the year, many FOMC members were unsure whether any rate adjustments would be needed in 2019 - so it seems like the downside is currently limited.
On a daily chart and technical perspective, only a drop below 10,900 points would darken the picture and level the path down to 10,280 points.
For the upcoming days, an ongoing consolidation with a slight drift higher has the highest probability in our opinion.
The reason: while the ECB minutes last Thursday suggested that ECB policymakers felt negatively towards the eurozone economy at their last policy meeting and asked to prepare to give banks more long-term loans, it would not probably be enough, in terms of dovishness, to initiate a dynamic push upwards in the DAX30. That said, market participants will most likely wait until the ECB meeting on the March 7, and a clear signal (probably of more ECB easing), before again resuming to aggressively buy German stocks.
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between November 3, 2017, to February 22, 2019). Accessed: February 22, 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 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%.
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US Dollar
The outlook for the US dollar index hasn't changed much over the last week of trading.
After last Wednesday's Fed Minutes which showed that there was a widespread agreement among the voting Fed members to end the reduction of the 4 trillion USD balance sheet by the end of the year (which can be interpreted as dovish, thus making the USD bearish) and the hope that a resolution to the trade war between the US and China is in the near future (which would also push the USD in a bearish direction). From a fundamental perspective, the advantage for the USD seems to be found on the short side.
Nevertheless, from a technical perspective, only a break below 95.00 points would darken the picture. Until then, the mode stays neutral between 95.00 and 97.79 points.
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2016, to January 2019). Accessed: February 22, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
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Euro
In our last week's weekly market outlook we wrote, "With the sceptical outlook for the US-Dollar […] a break below 1.1200 in the upcoming days seems unlikely." And indeed, EUR/USD traded back above 1.1300, between 1.1200 and 1.1600.
With a thin economic calendar and the ECB meeting next Thursday in focus, it seems very likely that the EUR/USD won't see any dramatic movement in one direction or the other, but a continuation of subdued volatility in the upcoming days.
Nevertheless, after the ECB minutes last Thursday, it wouldn't come as a surprise if we see some small intraday-pressure in Euro crosses. It was stated during the inutes that ECB policymakers have a gloomy view of the eurozone economy, and asked to prepare to give banks more long-term loans. On top of that, it also seems likely that any rate hikes are off the table since the ECB warned last month of "downside risks" to the eurozone economy.
If any rumours begin to spread that the ECB meeting next Thursday will have an even more dovish touch than already expected (Olli Rehn e.g. said that the ECB should be ready "to do whatever it takes" in the event that things deteriorated further), the Euro could see the beginning of some heavier selling.
If such selling pressure hits the EUR/USD and it breaks below 1.1200, a dynamic and sharp move down to 1.1000 becomes an option.
Nevertheless, between 1.1200 and 1.1600 the EUR/USD stays neutral on a daily time frame:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between November 22, 2017, to February 22, 2019). Accessed: February 22, 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 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%.
JPY
The JPY, especially USD/JPY, showed very interesting price action over the last weeks. After the 10-year US yields recovered a little into the start of 2019, they peaked around 2.75% and dipped lower from there.
This is most likely one of the main drivers for the push higher in Gold, now eyeing 1,360 USD/ounce.
Based on the negative correlation between Gold and USD/JPY, one would usually expect USD/JPY to trade lower when Gold pushes higher.
But instead, USD/JPY pushed up to 111.00, not showing any signs of weakness so far. A potential reason can found in some comments from BoJ Governor Kuroda last Tuesday, when he said the central bank was ready to ramp up stimulus if sharp yen rises hurt the economy and derail the path towards achieving its 2% inflation target.
But since the JPY wasn't sharply sold on these comments, it seems as if most of the BoJ's dovishness is already priced into the JPY, leaving USD/JPY realistically vulnerable to a push lower.
That said, any drop below 110.20 should be watched carefully, activating targets around 109.60 and below 108.50.
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY 4-hour-chart (between December 6, 2018, to February 22, 2019). Accessed: February 22, 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 USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.
Gold
As expected in our weekly market outlook for Gold last Monday, Gold profited from its current bullish momentum and went for newly highs.
While the mode looks a little extended on the upside, the current pullback against 1,323/325 can be considered attractive for long-engagements from a risk-reward perspective and a first target on the upside around the 2017/2018 highs around 1,360 USD/ounce.
In general, the fundamental picture for Gold stays positive, especially after last Wednesday's Fed Minutes underlined the widespread agreement among the voting Fed members to end the reduction of the 4 trillion USD balance sheet by the end of the year. This can not only be interpreted in a dovish way, but shows increasing fears fuelling speculation of an US recession at the horizon - an environment in which Gold usually gains momentum.
Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between November 22, 2017, to February 22, 2019). Accessed: February 22, 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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