Central bankers exert pressure on EUR and USD, stocks add to ongoing rally

Summary:

• Dovish comments from Fed and ECB members put USD and EUR under pressure

• Donald Trump cancels trip to World Economic Forum in Davos

• Stocks resume rally after yesterday’s brief weakness

Momentum on the global stock markets eased a bit on yesterday’s morning and it looked like bulls are set to take a break. However, buyers showed later on that they are here to stay for some time as Wall Street reversed earlier losses and reasonable gains were achieved in Asia. The US dollar is trading lower against all of its major peers after a range of dovish comments from Fed members yesterday.

US stocks continue to recover at the beginning of 2019. US500 (S&P 500 futures underlying) is already trading almost 3.5% higher YTD. The benchmark climbed back to the price zone ranging 2600-2630 pts that served as a support previously. Source: xStation5

Namely, several Fed central bankers that made public appearances yesterday (including Chairman Powell) reiterated message that the Reserve can be patient and wait how situation on the markets and in the economy develops. Especially interesting remarks came from the Fed Vice President, Richard Clarida. Clarida said that any headwinds to the US economy that prove persistent should be offset by Fed’s policy. Such remarks hint that Fed may be reluctant towards further tightening of financial conditions and may even tilt towards more stimulus in case potential deterioration turns to be longer-lasting one. However, Powell in his speech yesterday said that for now the Reserve is committed to reducing its balance sheet - a remark that depressed US stocks and lifted dollar before situation took U-turn on Clarida’s words.

EURUSD broke above the consolidation range two days ago with a quick and firm move higher. However, the pair reversed from the vicinity of the 200-session moving average yesterday and threatened to revisit previous trading range. Today’s USD weakness helps the pair push higher but bears may not be completely out of the woods. Source: xStation5

Cautious remarks were also expressed yesterday by the Bank of France chief and ECB’s Governing Council member, Francois Villeroy de Galhau. Central bankers said that prospects for the European economy remain favourable and highlighted that economic slowdown is not the same thing as economic downturn. However, de Galhau said that ECB should wait until spring and then adjust its policy to incoming datastream. He added that a number of risks including economic weakness or concerns over international trade made last month’s decision to halt net asset purchase programme a “heavy” one to make. He said that the European Central Bank tries as predictable as possible but at the same time declined to specify a meeting during which the Bank may tweak its policy. While de Galhau said that normalizing monetary policy is much desired he also added that the policy will remain accommodative for as long as necessary to maintain price stability. Remarks can be seen as somewhat dovish therefore one should not be surprised by the fact that EUR is performing rather poorly against its major peers on Friday morning. The nearest ECB decision will be announced on 24 January.

Donald Trump announced via Twitter that he is cancelling his trip to this year’s World Economic Forum in Davos on the back of the government shutdown. Source: Twitter

Last but not least, the US government shutdown extends onto 21st day. Neither side wants to back down on the Wall idea and Donald Trump is said to keep national emergency option open. Just yesterday reports surfaced saying that the US President delegated the US Army Corps of Engineers to analyze whether he could use money from emergency funding to raise barrier on the US-Mexico border. The report, however, was not officially confirmed yet. Apart from delays in the US data releases there is another issue relating to the shutdown that investors may find themselves disappointed with. Namely, Donald Trump announced yesterday on Twitter that he is cancelling his trip to the World Economic Forum in Davos, Switzerland. Annual meeting in Davos is an opportunity to hold some top level talks with World’s leaders and Trump’s presence amid all the uncertainties relating to international trade would be more than desired. However, the US delegation including Steven Mnuchin, Mike Pompeo, Wilbur Ross and Robert Lighthizer is said to attend the Forum.  Event in Davos is to be held on 22-25 January.

In other news:

• Japan’s PM Shinzo Abe expressed his support for the UK PM May and said that whole World wants to avoid chaotic no-deal Brexit

• Chinese Vice President Liu He will visit Washington on 30-31 January to continue trade talks

• Australian retail sales increase 0.4% MoM in November (expected 0.3% MoM)

• Japanese household spending decline 0.6% YoY in November (expected 0.1% YoY decline)