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I. Market focus:
The beginning of the new week was marked by the weakening of the dollar. The U.S. currency declined on Monday morning, signaling a possible completion of its upward correction, observed during February. The main trend of the U.S. dollar is still downward, and it continues. The reasons behind this trend remain investors' concerns about the substantial increase in the U.S. public debt due to the implementation of the tax reform approved at the end of the previous year. The dollar can resume its growth if expectations that the Federal Reserve may tighten its monetary policy at a faster pace than previously expected increases. The regulator has already hinted such a possibility. The Fed's latest accompanying statement was more hawkish than the previous one. In particular, the Fed removed the note that price pressure measurements "have declined" and were "running below 2 percent", and said it expected the rate of price changes "to move up this year" and stabilize around its 2% target "over the medium term. On Wednesday, the U.S. data on the consumer price index (CPI) and retail sales will be released, which most likely will confirm the Fed’s expectations, thus having a very strong influence on the prospects of the U.S. currency.
Today's session will not be very busy with scheduled events and data, suggesting that trading will be rather quiet. Investors will pay attention to the comments of the policymakers of the Bank of England (Gertjan Vlieghe at 09:50 GMT and Ian McCafferty at 16:30 GMT) and the Reserve Bank of Australia (Luci Ellis at 21:50 GMT).
II. The market highlights are:
Michel Barnier, the European Union’s (EU) chief Brexit negotiator, stated in Brussels after the latest round of the UK-EU talks that Brexit transition period is “not a given”. He noted that "substantial" disagreements remained and he had "some problems understanding the UK's position". “To be quite frank, if these disagreements persist, the transition is not a given,” Barnier said. “If this disagreement should exist there will undoubtedly be a problem. I hope that we will be able to resolve this disagreement in the next round,” he added.
Statistics Canada reported Friday that the number of employed people fell by 88,000 m-o-m (-0.5 percent m-o-m) in January of 2018, missing economists’ forecast for a 10,000 increase and after a revised gain of 64,800 in the previous month (originally 78,600). Meanwhile, Canada's unemployment rate rose to 5.9 percent in last month from an upwardly revised 5.8 percent in December of 2017 (originally 5.7 percent). That was in-line with economists’ expectation. According to the report, full-time employment rose by 49,000 (+0.3 percent m-o-m) in January, while part-time jobs tumbled by 137,000 (-3.8 percent m-o-m). In January, the number of private sector employees decreased by 70,700 (-0.6 percent m-o-m), while the number of public sector employees dropped by 41,200 (-1.1 percent m-o-m). At the same time, the number of self-employed rose by 23,900 m-o-m (+0.8 percent m-o-m) last month. Sector-wise, declines were spread across a number of industries, including educational services (-1.5 percent m-o-m), finance, insurance, real estate, rental and leasing (-1.5 percent m-o-m), professional, scientific and technical services (-1.1 percent m-o-m), construction (-1.0 percent m-o-m), and health care and social assistance (-0.5 percent m-o-m). At the same time, employment increased in business, building, and other support services (+1.5 percent m-o-m).
The weekly report from Baker Hughes, which was released Friday, showed that the number of active U.S. rigs drilling for oil climbed by 26 to 791 during the week ended February 9. That marked the third straight week of increases and the biggest weekly rise in more than a year. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, surged by 29 to 975, as the gas rig count increased by three to 184 last week. The U.S. rig count is up 234 rigs from this time last year when it stood at 741.
Japan’s government has decided to nominate Haruhiko Kuroda as governor of the Bank of Japan (BoJ) for another five-year term when his current one expires in April, the Kyodo news agency reported on Friday. Kuroda’s nomination needs approval by both houses of parliament, a near certainty as premier Shinzo Abe’s ruling coalition holds comfortable majorities in the lower and upper houses of the Diet. The reappointment signals continuity for the radical easing program credited with helping restore the growth of the Japanese economy.
III. Market Situation
The currency pair EUR/USD rose significantly, refreshing its high of February 8, as the U.S. dollar resumed decline and risk appetites returned. However, despite the recent drop in the U.S. currency, it continues to see demand from cautious investors as the situation in the stock market remains fragile. Some analysts expect the dollar may strengthen this week. In the short-term perspective, it is expected that the volatility in the financial markets will preserve, while an easier fiscal policy and rising risks to inflation in the U.S. may cause an acceleration in the pace of the monetary policy tightening by the Fed, which will be a positive factor for the U.S. dollar. This week, particular attention will be paid to the U.S. data on consumer price index (CPI) and retail sales, which are likely to confirm the expectations of the Fed’s policymakers, and will have a very strong influence on the prospects of the U.S. currency as well. Resistance level - $1.2404 (high of February 7). Support level - $1.2165 (low of January 18).
The currency pair GBP/USD rose moderately, recovering about half of the losses it suffered on Friday on the back of the broad strengthening of the U.S. currency, release of the mixed production data in the UK as well as increased uncertainty over a UK-EU transition period after Brexit due to statement of the EU's chief Brexit negotiator Michel Barnier. The pair’s correction reflected the weakening of the U.S. currency and the increased demand for high-risk currencies, such as the pound. With an empty economic calendar in the UK ahead, investors will focus on the news about Brexit talks, the dynamics of the U.S. currency and the general market sentiment toward risky assets. Some attention will be also paid to the comments by the Bank of England’s (BoE) policymakers Gertjan Vlieghe and Ian McCafferty. Investors await the UK’s inflation data for January, set to be released tomorrow. As a result of the slump in the pound in the immediate wake of the Brexit vote in June 2016, inflation in the country rose sharply, limiting consumer spending and putting pressure on the economy, which is more dependent on the consumer sector. Economists expect a slowdown in consumer price growth in January to 2.9 percent y-o-y from 3 percent y-o-y in the prior month. Resistance level - $1.4068 (high of February 8). Support level - $1.3731 (low of January 15).
The currency pair AUD/USD traded higher, near the peak of February 8, as the U.S. currency demonstrated negative dynamics and the demand for high-risk currencies increased. Gradually, market participants’ attention shifts to tomorrow's data on the business confidence index from the NAB and the consumer confidence index from Westpac, as well as the report on the Australian labor market, scheduled to be released on Thursday. According to economists’ forecasts, the NAB business confidence index declined to 10 points in January from 11 points in December, while the unemployment rate remained at around 5.5 percent and the number of employed persons increased by 15,000 after a gain of 34,700 in December. Resistance level - AUD0.7953 (high of February 5). Support level - AUD0.7700 (psychological level).
The currency pair USD/JPY traded slightly lower, correcting after strong growth at the end of the Friday session. The further fall of the pair was limited by the weakening demand for traditional safe-haven currencies, as well as low trading volumes due to a holiday in Japan. At the same time, market participants were adjusting their positions ahead of tomorrow's release of the preliminary data on Japan's GDP for the fourth quarter. According to the forecasts, the Japanese GDP grew by 0.2 percent q-o-q and by 0.9 percent y-o-y in the final quarter of 2017. In the third quarter, Japan’s economy expanded by 0.6 percent q-o-q and 2.5 percent y-o-y. Resistance level - Y109.79 (high of February 8). Support level - Y108.00 (psychological level).
U.S. stock indexes closed higher on Friday, but still recorded their worst week in two years. The top-weighted technology and financials sectors were relatively strong throughout the session, being the biggest contributors to the winning performance. On the contrary, the energy sector was the worst-performing group as the price of crude oil declined for the sixth session in a row. Friday's economic data was limited to report on wholesale inventories, which showed an increase of 0.4 percent m-o-m for December of 2017, higher than a preliminary estimate of 0.2 percent m-o-m and slightly below a downwardly revised 0.6 percent m-o-m increase in November.
Asian stock indexes closed mixed on Monday, correcting after Friday’s tumble. The Japanese equity market was closed for a holiday.
European stock indexes are expected to trade mixed in the morning trading session.
Yields of US 10-year notes hold at 2.85% (0 basis points)
Yields of German 10-year bonds hold at 0.75% (0 basis points)
Yields of UK 10-year gilts hold at 1.58% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in March settled at $59.91 (+1.20%). The crude oil prices surged, correction after the Friday's decline, which was triggered by the release of the weekly data on the U.S. oil rig count by Baker Hughes, which showed that the number of active U.S. rigs drilling for oil climbed by 26 to 791 during the week ended February 9. That marked the third straight week of increases and the biggest weekly rise in more than a year. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, surged by 29 to 975, as the gas rig count increased by three to 184 last week. The U.S. rig count is up 234 rigs from this time last year when it stood at 741. The weaker U.S. dollar also helped the oil quotations.
Gold traded at $1,323.90 (+0.56%). Gold prices rose moderately, as the U.S. currency demonstrated decline. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell by 0.33 percent to 90.14. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.
IV. The most important news that are expected (time GMT0)
Consumer Price Index
MPC Member Vlieghe Speaks
MPC Member McCafferty Speaks
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