Daily Insights Report 18/01/17

• 31 Mar 2017

18 Jan 2017

– The Dollar fell 1.3% against the Yen to 112.67.

– The Euro rose 1% to reach $1.0707

– It is likely that the markets reacted to the President Elect’s comments about the USD which stated that the USD is “too strong”, and because of this – they would not be able to compete. However, due to his comments, it is not sure if he thinks the Dollar is too strong compared to the RMB or in general terms the currency is too strong. Since the election decision, the Dollar has heavily appreciated. It is likely that his policies will shift many things in the global economy, which may not be market-friendly.

Yesterday’s speech by the Prime Minister was assumed to be a reason that the Pound would fall in value. However, the opposite happened, as the Pound gained nearly 3%. This is the highest one day gain since October 2008. At a time of so much uncertainty and volatility, this is worth examining. Over the past three months, after every speech given by the Prime Minister, the Pound has fallen every time. What is believed to be different is that this time her speech contained a lot of clarity. In the past, there was much ambiguity which has never helped financial markets. The market sometimes thought that a ‘soft’ Brexit (remain as close as possible to the existing agreement with the EU) would be possible, but yesterday’s speech made it clear. Her statements stated the firm intent of freeing Britain from the laws of the European Court of Justice. This would end the free movement of citizens of EU citizens into the UK.

Commodities

– Oil prices saw a choppy session in trading as Brent crude went as high as $56.95 a barrel before balancing at $55.47. Meanwhile, West Texas Intermediate (WTI) crude up 0.2% to reach $52.67.

– Gold extended its rally to a 7 day winning streak. a 7-day streak of gains has not been since November. It added $12 in a day and reached $1,215 an ounce.

United States Dollar (USD)

Consumer Price Index

The expectation for this data is 0.3% overall, however 0.2% for the core data.

Higher fuel prices are likely to have brought the consumer price index above 2% for the first time in two years. While the core CPI passed the level of 2% months already, the cost of shelter has been rising as well. However, different calculations of the general price index lead to different conclusions. For example, the Federal Reserve’s PCE (Personal Consumption Expenditures) Price Index has not passed 2%. The Federal Reserve monitors inflation very carefully as it is a big influencing factor to decide what direction the interest rate needs to move, which in turn heavily changes the value of the currency.

NAHB Housing Market Index

Homebuilder confidence may not be as high as December’s (which was a 12-year high) for homebuilders. Looking at builder sentiment, 2017 may have a booming year for construction. This monthly survey of home builders asks them to rate the current sales of single-family homes and sales expectations for the next six months. A number above 50 indicates more builders view sales conditions as good compared to poor. This month’s forecast is 69, showing strong signs of optimism. If the housing market in America is not growing or becomes stagnant, it is likely the currency would suffer as a result.

Industrial Production (December)

The auto sector and utility sector both saw growth, which can lead to a very significant increase for December. The forecast is 0.6% growth of industrial production. A sharp increase in the auto mobile sales and chillier weather across the country will show gains for US output.

British Pound (GBP)

Unemployment Data

It is likely that the headline level of unemployment stayed at 4.8% for November. Normally job statistics respond with a lag to economic fluctuations. It is still likely that the labor market will worsen in the coming months. Until now, there has been very little evidence of the UK’s labor market worsening, except for the claimant rate. This showed a rise in unemployment as there were more people looking to claim unemployment benefits.

With the event of Brexit still ongoing, it is not sure to what extent the UK will be detached from the EU. This would definitely impact the unemployment level of the country.

Euro (EUR)

Consumer Price Index

November’s data for harmonized inflation was at 0.6%. However December’s data is likely to have jumped to 1.1% – the highest level in over three years. With the cost of energy prices and food prices rising – inflation can be seen in the different members of the EU. France saw inflation rise to 0.8% from 0.7% the year before. Germany saw inflation rise from 1.7% from 0.7%.

Since deflation is no longer a worry in the Euro Zone, a weaker Euro and higher commodity prices is likely to contribute to growing inflation.

Technical Analysis

EURGBP

Currently, the EURGBP pair is more or less idle around the 0.8650 area. Looking at the daily chart, we can see the value is just slightly above the 100 day SMA (Simple Moving Average). The stochastic indicators indicate that the pair is almost oversold, so it is an opportunity that the trend may be reversing direction. The stochastic chart shows that it has been a significant downward moving in the price. It may be more safe to wait for the stochastic indicator to start to move back and north of the 30 level before entering into this trading pair as it is possible to stay in the oversold territory for a while.