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Forex Market Analysis: Global Market Insights: US Dollar, Stocks, and Geopolitical Dynamics

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Forex Market Analysis: Monday 15 Jan 2024

Economic data: Markets closed for Martin Luther King, Jr. Day

Earnings: Markets closed for Martin Luther King, Jr. Day

CURRENCIES:

• Event Focus: UK Unemployment and Inflation Data
  • Major event risk from the UK includes upcoming releases of unemployment and inflation data.
• US Market Dynamics: Lower Yields and Rate Cut Forecasts
  • US dollar maintains its trading range despite declining yields and heightened expectations for rate cuts.
  • US 2-year yield experiences a six-day decline, with markets predicting nearly 25 basis point cuts in each meeting from March to November.
  • Note: Potential rate adjustments by the Fed may be limited due to the proximity to the presidential elections.
• US Dollar Basket Performance: Trading within Range
  • The US Dollar Basket, a proxy for USD performance, has been trading within a range for the past two weeks.
  • The significant resistance at the 103.00 level, coupled with the presence of the 200 and 50-day simple moving averages, limits the dollar’s upside potential.
• Challenges for the USD: Declining Yields and Rate Cut Expectations
  • The USD faces challenges such as decreasing yields, a more imminent prospect of rate cuts, and easing price pressures.
• Implied Fed Funds Rate: Market Expectations
  • Market expectations, as reflected in the implied Fed Funds Rate via the Fed Funds Futures Market, indicate anticipation of future rate cuts.
• Inflation Outlook: Despite Slightly Higher CPI Readings
  • Despite slightly higher Consumer Price Index (CPI) readings last month, expectations suggest a continued drop in inflation.
  • USD’s current range-holding is attributed in part to its safe-haven appeal, particularly following joint US and UK strikes on Houthi targets.
• Global Economic Outlook: Chinese Q4 GDP Data
  • Chinese Q4 GDP data is anticipated to provide insights into the global economic outlook.
• Safe Haven Appeal of USD: Influenced by Geopolitical Events
  • USD’s safe-haven appeal is reinforced by geopolitical events, such as joint US and UK strikes on Houthi targets, contributing to its range-holding status.
• Gold Performance: Notable Safe Haven Asset
  • Gold, a significant safe-haven asset, exhibited an increase over the weekend, aligning with USD’s safe-haven appeal.
• Key Levels for USD: Resistance at 103.00
  • The USD faces resistance at the major level of 103.00, with the 200 and 50-day simple moving averages further contributing to this resistance zone.
• Factors Influencing USD Range: Safe Haven Status
  • Despite various challenges, the USD’s ability to maintain its range is influenced by its safe-haven status, particularly in response to recent geopolitical developments.

STOCK MARKET:

• Market Recap and Outlook:
  • Stocks resumed winning streak after a nine-week break to start 2024.
  • Nasdaq Composite led with a 3% gain; S&P 500 approached a record high.
  • Microsoft surpassed Apple as the world’s most valuable company.
• Upcoming Focus:
  • In a holiday-shortened week, attention shifts to financial sector results and Wednesday’s retail sales data.
  • US markets closed Monday for Martin Luther King Jr. Day.
• Retail Sales Forecast:
  • Retail sales expected to rise by 0.4% in December, exceeding the 0.3% gain in November.
  • Bank of America anticipates “robust” retail sales due to applied seasonal adjustments.
• Economic Calendar:
  • Thursday: Initial jobless claims data.
  • Friday: University of Michigan’s consumer sentiment report.
• Geopolitical Events:
  • Monday: Iowa caucuses mark the official start of the 2024 US presidential election.
  • Rising tensions in the Red Sea draw increased investor attention.
• Earnings Reports:
  • Investment banks Goldman Sachs (GS) and Morgan Stanley (MS) set to report.
  • Focus on the investment banking story and the trajectory after a challenging year.
• Inflation Insights:
  • Last week’s inflation data showed firmer consumer prices but moderated producer prices.
  • Red Sea-related disruptions noted as an “upside risk” to inflation forecasts.
• Fed Rate Cut Expectations:
  • Investors price in a 77% chance of a 0.25% Fed rate cut in March.
  • Barclays economists expect incremental cuts starting in March but at a more gradual pace.
• Earnings Season Kickoff:
  • Major money center banks, including JPMorgan, Wells Fargo, Bank of America, and Citi, reported results.
  • JPMorgan reported a nearly $50 billion record annual profit.
• Tech Sector Focus:
  • The financial sector takes the spotlight initially, but the tech sector’s performance will be closely monitored.
  • Forward P/E ratio for the Technology sector stands at 27, second highest among S&P 500 sectors.
• Magnificent Seven and Nasdaq Influence:
  • Results from “Magnificent Seven” tech giants, including Meta Platforms, Alphabet, Amazon, and Tesla, will impact the Nasdaq and overall market sentiment.
  • Negative guidance from tech sector companies above recent averages.
• Sector Valuations:
  • Technology sector’s forward P/E ratio at 27, second only to Real Estate, which traded at 39.
  • Technology’s performance crucial as it accounts for over 28% of the S&P 500’s market cap.
• Fourth Quarter Earnings Season:
  • The tech trade’s impact on overall market direction will be significant as the earnings season progresses.
• Investor Sentiment:
  • The party for fourth-quarter earnings season begins when reports from the “Magnificent Seven” tech giants start rolling in.

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