market relief

Despite the threat of a government shutdown US markets still managed to close at new record highs last week. It was also a good week for European markets hitting their best levels this year with the German DAX once again within touching distance of the record highs we saw back in November.

It was a more disappointing week for the FTSE100 which slipped back after the record highs of earlier this month. The UK index appeared to be undone by a poor week for commodity prices with copper and oil prices having a negative week, dragged down by the oil majors and basic resource stocks.

Having seen the US government shutdown confirmed after last week’s US close there might be a case for suggesting that stocks may well be adversely affected. This seems unlikely in the long run given that the shutdown, at least in the short term, is likely to be fairly limited in nature, given that by and large economic data from across the globe continues to show a fairly robust level of economic activity.

Furthermore, dysfunctional US politics isn’t really anything new, in fact dysfunctional politics appears to be becoming the norm, not only in the US, but the world over, even if in Germany we do appear to be starting to make progress on the formation of a new government after the German SPD party membership granted permission for the party leaders to begin new coalition talks with Angela Merkel.

Despite this progress, and before we hang out the bunting, there still remains some way to go before any form of agreement starts to evolve into a workable arrangement between the various parties. The SPD still remains broadly split in trying to craft an agreement with Mrs Merkel with only 56% of the party voting to begin talks. This would suggest that any coalition, if it is formed, is likely to be a fairly fragile one, and before that even happens any deal that is put together would have to be once again put to a vote of SPD members.

As we look ahead to a new week, and a higher European open after Friday’s US record closes, most of the markets attention is likely to be on two important central bank rate meetings this week.

Firstly the Bank of Japan meets for the first time since that unexpected tweak of monetary policy this month. The reduction by $10bn of its monthly bond buying program jolted the markets, particularly since the general consensus had been that the BoJ was in for the long haul. This month’s actions have shown that can’t be taken for granted, so markets will be paying close attention to not only what Kuroda does, but also about how he guides future expectations of policy moves later on into 2018.

That is followed by the ECB on Thursday with the rise in the euro already resulting in briefings by senior officials that a strong currency isn’t particularly desirable at this time.

It’s also the start of the World Economic Forum tomorrow, and while the great and the good are hob-nobbing in Davos getting an awful lot of media coverage, as far as the markets are concerned it will probably be one big snooze, just like previous years. One thing that might make it interesting would be the presence of President Trump for the first time which could make for some interesting optics, after his reported rather colourful comments about certain countries, assuming he goes given the current shutdown of the US government.

EURUSD – has held above the 1.2160/70 level for the time being and while it does so the bias remains for a move towards the 1.2600 area and 61.8% retracement level of the 1.3995/1.0340 down move, on a move through the 1.2300 level. Below 1.2160 argues for 1.2090.

GBPUSD – the next resistance area for the pound after five consecutive weekly gains sits at the 1.3980 area which is the 38.2% retracement of the 1.7190/1.1950 down move and a significant obstacle to a move through to 1.4000. Support comes in at last week’s low at 1.3725 and the 1.3650 area.

EURGBP – is currently finding support around the 0.8800 area, but it really needs to move back through the 100 day MA and 0.8910 to argue for further gains. A move below the 0.8800 area has the potential to target a move back to the 0.8740 area. Above 0.8910 targets the 0.9000 area.

USDJPY – currently in a range with support at the 110.10 area last week. We need to move above the 111.50 area to retarget the 112.00 area, or face the prospect of a move towards 109.50.

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