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US stimulus hopes lifts mood

Friday’s US non-farm payrolls report gave us some cause for concern that the economic recovery in the world’s largest economy is running out of steam. 

The update showed that 49,000 jobs were created last month, which was essentially in line with the survey carried out by Reuters. December’s reading was revised lower to -227,000 from -140,000. The unemployment rate fell from 6.7% to 6.3% but the participation rate moved fractionally lower so that might explain some of the fall in the jobless rate. On a yearly basis, average earnings held steady at 5.4%, which it is relatively high and that suggests that a lot of lower income earners have not returned to the labour market. In third quarter of 2020, the US economy grew by 33.4%, followed by 4% growth in the fourth quarter, so there was a sharp deceleration in growth. Last week’s jobs report feeds the narrative the rebound is fading.

Some extra volatility was added to the markets on Friday when Robinhood, the trading app, that is very popular with retail investors, announced it removed its trading restrictions on Gamestop – a stock that saw colossal volatility in recent weeks. Equity markets came under a little pressure in the wake of the announcement. European indices closed a little lower on the day, but as the US session went on, the S&P 500 managed to register yet another record close.

At the back end of last week, the Biden administration put in motion a plan to get the $1.9 trillion stimulus package signed off without support from Republican lawmakers. President Biden has a history of fostering good relations with politicians from across the aisle as well as seeking consensus on issues but this time he is determined to put the American people first. The stimulus move also helped US equities notch up a record close. Janet Yellen, the US treasury secretary, claimed the US economy could return to full employment next year if President Biden’s $1.9 trillion relief package is passed.

President Biden warned the Beijing administration will face tough ‘extreme competition’ from the US but he will not use Trump’s tactics. The positive sentiment from the US at the end of last week helped Asian equity markets. European stock markets are on track for a positive start.           

Since early January the US dollar index has been rebounding, in fact, last Thursday it hit a two month high but it retreated on Friday in light of the US employment data. There might be concerns the US economy is slowing down but its recovery needs to be put in context with other countries. In the final quarter of 2020, the eurozone contracted by 0.7%, according to the preliminary report. Last week the Bank of England cautioned the British economy will contract by around 4% in the first quarter of 2021. When you take into account what is going on in other parts of the world, the US is still in relatively good shape.  

Sterling enjoyed a positive move run last week. The BoE predicts the British economy will undergo a healthy economic recovery later this year as the vaccination programme should prompt the government to relax restrictions, which should facilitate the economic rebound. In addition to that, the British central bank gave off the impression that it won’t be introducing negative rates anytime soon, which was a big factor in the pound’s upward move. On Friday, the CMC GBP Index hit an 11 month high, partially helped by the jobs update from the US.

The UK continues to be one of the best countries in the world as far as the vaccination rollout is concerned, approximately 17% of the population have received their first jab of the vaccine. It is not all good news on the health front though, the AstraZeneca-Oxford vaccine is not effective against the South African strain of the coronavirus.                  

Silver experienced a lot of volatility last week as the metal came under a short squeeze attack, similar to Gamestop. The excitement was short lived as derivative exchanges increased their margin requirements on silver futures. By Friday, it had given back a large portion of the gains that were racked up earlier in the week but it finished comfortably above the lows of late January.

Brent crude oil and WTI gained 6% and 9% respectively last week as OPEC+ maintained their production levels. The hopes in relation to the US stimulus package buoyed the energy market too.

Over the weekend, Bitcoin traded above $40,000 for the first time since early January but it is now back below $39,000.

It is a quiet day in terms of economic announcements, at 7am (UK time) German industrial output for December will be posted and economists are predicting 0.0% growth, down from 0.9% in November.    

EUR/USD – Friday’s candle has the potential to be a bullish engulfing and if it moves higher from here, it could target the 50 day moving average at 1.2143. Beyond that, it could retest 1.2349. A move below 1.1952, might bring 1.1800 into play.  

GBP/USD – since late September it has been in an uptrend, it recently hit a 33 month high. If the positive move continues, it could target 1.4000. A pullback might find support at 1.3541, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8670. A rally from here could see it hit 0.8995, the 200-day moving average.   

USD/JPY – Friday’s candle has the potential to be a shooting star, a move lower could see it hit 103.93, 50-day moving average. Should the wider uptrend continue, it might hit 106 or 107.     

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