JPY and Gold benefit as investors close USD positions

The sell-off in stocks yesterday wasn’t just limited to the Asian and European markets, with bearish pressure also felt in US Stocks when the US trading session commenced. The S&P 500 suffered its biggest decline since the global sell-off in October with weakness evident in the Dow Jones Industrial Average (DJIA). Concerns about global growth unsettled investors yesterday, but US Futures later rebounded to end the day relatively flat.

Although concerns about global growth seem to make never-ending headlines, reasons for the rebound in US stocks could be linked to the US economy strengthening. This would motivate investors to continue looking towards US stocks regardless of concerns elsewhere around the globe.

Although US Futures concluded trading by recovering earlier losses, the same can’t be said for the USD which is continuing to weaken. There is anxiety that the Federal Reserve might look at continuing concern over global growth and delay its plans to raise US interest rates. I don’t think the Fed will do this unless the concern gets considerably worse, but the anxiety surrounding the possibility is enough to inspire investors to take profit on the USD. The JPY and Gold were the main beneficiaries from USD weakness with the USDJPY pulling back by an incredible 300 pips in just one day. Gold also noticed bullish momentum, with the metal progressing from $1199 to trade at its highest level since late October at $1238.

With US economic data always lower in the days following the Non-Farm Payroll release, the USD is susceptible to some softness this week. However, I think investors were spooked when they saw the sell-off in the Asian and European markets and seized the opportunity to close USD positions. It was previously mentioned that with investor attraction towards both the EURUSD and GBPUSD being weak, gains from risk appetite in the currency markets provided the strongest opportunity for both pairs to rally to the upside. This is exactly what occurred on Tuesday, with the EURUSD rallying sharply from 1.2291 to 1.2446 and the GBPUSD appreciating from 1.5625 to 1.5718.

Overnight, it was announced that China inflation levels eased to a five-year low in November with this leading to even further concerns about ongoing weakness in the Chinese economy. Although the inflation data was disappointing, one particular positive remains; low inflation levels open up the opportunity for further interest rate cuts from the People’s Bank of China (PBoC). When you look at a decline in domestic spending being the major culprit behind economic momentum slowing, further rate cuts from the PBoC would be seen by the markets as a positive step to reinvigorate economic growth.

As you would expect when concerns are China are being floated around, JPY strength has continued overnight. When there are concerns regarding an economic slowdown in China, JPY traditionally strengthens and this week concerns in China are heightening each day. Since the USDJPY moved as high as 119.908 on Wednesday morning, the pair declined to 118.677. If investors continue to take profit on the USD today, further support for the USDJPY can be found at 118.677, 118.216 and 117.940. Potential USD softness would also provide an opportunity for Gold to continue recent gains, with the metal currently finding resistance around $1235 preventing a move towards $1250.

The European calendar is relatively light today and unless the volatility we noticed yesterday continues, we might be in for a quieter trading session. The only noteworthy economic release is the UK Trade Balance, where the current expectations are for the deficit to have declined in comparison to the previous reading. This would support the Pound but looking at GBPUSD already making gains this morning, I think the move could already be priced in.

The EURUSD has also opened the day positively, which means the gains recorded in both the Cable and Eurodollar on Wednesday morning could just be linked to general USD softness. The Euro is rallying at present, with the combination between USD weakness and European Central Bank (ECB) disappointing the bears by leaving monetary policy unchanged in December providing Euro bulls with some momentum. However, comments from ECB Chief Economist Peter Praet on Tuesday that EU inflation could hit zero in the near future do provide a subtle reminder to investors that the longer term risks for the Eurodollar remain underpinned to the downside.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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