EUR/USD: Financial markets have been ahead of the curve in their worries over the Eurozone growth outlook, and have reduced significantly their view on lift-off this year. Draghi used the December meeting to explain that he viewed market expectations as focused on a thinking that the economy will worsen but importantly "they well understood our reaction function". While the market’s focus is on the date-dependent nature of forward guidance, Draghi is likely to emphasise the state-dependent aspect. It is too early to adjust rate forward guidance, but if it happens it should not be a complete surprise. The ECB meeting this week is likely to have a mild dovish tilt as the ECB focuses more on downside risks to growth but is still unwilling to officially shift risks to the growth outlook which will likely remain “broadly balanced”.

Investors expect a dovish statement from the ECB this week. But in our opinion it is too early to significant shift in ECB policy and the EUR/USD is likely to appreciate if the ECB is less dovish than expected. We opened EUR/USD long at 1.1355 today.

GBP/USD: British workers' pay growth hit a new 10-year high and employment grew by much more than expected in the three months to the end of November, as the labour market remained robust despite other signs of an economic slowdown ahead of Brexit.

Average weekly earnings, including bonuses, rose by 3.4% on the year, the Office for National Statistics said on Tuesday, the biggest rise since mid-2008 and compared with a median forecast of 3.3%. Excluding bonuses, earnings rose by an annual 3.3% in the three months to November. Adjusted for inflation, total pay rose at the fastest pace for two years.

Employment increased by the largest amount since the three months to April, although it is unclear whether businesses will maintain hiring at these levels as uncertainty around Brexit mounts.

British Prime Minister Theresa May sought to break a parliamentary deadlock over Brexit on Monday by proposing to seek further concessions from the European Union on a plan to prevent customs checks on the Irish border.

With little time left until the United Kingdom is due to leave the EU on March 29, there is no agreement in London on how it should leave the world’s biggest trading bloc, and a growing chance of a dramatic ‘no-deal’ exit with no provisions to soften the economic shock.

Still, the Bank of England has said it will need to raise interest rates gradually to offset inflation pressures from the labour market.
The GBP rose on Tuesday after strong employment data suggested Britain's labour market remained robust despite an economic slowdown ahead of Brexit.

The GBP/USD remains above the 7-day exponential moving average. The pair broke above the 50.0% Fibo of September-January fall and the next hurdle is 61.8% Fibo at 1.2970. We stay sideways despite bullish signals coming from technical analysis. Short-term moves are unpredictable and the pair could be volatile due to uncertainty over Brexit.

USD/CAD: The Canadian dollar weakened against the USD as investors worried about progress on trade talks between the United States and China and after the International Monetary Fund cut its world economic growth forecasts.

The IMF predicted the global economy would grow 3.5% in 2019 and 3.6% in 2020, due to weakness in Europe and some emerging markets, and it said failure to resolve trade tensions could further destabilize a slowing global economy.

China's economic growth cooled slightly in the fourth quarter from a year earlier as expected, weighed down by weak investment and faltering consumer confidence as Washington piled on trade pressure, leaving 2018 growth the weakest in 28 years. Canada exports many commodities, including oil, so its economy could be hurt by a slowdown in the global economy.

The decline for the loonie comes after data on Friday showed a pick-up in December in Canada's annual inflation rate but stable underlying price pressures that could forestall additional interest rate hikes from the Bank of Canada over the coming months.

Canadian retail sales report is due on Wednesday.

We used today’s rise to get USD/CAD short at 1.3350, in line with our strategy. In our opinion the corrective move of January drop is coming to an end – the pair is currently near 38.2% Fibo of January move (1.3365).

During the holiday period, market sentiment fluctuated greatly, as evidenced by unusually large price swings in equity and fixed-income markets. There appears to be widespread concern among market participants about growth prospects in the three major economic areas, the United States, China and Europe. The unsolved trade dispute between the US and China, the government shutdown in the US and the uncertainties about Brexit only add to investors’ concerns. In this environment, major equity indices troughed between Christmas and New Year and have recovered by about 5-10% since then. Bond yields tumbled as investors trimmed their rate-hike expectations for the Fed and the European Central Bank.

Jerome Powell, chairman of U.S. Federal Reserve, said on Friday that the Fed "will be patient" while it weighs future interest rate hikes.

Powell said the Fed noticed the concerns about downside risks, which include slowing global growth, ongoing trade negotiations, and general policy uncertainty coming out of Washington.

Heading into 2019 with these conflicting signals, Powell stressed that the Fed was "going to be taking that downside risk into account." "There is no preset path for policy," he said, "and particularly with muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves."

Powell said that the Fed would be prepared to adjust their normalization plans, after a three-year long campaign to shrink the portfolio that the Fed purchased after the Great Recession took place. "If we ever came to the conclusion that any aspect of our normalization plans was somehow interfering with our achievement of our statutory goals, we wouldn't hesitate to change it, and that would include the balance sheet, certainly," Powell said.

Last month, Fed policymakers already lowered the forecast of the rate hikes in 2019 to two times, while their previous estimate was three. However, Powell voiced more flexibility in the future path of Fed's monetary policy. Powell said the Fed "will be prepared to adjust policy quickly and flexibly" in order to maintain the expansion, support the labor market and keep inflation near 2%. "We're always prepared to shift the stance of policy and to shift it significantly, if necessary," Powell added.

The USD reaction to Friday’s robust December labor-market report was muted. While the strong US numbers sent a reassuring message about the health of the US economy and stronger labor market data clearly argue for further policy normalization/tightening, the more fragile financial markets demand at least a pause – and Fed Chair Jerome Powell’s that the Fed would “listen carefully” to the market, fulfilled investors’ hopes for a “Powell put”.

Scope grows for eventual EUR/USD gains to the 1.1516 Fibo, a 50% retrace of the 1.1815 to 1.1216 (September to November) drop. On Thursday EUR/USD failed to register a daily close under the 1.1323 Fibo, a 61.8% of the 1.1216 to 1.1497 (November to January) recovery. The market continues to trade back within the daily cloud (1.1354-1.1516), further reinforcing the upside. We remain long for 1.1570.

Bearish sentiment dominates the US and German stock exchange and the data released today can do little to change the negative picture. The US annualized GDP was released, amounting to 3.4%, 0.1 pp. below market expectations. Growth structure was similar to the previous estimate, albeit with slightly lower contribution of private consumption and slightly better investment. The reading does not change much in the trading perspective. The economy seems to be slowing down  as growth in Q3 was 0.8 pp. lower than in previous quarter, when the economy probably peaked during the current cycle. Slightly disappointing was also the November reading on durable goods orders, which grew 0.8% m/m vs. median forecast at 1.6%. Despite disappointment, both readings were however quite good, showing that the real economic sentiment may be not as bad as suggested by sliding stock indices.

Therefore, it is justified to expect the S&P 500 to stop at current level, where investors are supposed to await new information. After this consolidation, it seems probable that the current downward trend will be continued until the index reaches 2400 pts. At the moment, this support seems to be good starting point to start upward correction, that would drive the index towards 2500 pts or even 2550 pts., depending on incoming information. Looking at German DAX Index, similar scenario is possible, with 10250-10500 pts being the area where the index could turn north. 

As for the gold price, both technical situation and fundamentals, given by the fear of economic slowdown, allow to expect reaching USD 1280. Extending this movement in short term is however unlikely, especially if stocks pared losses over the nearest few sessions. is an independent macroeconomic consultancy with thousands of subscribers all over the world. We provide fundamental research to help our clients make better investing decisions. Our subscribers should expect to get access to:

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