By eToro

Weekly Market Review 05-11/01/2015

Volatile Week Ahead

Investors had plenty of time to think and ponder. With thin trade over the holidays, the trading floors quiet and empty and all of the miscellaneous charts about as flat as the proverbial pancake, the world’s market movers and shakers had time to carve out their strategies, plan ahead and chart both the risks and upsides. This week, all those plans and big billion dollar bets will begin to take form and the relative calm of the holidays will be a mere memory. Ahead is a week dense with economic events from Europe, China and the US and markets that strolled in a calm flowing motion will quickly turn into a gushing river wrought with danger and volatility and, yes, opportunities. What will those events be and how might they play out? That is our focus this week.

The Euro at Stake

The first set of high profile data will be the Eurozone’s inflation release due out on Wednesday. The data is expected to have a significant impact on the chance for more QE from the ECB. It is widely believed that Mario Draghi’s number one concern is that the Eurozone’s low inflation or, perhaps more aptly, disinflation, which currently stands at a mere 0.3% annually will fall to 0% or below. If the CPI figures do indeed fall to zero, or worse, below it, it could trigger a big Euro selloff as speculation of a new ECB QE program mounts.

Dollar Bulls Eye FOMC Minutes

As the day rolls out and trading shifts to the New York session, attention will quickly focus on another big market moving event, specifically, the release of the Fed’s minutes. The protocol of the Fed’s rate decision is almost as important as the rate decision itself as it reveals the internal dynamics of the Fed, how each member of the FOMC votes and what exactly are their concerns and expectations regarding the US economy. Dollar bulls will be the ones most closely watching the data. With the robust GDP figure of 5% for Q3, Dollar bulls estimate that the Fed will be raising rates somewhere between March and September. If the protocol of the FOMC reveals that its members – even dovish members – are turning optimistic and talk about a rate hike that could support Dollar gains even further. If, however, the Fed seems more hesitant, that might derail some appetite for the Dollar.

Chinese Inflation to Dominate Commodities

China is known to dominate much of the commodities sector with its huge demand for raw materials, agriculture products, energy and metals. It is, therefore, unsurprising that China’s latest slowdown has played a key role in the global commodity selloff.  Commodity bulls expect that if China does stabilize it will allow commodities to rebound, expectations which bring us to the upcoming Chinese data. Chinese inflation, which has been falling steadily, could lead the PBOC to announce more rate cuts down the road and thus spur more demand. However, if inflation falls too much that could also spell trouble. Investors will hope for China’s CPI between 1.2 and 1.5% which will, on the one hand, still leave room for more easing and thus assist commodities demand while, on the other hand, aren’t considered too low. Anything above or below could be negative for commodities alongside other China related trades.

The Non-Farm Finale?

As with every week that ends with a non-farm release, the NFP finale poses an important ending tone.  However, this time around, investors will equally follow another job market indicator, namely unemployment. It seems that some market movers and policy makers believe that the 5.5% unemployment level could potentially be the full employment level for the US, a level where any fall below leads to higher wages and inflation. With the non-farm figure for December expected at 240K and unemployment expected at 5.7%, that level which tends to trigger a rate hike could move closer and thus support the Dollar provided those two expectations are fulfilled. If not fulfilled, however, investors could become more hesitant and switch to neutral on the Dollar.

Down to Business

The two main events of the week are clearly the Eurozone’s inflation level and the US unemployment figure. If Eurozone inflation slides while US unemployment falls further, that will lay the groundwork for another bearish push of the EUR/USD. If Eurozone inflation stabilizes while US employment levels miss the expected mark, the Dollar could move into range bound from a bullish bias on the short term.

On the plate

ISM Non-manufacturing PMI (Tuesday) – Will provide a reading on the US services sector and shed light on the prospects of Q4 GDP growth.

Eurozone CPI(Wednesday) –  If Eurozone inflation reading will slide below 0.3% YoY that could signal more QE from the ECB and consequently hit the Euro.

FOMC Minutes(Wednesday) –  If the Fed protocol will reaffirm assessments on an upcoming US rate hike in the next 6-9 months ,it will support dollar demand.

BoE Rate Decision (Thursday) – With UK inflation falling and growth disappointing, the BoE is expected to take a dovish stance in its rate decision. If this will indeed be the case, the Sterling could face renewed selling pressure.

Chinese CPI(Friday) – If Chinese inflation will range from 1.2% to 1.5% that will be considered positive for commodities. If Inflation will slide lower , that will hit commodities as well as the Chinese currency the Yuan.

Nonfarm Payrolls & Unemployment( Friday) – Will set the final tone for the week. If Payrolls rise by 240K or more and unemployment falls to 5.7% that will enforce speculations on an upcoming US rate hike in the next 6 to 9 month. The dollar on such a case , is expected to end the week with gains.

Chart of the Week – DAX


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