Investors' high-risk appetite had dominated today’s market open but has slightly faded after a price correction. Bullish cryptocurrencies, the stock market, and a weaker Dollar last week indicated a clear change in the market’s risk profile. The only concern for investors is that Gold continues its bullish price movement which normally indicates a possible fragile market. However, the bullish price movement may simply be a result of a weaker Dollar and investors using Gold as a hedge against inflation.
Most markets have seen a similar price movement which traders will continue monitoring throughout the European session. The stock market increased to a new price high this morning and reached the highest pricing since December 14th. Though the price had corrected as experienced with Dollar pairs.
European and US stocks both experienced bullish price movement over the past week. However, European stocks such as the DAX and CAC still hold the lead. The DAX this morning is trading at an 11-month price high after the price increased by 9% over 2 weeks.
Will the “Risk on” Sentiment Last?
As mentioned above, the price movement did at first indicate a “risk on” sentiment. However, traders will continue monitoring the price action after the price declines for 5 consecutive hours.
The earnings season scheduled for this week will largely influence the stock market. Earning reports scheduled to be released this week include Netflix, Morgan Stanley, Goldman Sachs, Procter and Gamble and IBM. The price movement and market sentiment will largely depend on the revenue and earnings per share which are announced.
The drive in equities and commodities has been largely driven by the declining inflation rate and abandonment of the US Dollar. Cryptocurrencies have also been positively affected by an end to the Federal Reserve’s hiking policy and a possible cut later in the year. The price of Bitcoin has increased by 19% since Thursday’s Consumer Price Index. Bitcoin’s price has now increased above $20,000 and returned to its pre-FXT crisis price range. Traders are cautious above the current resistance level but at the same time will consider the potential further bullish trend.
Over the weakened, members of the Federal Open Market Committee mainly indicated that the Fed will continue on the path to interest rates above 5% but would simply lower the size of the hikes. This week’s Producing Price Index will also affect the Fed’s decision on February 1st.
USD/JPY - The Yen Turns the Table
The price of the USD/JPY is experiencing mixed price movements after the Yen reached a new price high but then significantly retraced back in the Dollar’s favor. The US Dollar has over the past few hours appreciated against most currencies. The Yen on the other hand has been one of the most bullish currencies against the Dollar over the past 3-months. The Bank of Japan's policy and weaker Dollar has largely influenced the recent month’s price movement.
The USD/JPY has declined by almost 16% since mid-November 2022 but has seen some sizable retracements along the way. Therefore traders must be cautious about their entry and exit. This morning’s price has increased by 0.75% which has resulted in bullish signals from Moving Averages and the Relative Strength Index. Most lower moving averages have crossed over upwards as has the stochastic Oscillator. Both are possible indications of an upward trend but traders should be cautious of bearish breakouts.
Many economists are expecting the Bank of Japan to potentially increase interest rates and revise its yield curve control before the summer. This has been one of the main drivers for the Japanese Yen. What is extremely interesting is that Japan's 10-year bond yields rose above 0.54% last week. This would be the first time the market has experienced this in more than 7 years. Bond yields are also another indication of future interest rates, so a rise would be positive for the currency.
Lastly, technical analysts have advised that even though the fundamentals are largely against the Dollar at the moment, but, traders still should be cautious of some bullish Dollar price action. One of the main announcements for the US Dollar this week will be the Producer Price Index and Retail Sales figure for December. A higher PPI can support the US Dollar.
On the other hand, the Japanese Yen will largely be influenced by Wednesday’s Bank of Japan Press Conference, Monetary Policy Report and Economic Outlook Report. Investors are mainly hoping for a change in the regulator’s Yield Curve Control Policy.
Summary:
- Risk-based assets such as cryptocurrencies and stocks reach a new price high but then sharply correct.
- Markets continue to price in a weaker monetary policy for 2023 while the FOMC indicates a 0.25% rate hike for February.
- Bitcoin increased by 19% since the latest inflation figures.
- The Japanese Yen is supported by a change in the national Yield Curve Control.
