Mounting hopes for a less hawkish Fed to end last week: US dollar, ASX 200, EUR/USD

Market Recap

Initial concerns about a more persistent wage inflation were overturned by the release of the US non-farm payroll report to end last week, as US average hourly earnings turned in a significantly lower-than-expected reading (4.6% versus 5.0% forecast). While stronger job gains continue to suggest some resilience in the labour market (223,000 versus 200,000 forecast), this comes on the back of a 28,000 downward revision over the past two months, which provides some offsetting effect. The unemployment rate was lower than expected (3.5% versus 3.7% forecast), which could be the trigger for the paring of gains at last Friday’s opening, but that was eventually shrugged off with the subsequent release of US services Purchasing Managers' Index (PMI). Compared to market expectations of further expansion, US services activities have surprised to the downside (49.6 versus 55 forecast), suggesting that US economic conditions have been moderating quickly. The contraction in services activities and the softer wage inflation were welcomed by equity bulls as arguments for a less hawkish Federal Reserve (Fed). Interest rate expectations saw a ‘more dovish’ shift, with market participants leaning towards a lower terminal rate at the 4.75-5.0% range while Treasury yields and the US dollar reacted sharply to the downside.

After a short-lived rebound, the US dollar is back to retest its near-term consolidation base at the 103.50 level once more, as concerns of persistent pricing pressures have failed to find its much-needed validation last week. Having traded in a ranging pattern since December last year, any downward break of the 103.15-103.50 level could reiterate its downward bias, potentially paving the way towards the 101.30 level next. This week will bring focus to the key US Consumer Price Index (CPI) next, with current expectations pointing to further moderation in pricing pressures. That said, previous reading in December were met with a short-lived market reaction despite another downside surprise, which could bring similar volatility this week.

Asia Open

Asian stocks look set for a positive open, with ASX +0.88% and KOSPI +1.92 at the time of writing. The Japan market is closed today for a holiday. Moderating hawkish bets for the Fed have brought greater traction to the more growth-exposed KOSPI, as big tech companies outperformed last week. The reopening of China’s borders ahead of the Chinese New Year period are also in focus. While that is a positive step towards a longer-term growth recovery, the near-term risk of virus waves are put into question, which could be catalysts for jitters over the coming weeks. The Nasdaq Golden Dragon China Index closed slightly in the red (-0.76%) to end last week and while the formation of a new higher high last week reiterates its ongoing upward bias, one may watch for the potential risks of a bearish divergence on moving average convergence/divergence (MACD), which may trigger some profit-taking before another leg higher.

For the ASX 200, a previous break below its 200-day moving average (MA) last Tuesday was met with strong attempts by dip buyers to defend the key support line, which lies in coincidence with a key 50% Fibonacci retracement level. That brought about the formation of a bullish crossover on MACD for now, reflecting some building momentum to the upside. Ahead, the 7,300 level may be on watch as the next level of resistance, while previous dip-buying efforts will leave the 7,000 level in focus as a key support line.

On the watchlist: EUR/USD lifted off lower channel trendline support

The release of key US economic data to end last week brought about a U-turn in the US dollar to the downside, with markets placing their focus on softer wage inflation and services contraction as arguments for a less hawkish Fed. This drove the paring of previous losses for the EUR/USD, which was lifted off a lower channel trendline support at the 1.050 level. The near-term higher highs and higher lows suggest an ongoing upward bias for now, which could leave a retest of the upper channel resistance on watch this week at the 1.078 level, in coincidence with a previous horizontal support-turned resistance in May last year.

Friday: DJIA +2.13%; S&P 500 +2.28%; Nasdaq +2.56%, DAX +1.20%, FTSE +0.87%