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Stocks drift but sentiment remains positive towards risk

Fawad Razaqzada Fawad Razaqzada 12/01/2021
Stocks drift but sentiment remains positive towards risk Stocks drift but sentiment remains positive towards risk
Stocks drift but sentiment remains positive towards risk Fawad Razaqzada
…as evidenced, for example, by yen crosses such as the GBP/JPY breaking higher…
 
With little on the agenda on the macro front, European stock indices have drifted lower despite the big rally for Chinese markets overnight. In other words, the slight weakness is largely because of profit-taking. At the time of writing US futures were also pointing to a slightly weaker open. In FX, the pound had rebounded while the yen had extended its decline – another sign that it is still risk-on. Gold and silver were coming off their best levels after rebounding earlier. The US dollar index was flat after a 4-day rally, as the EUR/USD tested support around the 1.2150 area.    

In recent days, the dollar has been printing bullish price action, tracking the rising US 10-year bond yields. The greenback has risen most notably against the yen and gold, pointing to reduced have appetite. However, the dollar has underperformed against the likes of the pound and yuan. The reserve currency’s mixed performance means it is far too early to conclude it has formed a low, especially as sentiment towards risk remains overall positive.
Indeed, the reflationary trade is likely to remain in place for a while as investors look ahead to more normal times ahead, while knowing full well that central banks will be maintaining their extremely accommodative monetary policy stances for a while yet.

With the dollar all over the place, and risk assets still in demand, concentrating on the yen crosses make sense from a bullish point of view – not least the GBP/JPY, which has received a double whammy of good news: avoidance of a no-deal Brexit and the ongoing reflationary trade:

GBP./JPYSource: ThinkMarkets and TradingView.com

The GBP/JPY is likely to head further higher as investors price out no-deal Brexit risks further, something which I pointed out yesterday when analysing the GBP/USD currency pair HERE.
 
Meanwhile the EUR/JPY could be yen cross to break higher given that the positively-correlating GBP/JPY has already broken out to a fresh multi-month high today. The EJ has been holding inside a bullish consolidation pattern after bursting higher in early December. It has started to go a little lower in recent days, but this has now push rates to test key support around the 126.55 area:

EUR/JPYSource: ThinkMarkets and TradingView.com

As per the chart, this is where the bullish trend line meets the point of origin of the latest mini-breakout. If the EJ wants to go further higher, it will need to hold its own above this level now, as a clean breakdown would probably pave the way for a sharper correction.

If the above support holds, as I expect that it might, then the first bullish objective would be the liquidity above the most recent high at 127.50.  Thereafter, the 127.2% Fibonacci extension level comes in at 128.55.

However, if the above 126.55 support breaks down decisively then the bears may target the 126.00
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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