The second trading month of the year started with a bang: the U.S. stock market crashed, sending the DJIA down in a vicious spiral. The volatility index (VIX) experienced high levels and the DJIA dropped a record number of points in one single day.
Such a tumble couldn’t go unnoticed on the Forex market. In a blink of an eye, the JPY flexed its muscles, showing the equities/JPY correlation is alive and kicking.
And yet, no important new caused the market reaction. Or, so it seems at the first glance.
NFP and Average Hourly Earnings
Last Friday the NFP largely beat expectations. At this point in the tightening cycle, the job creation should have been slower. Yet, it the U.S. economy keeps adding jobs at a fast pace.
While this was a positive news for the dollar and the stock market, the main news of the day was the Average Hourly Earnings releases. It increased dramatically, sending fears that inflation will spiral out of control.
Still, the market didn’t seem to care about it last Friday. However, this week’s reality started to settle: higher wages bring higher inflation, and that translates in lower equity levels. Hence, the selloff does have an explanation.
This Week’s Outlook
No important economic releases appear on the economic calendar for the rest of the week. It means the VIX and the stock market’s reaction will drive prices too.
So far until today, the Euro traded with a bearish tone. All major Euro pairs suffered, starting with the EURUSD and ending with the EURJPY and EURGBP.
Talking about the EURUSD, the pair saw tremendous resistance above 1.25. It tried twice to overtake the level, without much of success.
But the drop to the current 1.23 seems corrective in nature. I wouldn’t be surprised to see the pair catching a bid into the end of week trading.
As a matter of fact, timing is everything in Forex trading. Considering that we’re still in the first half of the trading month, there’s plenty of time for the real move to come. Or, maybe it already did!
Bank of England Tomorrow
For GBP traders, Bank of England tomorrow could be a game changer. With GBPUSD flirting with 1.40, Bank of England faces a tough decision: keep the rate on hold and adopt a hawkish stance or raise the rates. I’ll settle for the first option.
To sum up, the week is far from over, with Thursday and Friday to be decisive. Will the Euro recover, or the GBP will hold the central role? As for the USD, it seems to be in a well-defined trend for now.
Also published on Medium.