Aside from the incredible bull run higher seen on Wall Street, the key story for early 2018 has become the sharp weakness on the US dollar. This is impacting across financial markets as the Dollar Index has fallen to levels not seen since January 2015. But what is driving the move and what is the outlook on forex, equities and commodities markets? We take a fundamental and technical look under the bonnet.

1. .
Weekly Outlook
Monday 15th January 2018 by Richard Perry, Market Analyst
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therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please
ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such
transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only
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WHEN: Thursday 18th January, 0200GMT
LAST: +6.8% in Q3 2017
FORECAST: +6.7% in Q4 2017
Impact: European traders will wake up on Thursday to
news of the latest China GDP figures. The government
2017 target for GDP growth of 6.5% is likely to be
exceeded with growth expected around 6.9% according
to Premier Li Keqiang. This comes amidst rising forex
reserves and pushing for supply side reforms. At the
same time we get the release of Industrial Production
and Retail Sales (effectively the two halves of the
economy). Positive surprises on these data points will
be supportive for risk appetite with commodity
currencies (Aussie and Kiwi) especially reactive.
Key Economic Events
Date Time Country Indicator Consensus Last
Tue 16th Jan 0930GMT UK CPI (headline / core) +3.0% / +2.6% +3.1% / +2.7%
Wed 17th Jan 1000GMT Eurozone Final CPI (headline / core) +1.4% / +0.9% +1.5% / +0.9%
Wed 17th Jan 1415GMT US Industrial Production (MoM) +0.5% +0.2%
Wed 17th Jan 1500GMT Canada Bank of Canada monetary policy +1.25% +1.00%
Thu 18th Jan 0030GMT Australia Unemployment +5.4% +5.4%
Thu 18th Jan 0200GMT China GDP +6.7% +6.8%
Thu 18th Jan 0200GMT China Industrial Production / Retail Sales +6.0% / +10.1% +6.1% / +10.2%
Thu 18th Jan 1330GMT US Building Permits / Housing Starts +1.30m / +1.28m +1.30m / +1.30m
Fri 19th Jan 0930GMT UK Retail Sales (ex fuel YoY) +3.0% +1.5%
Fri 19th Jan 1500GMT US University of Michigan Sentiment (prelim) 97.0 95.9
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1N.B. Please note all times are Greenwich Mean Time (GMT), data source Reuters
Macro Commentary
There have been signs over the past week of a subtle shift away from the ultra-loose monetary policy paradigm.
The Fed has been tightening policy for 2 years but the ECB & Bank of Japan could follow suit this year. December
was the first month on month decline in BoJ total assets since the massive QQE program began in late 2012, whilst
it has also cut monthly asset purchases of longer dated JGBs. There is speculation that a “stealth tightening” is
underway. The big signal would be the 10 year JGB yield moving above 0.10% which has limited market
fluctuations since the BoJ introduced a zero yield target. Allowing the 10 year to rise to maybe +0.25% would be a
big shift. Yen futures positioning reveals a market deeply short, meaning room for a significant short covering rally.
December meeting accounts show the ECB moving towards ending its asset purchase program as it could revise
forward guidance in early 2018. Looking to gradually adjust its language to reflect improving economic prospects
“without a change in sequencing”, would likely mean adjusting QE guidance first. This could remove the potential to
increase “in size and/or duration” or the possibility to extend beyond September 2018 in the meetings ahead. This
has driven German Bund yields higher and negatively impacting on the dollar. The dollar no longer has first mover
advantage and if inflation fails to significantly ignite, the outlook seems to be tough for the coming months.
Must Watch for: China GDP
China GDP
Growth seems to be stabilising for China

2. Weekly Outlook
Monday 15th January 2018 by Richard Perry, Market Analyst
Foreign Exchange
The dollar seemed ready to form support but om the past week it has come under significant strain from a
number of factors which the market is speculating on. Is the BoJ engaging in a stealth tightening? Is China set
to diversify its foreign exchange reserves away from Treasuries? Is the ECB set to tweak the language to
prepare the market for the end of QE? On Friday afternoon, there was a bit of relief as core CPI ticked higher to
1.8% however it seems that there needs to be sustained inflationary pressures to mount a significant degree of
support for the dollar. As yet that seems to be a way off. The euro on the other hand is storming higher. A break
to a three year high against the dollar was driven by the removal of political uncertainty in German politics on
Friday but the ECB moves will be key in the weeks to come. The next meeting is on 25th January and any shift
in forward guidance will be pounced upon by traders. The yen strengthening may be more subtle than the euro
and play out as a move over the months to come as the BoJ still seems to be fairly patient and will not want to
unduly strengthen the yen too quickly. Positioning on futures contracts for the yen will be worth watching now.
Brexit was again supportive for Sterling on Friday with the suggestion that the Spanish and Dutch preferred a
soft Brexit, but is interesting as the EU27 tend to speak as one on such matters. It is ikely that this move will not
be one way and the next headline that refutes this or speaks of a tough stance will unwind sterling gains.
WATCH FOR: UK CPI and Retail Sales for sterling, the BoC policy decision and China data
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FX Outlook
GBP/USD
Watch for: Breaching key resistance at $1.3655
opens the upside and becomes supportive
Outlook: The sharp upside breakout on Cable is
a move to levels not seen since the vote for
Brexit. This now opens the upside back towards
$1.4000. The momentum of the breakout is
strong but also could be susceptible to a near
term consolidation or even correction. The
breakout level at $1.3655 now becomes a basis
of support this week. Corrections are a chance
to buy with the ongoing dollar weakness and
strength of the technical trends and momentum
for Cable. The key support has been left now
around $1.3450
EUR/USD
Watch for: Corrections back to the key breakout
at $1.2092 now a chance to buy
Outlook: A huge breakout to three year highs on
the euro against the US dollar. Dollar weakness
and euro strength is helping to drive the move
and momentum indicators are very strong now.
The RSI is above 70 moving into this week but
this looks to be a decisive breakout and one that
looks to be trending now. The breakout at
$1.2092 (old September high) becomes a basis
of support now for any unwinding corrections,.
The 50% Fibonacci retracement of the huge
ECB QE driven sell-off comes in at $1.2165 and
is also a basis of support.

3. Weekly Outlook
Monday 15th January 2018 by Richard Perry, Market Analyst
Equity Markets
The little seems able to derail the Wall Street rally which has been seeming unencumbered since the tax reform
decision. However earnings season is now getting going, with the banking sector taking early centre stage. The
size of the deferred tax charges hitting the big US banks will be the key theme throughout this week, but also
look for how revenue has compared with the year earlier, whilst the prospects for regulatory relief will be
interesting too given the changes afoot at the Fed. Earnings season is expected to return double digit earnings
growth of +10.5%. The question though for the S&P is just how far the bull run can go with the market trading
around 18.5x forward earnings (5 year average 15.9x and 10 year average 14.2x). European markets are facing
different issues. The DAX may be geared towards global growth but the export heavy index is being weighed
down by the storming breakout on the euro. The market could also struggle if risk appetite begins to wane. The
FTSE 100 continues to climb higher, aided by the huge run higher seen across the commodities complex and
financials. Base metals soaring higher helps to drive the mining companies higher (which account for around
12% of the FTSE 100). Furthermore, with global yields pulling higher and what looks like a shift in sentiment on
bond markets, the financials are performing very well too(around 19% of the FTSE 100. Banks certainly benefit
from the steepening on yield curves and if inflation expectations continue to increase then this should help to
underpin further gains in the sector.
WATCH FOR: Risk appetite being impacted by the China data, with the strength of the euro impacting on
the DAX. Earnings reactions to drive Wall Street
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DAX Xetra
Watch for: Resistance at 13,340/13,425 is key
now but can the bulls regather themselves?
Outlook: The DAX is underperforming major
peers as the huge export heavy companies are
being hit by the strength of the euro. The DAX
subsequently remains pressures, but could still
be dragged kicking and screaming higher by the
general tide of positivity which still flows through
global equities. Technically the DAX remains a
choppy range play and the resistance band
13,340/13,425 is a factor this week again.
Momentum indicators have lost impetus in a run
higher, but the support around 13,150 will be
watched as key this week. Can the bulls rebuild
lost confidence?
FTSE 100
Watch for: The bulls show little sign of waning
as blue sky continues to be reached
Outlook: The bull run that the FTSE 100 is
currently in seems to be similar to a move seen
with equities on a tear in December 2016, in the
wake of the Trump election victory. Back then
the RSI just kept on going, eventually peaking at
84. Right now, the RSI is just around 72 but with
the strength of the trend, the market is showing
little sign of fatigue and with blue sky overhead,
the prospects for further gains this week remain
good. There is a basis of support around
7700/7730 and whilst this remains in tact then
the outlook will remain strong.
Index Outlook

4. Weekly Outlook
Monday 15th January 2018 by Richard Perry, Market Analyst
Other Assets: Commodities & Bonds
The gold rally looked to be stalling but it was only a brief pause for breath as the consolidation has been bought
into. This comes despite the positive risk appetite on equities. The weakness of the dollar is a key factor in
driving gold to new four month highs. Commodities across the complex have been on a tear and gold has been
along for the ride. Gold is seen as a natural hedge for inflation and with US inflation expectations rising recently
(the 10 year US Breakevens which is a gauge for inflation expectations recently went above 2%). With the
relative dollar weakness this is helping to underpin gold higher which is now eyeing the key 2017 high of
$1357.50. Oil is another commodity that is storming higher, with both WTI and Brent crude hitting three year
highs. Driven by the OPEC production cuts, a trend of falling US inventories which have closed the supply glut,
there is little real resistance until around $70 on WTI and $76/$80 on Brent. However this may change as
drilling picks up again after the worst of the winter recedes.
There has been a real sense of a shift in sentiment on bond markets in the past week, with several major
players suggesting the bond bear market is ready to take hold. For the US 10 year yield the 2.64% level of last
July is crucial. A break above here would be not only a three year high, a huge head and shoulders base
pattern but also be a break of a multi-decade downtrend. A move towards 3% wold then beckon.
WATCH FOR: The lack of US data may hamper US yields, but watch for China data to drive sentiment
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Gold
Watch for: The bull trend is eyeing a move
towards $1357.50 if the bulls retain control
Outlook: The development of what is now a five
week uptrend is keeping the bulls on track for
the key September high at $1357.50. The long
term pivot band $1300/$1310 has now become a
basis of support and with momentum indicators
remaining strongly configured the near term
corrections remain a chance to buy. The steep
run of the bull trend will be difficult to hang on to,
given it is between $$1324/$1342 this week but
the extent of the bull control suggests that the
bulls are in control still even if the trend is
breached.
Markets Outlook
Brent Crude oil
Watch for: Momentum remains strong and
weakness is a chance to buy
Outlook: Can the move higher on oil possibly
continue? Absolutely yes, just because
momentum is overbought, does not mean that
the market cannot continue to run higher. The
market has only just broken out to multi-year
highs and there is little resistance overhead until
$76/$80. Strong trends tend to be characterised
by momentum holding stretched positions and
the RSI is only just above 70. The issue is that
consolidations can also play a role too. The
initial support at $67.25/$68.30 will be a key near
term gauge as a breach could mean a pullback
to the $65.85 breakout. For now though there is
little real reason not to back further gains.

5. Weekly Outlook
Monday 15th January 2018 by Richard Perry, Market Analyst
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