· The Japanese yen led other safe-haven assets higher on Friday after U.S. air strikes on Baghdad airport killed a senior Iranian military official, stoking tensions in the Middle East and lifting the price of oil.
“We are only into the third day of the new year, and a big fat dollop of geopolitical uncertainty has landed on investors’ desks,” said Jeffrey Halley, senior market analyst for Asia Pacific at broker OANDA.
“I am struggling to see how an Iranian riposte will not occur,” he added. “Oil installations and tankers were my first thoughts.”
The dollar eased 0.4% to 108.14 yen following the news, breaching several layers of chart support and reaching its lowest since early November.
Against a basket of currencies, the dollar eased a fraction to 96.770 but stayed above recent six-month lows around 96.355.
The pound was flat at $1.3135, after easing from a top of $1.3266 on Thursday. The euro stood at $1.1171, after backing away from major chart resistance around $1.1249.
Several Fed official are speaking on Friday including Governor Lael Brainard and the heads of the San Francisco, Chicago, Richmond and Dallas banks.
Analysts expect they will remain upbeat on the economic outlook and reiterate a steady outlook for rates.
· GBP/USD remains pressured closer to 1.3100 amid Mid-East tensions, ahead of UK PMI
GBP/USD extends its drop below 1.3150 amid safe-haven flows toward the US dollar following escalating Mid-East tensions. UK Construction PMI is set to show ongoing contraction and Brexit speculation continues.
21-day SMA, near 1.3120 now, holds the key to further declines towards an upward sloping trend line since October 10 around 1.3000.
Alternatively, the weekly high surrounding 1.3285 and December 16 low around 1.3320 could lure buyers during fresh recovery.
EUR/USD is trading closer to 1.1150 following the US killing of a top Iranian commander in Iraq. The risk-off mood sends investors to the safety of the US dollar. German inflation figures and US ISM Manufacturing PMI are eyed.
From a technical perspective, the pair already seems to have found acceptance below 38.2% Fibonacci level of the 1.1066-1.1239 recent upsurge and hence, seems vulnerable to slide further. From current levels, immediate support is pegged near the 1.1150 confluence region, comprising of 200-hour EMA and 50% Fibo. Failure to defend the mentioned support, leading to a subsequent weakness below the 1.1130 level (61.8% Fibo.) might be seen as a key trigger for intraday bearish traders and set the stage for a fall towards testing sub-1.1100 levels.
On the flip side, the 1.1175-80 region, closely followed by the 1.1200 handle now seems to act as an immediate resistance, which if cleared might assist the pair to aim back towards testing multi-month tops, around the 1.1240 region. Some follow-through buying now seems to pave the way for a further near-term appreciating move towards reclaiming the 1.1300 round figure mark, which coincides with the top end of over four-month-old ascending trend-channel formation on the daily chart.
· EUR/USD: Sidelined amid geopolitical tensions, eyes German data
EUR/USD is lacking a clear directional bias amid the heightened US-Iran tensions and the resulting risk-off tone in the markets.
The euro, however, barely moved in Asia and is currently sidelined around 1.1170.
Looking forward, the investors could put a haven bid under the euro, as the European Central Bank is running a zero interest rate policy and the common currency is backed by a solid Eurozone trade surplus.
EUR/USD will likely extend Thursday's decline if the German data prints below estimates. The data, due at 08:55 GMT, is expected to show the seasonally adjusted jobless rate remained unchanged at 5% and the economy added 2,000 jobs in December.
· Meeting minutes to be released at 2 PM ET/1900 GMT
Looking ahead to Friday, the FOMC meeting minutes from the December 2019 rate decision (no change) will be released at 2 PM ET/1900 GMT. The meeting minutes are usually released midweek, but because of the new year holiday, the release has pushed off to a unique Friday afternoon.
The Fed kept rates unchanged and marked to market the dot plot to reflect the lower funds target. The Fed members did not see a rate hike in 2020, but continue to see one hike in 2021 and 2022.
The GDP forecast for 2020 was raised to 2.0% -2.2% from 1.8% -2.1%. In September.
The unemployment forecast for 2020 was lower to 3.5%-3.7% from 3.6%-3.8% in September.
The PCE inflation remains near unchanged levels at 1.8%-1.9% from 1.8%-2.0% in September.
The Core PCE inflation remained unchanged at 1.9%-2.0% from September.
· The Fed’s next meeting is at the end of January. The market is currently pricing in a 94% chance of the bank holding rates steady again, according to the CME Group’s FedWatch tool.
· The Institute for Supply Management will release its latest report on Friday morning, including the purchasing managers’ index that is closely watched by investors.
The PMI index is calculated so that readings above 50 represent expansion in the manufacturing sector and readings below 50 represent contraction. The consensus estimate is 49, according to economists polled by Dow Jones. The reading last month was 48.1.
If the PMI comes in below 50 again, it will be the fifth consecutive month of retraction.
· The year 2020 certainly got off to a bang with tensions between the U.S. and Iran high amid Tehran-backed protests in Iraq and experts believe that geopolitical turbulence is only going to get worse this year, particularly in the run up to the most seismic event of the year — the U.S. election in November.
“I think this is going to be a year of greater turbulence, greater intensification of practically every geopolitical tension, and that is going to play into the Democratic primaries but also the 2020 election in a big way,” Inderjeet Parmar, visiting professor at the London School of Economics and head of City University’s department of International Politics, said Thursday.
“The last three years have shown us that the U.S. is wracked by polarization – pretty much every institution you can think of within politics is set up against another within the same political system … what we’ve got is a president against the Congress, a House against the Senate and we’ve got party against party. So, I think that turbulence is going to carry on and intensify,” he told CNBC’s Squawk Box Europe.
On a geopolitical front, voters will be closely-watching the viability of a phase one trade deal between China and U.S. and how tensions play out between the U.S. and Iran. But closer to home, the Democrats’ impeachment process against President Donald Trump will be the most closely-watched – and divisive – process, as well as the Democratic primaries, starting February, to elect the party’s nominee for the U.S. election.
Joe Biden, Bernie Sanders and Elizabeth Warren are seen as front-runners for the nomination.
“Even if you look at it from a market sort of standpoint, the market wants to know two things – it wants to know who’s the Democratic frontrunner,” Mike Gallagher, managing director of Macro and Strategy at Continuum Economics, told CNBC Thursday.
“That’s really important because if it’s Biden versus Trump in November, then from a markets standpoint, the economic policy isn’t really going to change radically. We know what Trump’s like. Biden, from a deficit standpoint, is probably pretty similar to Trump. And on the China front, Biden is more conciliatory toward China so if it’s a Biden-Trump runoff that’s ok for financial markets.
If Trump was to face Sanders or Warren in the election on November 3, candidates that have both taken a hard stance against Wall Street and have wealth tax plans, markets would be “very worried about a radical shift in the U.S. economic model,” Gallagher noted.
“If we saw Sanders or Warren coming in, not only in terms of tax but also in terms of spend, and that has an impact not only in terms of business and consumer confidence but also financial market confidence,” he said.
· Responding to the the US killing of Quds Force chief Qassem Soleimani in Iraq earlier this Friday, the Iranian President Rouhani said that Iran will be more determined to resist the US.
"Soleimani's martyrdom will make Iran more decisive to resist America's expansionism and to defend our Islamic values. With no doubt, Iran and other freedom-seeking countries in the region will take his revenge," Rouhani told the state TV.
· Democratic presidential candidate Joe Biden warned that “Iran will surely respond.”
“President Trump just tossed a stick of dynamite into a tinderbox, and he owes the American people an explanation of the strategy and plan to keep safe our troops and embassy personnel, our people and our interest, both here at home and abroad, and our partners throughout the region and beyond,” he said on Twitter.
Sen. Elizabeth Warren called the attack a “reckless move” that “increases the likelihood of more deaths and new Middle East conflict.”
· Danske Bank analysts suggest that focus this morning will be on the market reaction to the US killing of a leading Iranian commander, which has sent oil prices higher.
“On the data front, the US ISM manufacturing index for December will be today's highlight. The ISM index has fallen to lower levels than other US surveys and has not yet shown the signs of a recovery that we see in business surveys globally. Hence, we see some upside risk to today's number where consensus looks for a rise from 48.1 to 49.9.”
“Tonight, the minutes from the December FOMC meeting will be released. At the meeting, the Fed sent a signal of being firmly on hold with 13 out of 17 members expecting no rate changes in 2020 while three members projected one hike.”
· Oil prices rocketed nearly 4% in the morning of Asia trading hours, following reports that a top Iranian military general was killed in an airstrike in Baghdad.
Brent crude soared 3.98% to $68.90 per barrel, while U.S. crude surged 3.87% to $63.55 per barrel.
General Qassim Soleimani, who leads a special forces unit of Iran’s elite Revolutionary Guards, was reportedly killed, along with Abu Mahdi al-Muhandis, the deputy commander of Iran-backed militias known as the Popular Mobilization Forces, Iraqi television and officials said.
A senior Iraqi politician and a high-level security official confirmed to the Associated Press that Soleimani and al-Muhandis were among those killed in the attack.
The official, speaking on condition of anonymity, said al-Muhandis had arrived to the airport in a convoy to receive Soleimani whose plane had arrived from either Lebanon or Syria. The airstrike occurred as soon as he descended from the plane to be greeted by al-Muhandis and his companions, killing them all.
The attack came amid tensions with the United States after a New Year’s Eve attack by Iran-backed militias on the U.S. Embassy in Baghdad. The two-day embassy attack which ended Wednesday prompted President Donald Trump to order about 750 U.S. soldiers deployed to the Middle East.
Helima Croft, head of global commodity strategy at RBC Markets, told CNBC via email: “This brings us to the precipice of a full blown shooting war with Iran — not a shadow war or a proxy war.”
“It is almost impossible to overstate the implications of this event,” she added.
Earlier, in a note before the reports of the attack, Croft had written that Iraq is a “potential tripwire for a direct clash between Washington and Tehran in 2020.”
· As you’d expect, oil prices spiked on supply concerns and at its high had rallied over 4%. Gold also followed suit and hit its highest level since September.
The repercussions from today’s events are yet to be seen but, given the seniority of the leaders killed and detailed, they’re not likely to be small. One pundit was quoted saying “I’m not sure Donald Trump realises what he’s unleashed”, which could be putting it mildly. It’s around 7am in Iran at the time of writing. This leaves plenty of time for developments through the Asia session and beyond, so everyone is being kept on their toes for developments.
Today’s spike has taken WTI break out of its bullish channel and print an intraday high above $64. Yet with prices having retreated below 63.38 resistance, more information may need to come to light before to help decide which side of this key level WTI closes on. If tensions escalate and it appears there will be a squeeze on the oil supply, then we could find prices rebound back above $64 with relative ease. Yet if the response is somehow muted (unlikely at this stage) we could be looking a sharp reversal and for WTI to leave bearish hammer in its wake.
A break above 64 brings the 66.60 high into focus
A daily close <= 62 would leave a bearish hammer and signal a bull-trap, and take it back within the 50 – 64 range it was remained within since May
· Brent crude futures jumped nearly $3 on Friday to their highest since September after a U.S. air strike killed key Iranian and Iraqi military personnel, raising concerns that escalating Middle East tensions may disrupt oil supplies.
Brent, the international benchmark, LCOc1 hit an intraday high of $69.16 a barrel, its highest since Sept. 17, before easing to $68.21, up $1.96, or 3%, by 0618 GMT.
U.S. West Texas Intermediate (WTI) crude futures CLc1 were trading up $1.68, or 2.8%, at $62.86 a barrel, having earlier spiked to $63.84 a barrel, the highest since May 1.
“The supply side risks remain elevated in the Middle East and we could see tensions continue to elevate between the U.S. and Iran-backed militia in Iraq,” said Edward Moya, analyst at brokerage OANDA, in an e-mail to Reuters.
An air strike at the Baghdad International Airport early on Friday killed Iranian Major-General Qassem Soleimani, head of the elite Quds Force, and Iraqi militia commander Abu Mahdi al-Muhandis, an Iraqi militia spokesman told Reuters.
Reference: Reuters,CNBC, Forex Live
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