EM currencies wait on trade talks; Yuan weakens

Emerging market currencies held steady near the end of the week as cautious optimism over the progress of US-China trade talks supported appetite for riskier assets.

Higher-yielding currencies like the Brazilian Real and Mexican Peso among many others held onto gains against a softer US Dollar. Although emerging market currencies have the potential to appreciate further on Dollar weakness, the medium to longer term outlook will be influenced by various fundamental market themes. With trade developments, concerns over plateauing global growth, Brexit uncertainty and other geopolitical risks lingering in the background, EM currencies still remain vulnerable to downside risks in the longer term.

In China, the Yuan weakened as traders evaluated the potential outcomes for U.S China trade negotiations. The Yuan is seen appreciating if talks end on a positive note with further negotiations in the future. In regards to the technical picture, the USDCNY is likely to slip back towards 6.76 if the Dollar continues to weaken.

Dismal US retail sales flash amber lights

Concerns over the United States experiencing an economic slowdown were revived by dismal U.S retail figures for December.

U.S retail sales tumbled 1.2% in December, marking their biggest drop in more than nine years. This shocking report has certainly erased any odds of the Federal Reserve raising US interest rates anytime soon. With the Dollar safe-haven status also threatened by slowing growth concerns, bears are likely to return with a vengeance. The sentiment pendulum for the Dollar is likely to swing more in favour of bears as political risk in Washington, growth fears and expectations of the Fed taking a pause on rate hikes reduce the Dollar’s competitive advantage against its peers.

We see the Dollar Index sinking back towards 96.50 if 97.00 proves to be an unreliable support level.

Pound grinds lower on May’s Brexit defeat

The British Pound extended losses against the Dollar on Thursday evening after Theresa May suffered another parliamentary defeat on her Brexit plan B.

With just six weeks to go until Brexit, Sterling is set to remain extremely reactive and highly volatile to political developments and Brexit talks. Buying sentiment towards the British Pound is poised to receive a boost if the government ends up extending Article 50 to prevent a no-deal Brexit.

The GBPUSD remains bearish on the daily charts with prices trading below 1.2800 as of writing. Sustained weakness below this level should encourage bears to target 1.2750 and 1.2710, respectively.

Commodity spotlight – Gold

It has been a turbulent trading week for Gold prices with prices bouncing within the $1303 – $1317 regions.

Price action suggests that the yellow metal is waiting for a fresh directional catalyst to make the next major move. Focusing purely on the technical picture, Gold remains in a healthy uptrend on the daily charts. A decisive breakout above $1317 is seen opening a path towards $1320 and $1326. Weakness below $1308 will most likely encourage a selloff back towards the psychological $1300 level.