Market analysis: Focus will be on US data throughout the year

With 2015 in the record books, one of the leading stories driving volatility through the year concluded when the US Federal Reserve announced an increase in its interest rate after its December meeting.

Much of the year had been about speculation about a rise, and this came to fruition when the Fed announced a quarter basis point increase to the benchmark interest rate. Perhaps the key point from the meeting was Fed president Janet Yellen’s rather hawkish position on future rate increases, and her optimistic view of the US recovery – a combination of which will leave the door open to further increases through the year.

Ultimately, this will lead to intense scrutiny of the US data docket throughout this year and heightened levels of volatility through each of the major releases.

First up is the nonfarm payrolls report due on Friday (expected to show a month on month increase of 200 workers, versus the previous month’s figure of 211,000 workers). November’s payrolls showed a nice uptick and last month’s figure was particularly good considering a weakening unemployment rate amid an increasing labour-force participation rate. A reading above 200,000 should see some interim strength in the US dollar, which will be short-lived as risk appetite develops and markets slowly shift to higher yielding assets. But it is unlikely that there will be a clear breakout in the trend of the greenback, and as a result we expect the US Dollar Index to continue to range between 97.20 and 99.30 through this month.

One of the other key stories to watch in the early part of 2016 will be the performance of crude oil. Energy markets were hit hard in December, with the benchmark West Texas Intermediary crude contract dropping to six-year lows below US$35 a barrel. The downside move was initially triggered by Opec quashing any notion of a production cut during its meeting in the early part of last month, and was amplified by a combination of a stronger US dollar and the global supply glut in the energy markets. Crude will remain under pressure through the first quarter of 2016 and will settle in a range between $35 and $38.50 through January.

Although opportunities for a long term positional trade in crude might be premature at this point, there are certainly opportunities in the short term to take advantage of intraday volatility. Crude will continue to remain sensitive to the weekly US inventory reports due every Wednesday at 7.30pm UAE time and this could provide interesting intraday opportunities.

Finally, the euro ended 2015 on a high, closing above €1.0850 against the greenback. All eyes were on the European Central Bank (ECB) when it convened in December and its cutting of the deposit rate and announcement of an extension to the bank’s asset-purchase plan left markets largely disappointed.

The measures, or lack thereof, saw EUR/USD move towards €1.10 (Dh4.41) and was good enough to see the pair consolidate in this channel.

Markets will turn their attention to the European data docket with particular scrutiny towards the eurozone inflation rate, which is due out on Tuesday. The inflation rate has lagged well below the target 2 per cent rate and the most recent reading is expected at below 0.5 per cent. The reading will turn attention to the ECB’s next meeting on January 21 when markets will look for more aggressive cues from ECB president Mario Draghi to combat anaemic growth, reducing price pressure and higher unemployment.

In the lead-up to the meeting we expect EUR/USD to continue ranging between €1.08 and €1.10 after which a clearer trend will be established following the ECB’s monetary policy meeting.

Gaurav Kashyap is the head of futures at AxiTrader ME DMCC.

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