Financial market research and analysis

After a dip on the open, Wall Street climbed higher, ending in positive territory for a fifth straight session. Following a dismal December, stocks have experienced the longest winning streak in four months. A more dovish Fed and trade talk optimism has boosted risk appetite. However, signs were creeping in that the 5-day rally on Wall Street was starting to tire.

Taking the lead from the US, Asian markets moved higher, hitting one month highs. As with Wall Street signs of fatigue set in as investors questioned the US and China’s ability to reach a deal and resolve the ongoing IP issues.

Sentiment is greatly improved, and trade talk optimism has helped boost risk appetite across the week. However, traders are acutely aware that there is a lack of anything concrete between the US and China. The reality is that whilst both sides are working hard for a deal, there is a huge amount of ground to cover. Any deal right now would need to be extremely far reaching. The market wants to see more, which could stall the rally quickly.

Dollar drops on dovish Powell

The dollar stayed on the back foot overnight, as traders continued to digest further dovish commentary from Fed Chair Powell. Just last month the Fed was looking to hike 2-3 times across the year and now there are growing indications that they could instead pause the hiking cycle. Fed Chair Powell reiterated on Thursday evening the Fed’s flexible outlook, with softer inflation enabling the central bank to adopt a wait and see approach.

US CPI to drag dollar lower?

The release of US inflation numbers later today could provide the market with further evidence in support of Powell. Inflation was riding at 2.2% in November, it is expected to have fallen to 1.9% year on year. On a monthly basis inflation is expected to have declined -0.1%. Prints at these levels or weaker would be music to the ears of dollar bears. Meanwhile US stocks could rally on the prospect of borrowing costs remaining stable, or in fact decreasing if the Fed’s Vice Chair Clarida is to be believed.

Richard Clarida reinforced the Fed’s message of patience. He added that the Fed was prepared to take action if necessary, to protect the US economy from global crosswinds. The change in stance from the Fed has felt quite abrupt and the dollar’s sell off has reflected this. The greenback is trading some 2% lower versus a basket of currencies than it was as recently as December.

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