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The partial US government shutdown continued into the fourth week as disagreements between the White House and Congress remain. Over the weekend, Donald Trump offered Democrats a deal that would include extending protections for DACA individuals. These are people who were brought to the country illegally as children. In response, Nancy Pelosi said that Trump’s proposals were a non-starter that didn’t go far enough. Investors will now give more attention to the shutdown, with attention being focused to the big three rating agencies, who could downgrade US bonds.

The euro was little moved in early trading as traders continued to focus on Brexit and the Eurogroup meeting that will start today. They are also focusing on key economic data from Europe that could solidify the view that the economy is slowing down. The Eurogroup meeting will happen in Brussels. Meanwhile, data from China confirmed that the country’s economy was indeed slowing. In the fourth quarter, the country’s GDP rose by 6.4%, which was lower than the Q3 growth of 6.5%. This was the slowest rate of growth since 2009. On a positive note, the country’s industrial production increased by 5.7%, which was higher than the expected 5.6%.

Investors will start focusing on the annual World Economic Forum (WEF) meeting that will happen in Davos. The meeting takes place annually and brings together business and political leaders from around the world to discuss key pressing issues. Last week, key headliners of the event such as Donald Trump and Theresa May cancelled their plans to attend the meeting. Trump failed to do so because of the government shutdown while May cancelled because of the pressing issues around Brexit.

EUR/USD

On the 10th of this month, the EUR/USD pair started to drop after reaching a high of 1.1570. Since then, the pair has continued to drop, and today, it reached a low of 1.1360, which is slightly higher than Friday’s low of 1.1350. On the four-hour chart below, the pair’s price is below the 21-day and 42-day EMA. The RSI is slightly above the oversold level of 30, while the momentum indicator is just above the 100 level. The pair could continue the downward trend, and if it does, it will likely test the important support level of 1.1270.

USD/JPY

Early this month, the USD/JPY pair started to move up. Since then, the pair has climbed from a low of 106.42 and reached a high of 109.87 on Friday. The current price is above the short and medium-term moving averages as shown below. The parabolic SAR is currently lower than the trend, which is an indication that the momentum could continue. The same is shown by the double EMAs shown below. There is a likelihood that the pair will continue moving up, to test the psychologically important level of 110.

GBP/JPY

The GBP/JPY pair has been moving up since the year began. The pair has moved from a low of 133 and has continued moving up to Friday’s high of 142.24. On the hourly chart below, the pair’s current price is almost along the 21-day and 42-day EMA, while the RSI has eased from the overbought level of 82 to the current 43. This is an indication that the pair could ease a bit, potentially to the 140 level before it resumes the upward momentum.

USDCAD gained little after its freefall to one-month lows, rising slightly above the 50% Fibonacci of the upleg from 1.2781 to 1.3663 to start consolidation.

In the short term the pair could see some recovery as the RSI heads towards its 50-neutral mark, though as long as the indicator holds in negative territory, downside movements cannot be ruled out. The MACD continues to fluctuate below its red signal line, supporting that downside risks are still high as well.

Should the market improve, the 38.2% Fibonacci of 1.3325 could reasonably act as an immediate resistance as the bulls were unable to break that mark in recent sessions. If this proves a weak obstacle instead, then the focus will shift up to 1.3385, taken from the high on June 27. Higher, the 23.6% Fibonacci of 1.3455 and the 1.36 round level could be next in target.

Alternatively, in case negative pressures dominate, the area between the 50% Fibonacci of 1.3221 and the 1.3170 barrier may appear restrictive once again, while below that it would be more interesting to see whether the bears can pierce the 200-day simple moving average currently at 1.3094. A decisive close under that line could trigger steeper declines probably towards 1.2960, where the 78.6% Fibonacci is standing.

In the medium-term picture, the positive outlook has somewhat faded after the sell-off from 19-month highs and is set to turn neutral below 1.3170. Yet the positively sloped 50-day MA, which continues to distance itself above the 200-day MA,suggests that the bull market could hold for longer.

Rates: Risk sentiment to set the tone
The US 10-yr yield touched first resistance last Friday as stock markets flourished. Risk sentiment will drive intraday gyrations on bond markets today as well amid an empty eco calendar and in absence of US investors (MLK Day). These conditions might last until Thursday when January EMU PMI's will be released and when the ECB meets.

Currencies: EUR/USD decline to slow?
At the end of last week, the dollar remained well bid even as sentiment on risk was positive. EUR/USD has returned to the 1.12/1.15 trading range. After the recent correction, technical support is lining up. Last week's sterling rally also did run into resistance as there is still little progress on the Brexit saga

The Sunrise Headlines

• US equity markets closed Friday's session with gains mounting over 1%. Asian equities opened in green this morning, as China offered new concessions to eliminate its trade imbalance with the US.
• US-Sino trade talks continue to make progress as the Chinese government offered to ramp up purchases of US goods. However, discussions on more technical matters as intellectual property are remaining more laborious.
• The US shutdown heads into its 5th week, as US President Trump made a first substantive offer, which Democrats immediately shot down. However, the Senate Majority Leader McConell promised to bring the plan to a vote this week.
• UK PM May returns to Parliament today as she concluded talks with lawmakers from all sides. She will probably brief her MP's of little progress in the cross-party Brexit talks. She is now said to seek changes to the Irish backstop plan.
• China's economy further cooled down in the 4th quarter as GDP rose 6.4% (Y/Y), vs. 6.5% in Q3 and its slowest pace since ‘09. However, government actions to cushion the deceleration are starting to be seen in the Dec. economic data.
• Thousands of Greeks marched in Athens yesterday to protest a name deal with the neighbouring Republic of Macedonia. Law enforcements estimated that about 60,000 people had turned up to protest the ‘Prespes agreement'.
• Today's economic calendar is very thin as US markets are closed in observance of Martin Luther King Day. UK PM May returns to Parliament and the IMF releases its World Economic Outlook update

Currencies: EUR/USD Decline To Slow?

EUR/USD correction to slow?

The dollar initially showed no clear trend on Friday. US and European equities profited both from headlines on progress in the China-US trade talks. Later, US yields rose more than German/EMU ones and this finally triggered some USD outperformance. US December production data were strong, but U. of Michigan consumer sentiment declined much sharper than expected. However, it didn't break the USD's momentum. The trade-weighted dollar jumped to the 96.35 area. EUR/USD eased from 1.14+ levels to close the day 1.1363. USD/JPY had a good run and finished at 109.78. This morning, the China Q4 GDP showed a further slowdown, but the report was largely as expected (6.6% growth YTD Y/Y; 6.4% Y/Y in Q4). Regional equity markets mostly show modest gains. US equity futures are losing slightly ground. The dollar is holding most of Friday's gain. EUR/USD is trading in the 1.1375/80 area. USD/JPY hovers in the mid 109 area. There are no important data in EMU today. USD markets are closed in observance of Martin Luther King Day. Technical factors and global market sentiment will have to guide USD trading. Last week, there was no straight forward narrative for USD trading. The USD correction on a softer Fedapproach from early this year had run its course. Global sentiment on risk remain constructive, but it had no further negative impact on the dollar as US yields rebounded in lockstep. Medicore EMU data also hampered any euro progress. At the end of the week, the dollar even outperformed. EUR/USD settled again in the established 1.12/1.15 trading range. We start the week with a neutral bias on EUR/USD. The attempt of a topside break is rejected. Later this week, EMU confidence data (ZEW, ifo PMI) might bottom. The ECB will probably also maintain a rather constructive tone on the EMU economy. US politics (shutdown) and the earnings season are wild cards. Last week, the dollar outperformed, but the EUR/USD decline might slow as technical support is lining up from 1.1309 to 1.1270 area.

Sterling fell prey to profit taking on Friday. Earlier last week, the UK currency captured a better momentum as investors saw a rising chance that a no deal Brexit could be avoided. Today, UK PM will set out her plans after the Brexit deal was rejected last week. For now, it looks that a breakthrough in the UK Parliament will be difficult to reach. The EU is said to be divided on the length of a Brexit delay. In this context, further GBP-gains don't look evident

EUR/USD: dollar outperforms, but EUR/USD support is lining up.

Investor appetite to risk remains on the rise today, with equities in green across Asian markets. The slowdown in China’s economy will not impact this sentiment much unless a negative update on U.S.–China trade negotiations is received. Although U.S. President Donald Trump denied reports indicating that U.S. tariffs on Chinese exports would be lifted, he said over the weekend that there has been progress towards a deal with China. Despite the complex situation, it seems markets are tending to believe that negotiations are moving in the right direction and this is likely to provide further support to risk sentiment.

The release of Chinese GDP figures, which showed the economy has grown at its slowest pace in almost three decades, was not a surprise and this has been factored into asset prices. Fourth quarter GDP growth came in at 6.4% while full 2018 growth of 6.6% was slightly above Beijing’s target. U.S. trade tariffs have yet to deal direct significant impact to the country’s growth, however, the ongoing trade dispute is leading to a further slowing in consumer consumption and business capital expenditures. While China may continue to use its monetary and fiscal tools to offset the damage done by the trade conflict, there’s a limit on how much China may loosen policy given the swelling of its debt. It seems the only way for China to prevent a hard landing is to reach to a deal with the U.S., and that’s what the markets are hoping for.

Theresa May Plan B

UK Prime Minister Theresa May will unveil her Brexit “Plan B” to parliament later today after MPs rejected her initial “Plan A”. Her alternative plan is unlikely to differ much from the initial one and in the absence of any new information the UK may crash out of the EU on March 29. No one knows what will happen next, but the chances of a second referendum seem to be on the rise, as is an early general election. Traders need to be prepared for various outcomes, so expect Sterling moves to become more volatile in the days ahead.

Central Bank Meetings

The European Central Bank and Bank of Japan are both due to meet this week. No policy changes are expected from either, however updated guidance from ECB will move the Euro. Core Euro countries are experiencing sharp slowdowns. Germany and Italy may already be in a technical recession, and this is occurring as ECB ends its asset purchase program. The darkening economic outlook may put pressure on the ECB to keep interest rates at their current level for an extended period. If this is indeed the message from the ECB, the Euro may retest 2018 lows of around 1.12.

Daily Pivots: (S1) 140.91; (P) 141.49; (R1) 141.90; More...

A temporary top is in place at 142.22 and intraday bias in GBP/JPY is turned neutral first. Further rise is expected as long as 137.35 minor support holds. On the upside, above 142.22 will extend the rebound from 131.51 to 143.93 resistance first. Break will pave the way to 149.48 resistance next.

In the bigger picture, corrective medium term rise from 122.36 (2016 low) has completed at 156.69 (2018 high) already. That came after failing to break through 55 month EMA. No change in this view. Strong rebound from 131.51 argues that fall from 156.59 is just the second leg of the corrective pattern from 122.36. Break of 149.38 resistance will confirm the third leg has started to 159.69, and possibly above. Nevertheless, break of 131.51 will pave the way to retest 122.26 low.

Market movers today

The US market will be closed today due to it being Martin Luther King Day and there are few economic data releases. The main event this week will be the ECB, BoJ and Norges Bank meetings, although neither the ECB or the Bank of Japan are expected to make any changes to their current policy stance.

In terms of data releases, we are looking forward to the preliminary PMIs for euro area, Japan and the US on Thursday

Today's most important event comes from the UK, where PM Theresa May is expected to put forward her Brexit plan B to the House of Commons (the motion is amendable). However, at a cabinet meeting on Sunday, May stated according to people attending the meeting that there was little prospect of cross-party meetings yielding an alternative to the plan that was rejected last week. Instead, she said that she would seek changes to the Irish backstop session with the EU. Hence, uncertainty is very much alive given that the EU has ruled out a reopening of the deal. This will most likely be negative for GBP this morning.

Selected market news

The US equity rallied on Friday, while the US bond market continued the modest sell-off on Friday. The 10Y US Treasury bond yield has risen some 10bp since Monday last week, while the S&P 400 is up almost 7% since the start of the year. The gains on Friday in the US equity market were driven by expectations the US and China might reach a deal on trade.

On Saturday, US President Trump made some 'tweaks' to his proposal on the border wall. However, the Democrats rejected the proposal and thus the government shutdown continues. Even though the new proposal does not offer an ending to the government shutdown, it may be a new start for negotiations between Democrats and Republicans.

Finally, the US President Trump and North Korea's President Kim are planning a second summit in February. The combination of a possible trade deal, an end to the government shutdown and de-escalation between Trump and Kim will be positive for the equity market and should lead to moderately higher yields.

This morning, China released GDP numbers for Q4, showing the weakest growth since 2009. The data was marginally better than expected even though growth in Q4 slipped to 6.4% down from 6.5%.

However, given the focus on a possible trade deal, Asian equity markets this morning followed the positive sentiment from the US equity.

Markets flat ahead of plan B speech

It’s expected to be a relatively slow start to the week, with the extended weekend in the US weighing on volumes as the country observes the Martin Luther King Jr day bank holiday.

European indices are mostly eyeing a pretty flat open, with markets taking little direction from Asia overnight and potentially anticipating a relatively uneventful day overall. Of course, with the Brexit process having suddenly accelerated - a little over two months until exit day – traders are going to be constantly on high alert to breaking news and speculation.

Theresa May will present her plan B to parliament this afternoon following the humiliating defeat of her deal last week. The pound has been holding up quite well so far, despite all the theatre in parliament, but this has less to do with what May is achieving and more to do with the efforts of other MPs to take no deal off the table. This is the currently the greatest risk for the currency.

Gold flat at the start of the week

Gold is trading rather flat at the start of the week, in line with the movements we’ve seen in the dollar. A pull back on Friday came on the back of another jump in the greenback and as equity markets continued to push higher, with investor sentiment continuing to improve on encouraging progress in US and China trade talks.

Gold has been very resilient over the last week and a half, constantly threatening to break above $1,300, despite the fact that the dollar had been making steady gains and the risk environment is improving – not ideal for a traditional safe haven asset. Despite this, I remain bullish on the yellow metal but a break above this key resistance zone may just take a little longer, with $1,260 offering potential support if $1,280 gives way.

Oil edging higher even as Chinese data confirms slowest growth since 1990

Brent and WTI are continuing to creep higher at the start of the week, with the improved risk environment being an important tailwind for prices. The rally does appear to be losing some momentum as prices approach important resistance zones - $65 in Brent and $55 in WTI – which is understandable given that we’ve already seen a roughly 25% bounce since Christmas.

Data released overnight confirmed that the Chinese economy grew at its slowest pace in 28 years, a further worrying sign that an already decelerating economy is feeling the pain of a trade war with the US. This is unlikely to ease at the start of the year, although talks do appear to be progressing. China has reportedly presented a plan to increase imports over a six year period to reduce the trade imbalance, something that if enforced could be an important win for the Trump administration ahead of his re-election bid next year.

General Trend:

• Consumer Discretionary index outperforms in Shanghai, China Dec retail sales beat ests
• Shanghai Property index underperforms, China Dec property investment slowed
• Trade-sensitive Marine/Transportation index continues to outperform in Japan
• Energy, financial and resources companies rise in Australia
• China 2018 GDP growth was the slowest since 1990, exceeded annual target of ~6.5%
• There is renewed speculation of little progress regarding US/China talks on intellectual property issues (US financial press)
• China dismisses deflation concerns
• South Korea Jan prelim semiconductor exports decline ~29%
• US markets closed for holiday on Monday
• BoJ due to meet Jan 22-23rd

Headlines/Economic Data

Japan

• Nikkei 225 opened +0.9%
• 5938.JP Says not considering management-led buyout (responds to press report) [+~10%]
• 7201.JP CEO Saikawa: Not at the stage to talk about capital tie ups with Renault, have not heard anything about an integration
• (JP) Nomura Securities revision index for non-financial companies’ FY19 earnings was -30.2 as of late last week, suggests earnings downgrades are forecast to exceed upgrades – Nikkei

Korea

• Kospi opened +0.5%
• (KR) White House spokesperson: Pres Trump and North Korea Leader Kim summit scheduled for end of Feb; location to be announced later
• (KR) South Korea Jan 1-20th Trade Balance: -$1.6B; Imports y/y: -9.5% v +2.2% prior; Exports y/y: -14.6% v +1.0% prior; Semiconductor exports y/y: -28.8%
• (KR) North Korea propaganda suggests South Korea should help to restart cross border economic projects - Yonhap
• (KR) South Korea sells KRW700B v KRW700B indicated in 20-year bonds: avg yield 2.035% v 2.170% prior

China/Hong Kong

• Hang Seng opened +0.2%, Shanghai Composite +0.1%
• (CN) CHINA Q4 GDP Q/Q: 1.5% V 1.5%E; Y/Y: 6.4% V 6.4%E; 2018 Y/Y: 6.6% (slowest full year growth since Q1 2009) V 6.6%E
• (CN) China National Bureau of Stats (NBS) Chief Ning: US-China trade war impacted economy but manageable; reiterates has plenty of tools and measures to adjust policy
• (CN) China reportedly offered a 6-year $1T import boost at Jan talks in order to eliminate US trade imbalances by 2024; US trade officials said to be skeptical (press report from Jan 18th)
• (CN) USTR Lighthizer said to have told US lawmakers China and US are making little progress on intellectual property (IP) issues (in line with report from Jan 15th)
• (CN) CHINA DEC RETAIL SALES Y/Y: 8.2% V 8.1%E; 2018 Y/Y: 9.0% V 9.0%E
• (CN) CHINA DEC INDUSTRIAL PRODUCTION Y/Y: 5.7% V 5.3%E; 2018 Y/Y: 6.2% V 6.2%E; Capacity Utilization: 76.0% v 76.5% prior
• (HK) Hong Kong Monetary Authority (HKMA) said to conduct checks of bank rate on monthly basis in order to avoid surprises - Local Press
• 763.HK (US) Reportedly Trump Administration is preparing an executive order that would restrict Chinese telecoms from operating in the US – press
• (US) Pres Trump: there was a false report about lifting China tariffs; trade talks are going well and a trade deal with China "could very well happen"
• (CN) China PBoC Open Market Operation (OMO): Skips v CNY20B injected in 7-day and 28-day reverse repos prior; Net: CNY80B drain v CNY20B injection prior
• (CN) China PBoC sets Yuan Reference Rate: 6.7774 v 6.7665 prior
• 700.HK Maoyan (backed by Tencent) to delay IPO to Feb 4th v Jan 31st prior, secures 3 additional cornerstone investors
• (CN) China Dec Property Investment y/y: 9.5% v 9.7% prior
• (CN) China Dec Surveyed Jobless Rate: 4.9% v 4.8% prior
• (CN) China Premier Li: Important to stimulate market vitality to withstand downward pressure and relying on the strength of the people to promote coordinated economic and social development - presided over a symposium on Friday to solicit opinions from professionals in higher education, science and technology, healthcare and sports on the draft of the Government Work Report
• (CN) China earlier and quicker issuance of 2019 new local government bonds is expected to play a major role in narrowing infrastructure funding gaps and bolstering economic growth - China press

Australia/New Zealand

• ASX 200 opened +0.2%
• HSO.AU Updates on Brookfield proposal: Brookfield is currently finalizing due diligence and will seek needed approvals before making binding offer, expected to make fully financed binding offer by Jan 31st
• (AU) Moody's: Australia states are feeling pressure from correction in housing
• (AU) Australia sells A$700M v A$700M indicated in 2.75% April 2024 bonds, avg yield 1.9831%, bid to cover 3.8x
• (AU) Australia Dec HIA New Home Sales m/m: -6.7% v +3.6% prior
• (NZ) New Zealand Trade Min: There are a number of nations keen to join CPTPP; including US

Other Asia

• 2354.TW Said to have cut 50,000 seasonal jobs 1-month earlier than usual due to weaker iPhone demand - Nikkei

North America

• (US) Pres Trump offers 3 year extension of DACA protections in exchange for $5.7B for border wall funding; Sen majority leader McConnell has agreed to hold a vote on this proposal in the Senate

Europe

• (DE) Germany Foreign Min Maas: Unclear how any UK /Ireland talks could work, UK needs a Brexit deal with the whole EU; will be very difficult to re-negotiate UK's withdrawal agreement with EU - German TV
• (UK) PM May said to be considering amending the Good Friday agreement, after another failed attempt at negotiating a cross party Brexit deal – Telegraph
• TKA.DE Planning to invest £10B over the next 30-yrs to exit coking coal - German press
• (UK) Jan Rightmove House Prices m/m: +0.4% v -1.5% prior; y/y: 0.4% v +0.7% prior

Levels as of 12:50ET

• Hang Seng +0.3%; Shanghai Composite +0.4%; Kospi -0.1%; Nikkei225 +0.3%; ASX 200 +0.2%
• Equity Futures: S&P500 -0.3%; Nasdaq100 -0.4%, Dax -0.3%; FTSE100 -0.3%
• EUR 1.1361-1.1381; JPY 109.47-109.78 ; AUD 0.7151-0.7175;NZD 0.6715-0.6759
• Feb Gold -0.1% at $1,280/oz; Mar Crude Oil +0.2% at $54.16/brl; Mar Copper -0.5% at $2.69/lb

Daily Pivots: (S1) 124.28; (P) 124.63; (R1) 125.03; More....

Intraday bias in EUR/JPY remains neutral first, with focus on 125.09. Current development suggest that rebound from 118.62 is stronger than originally expected. . On the upside, break of 125.09 will bring further rise to 55 day EMA (now at 126.75) and above. On the downside, break of 123.40 minor support will turn bias back to the downside for retesting 118.62 low instead.

In the bigger picture, medium term rebound from 109.03 (2016 low) has completed at 137.49 already, with corrective structure. Fall from 137.39 is possibly just the second leg of the corrective pattern from 109.03. Break of 133.12 resistance should start the third leg to 137.49 and above. Nevertheless, break of 118.62 will resume the down trend from 137.49 for 109.03/114.84 support zone instead.

Daily Pivots: (S1) 0.8777; (P) 0.8809; (R1) 0.8854; More...

Intraday bias in EUR/GBP remains neutral for consolidation above 0.8763 temporary low. Further decline is expected as long as 0.8927 support turned resistance holds. Below 0.8763 will target 0.8620/55 support zone. We'd expect strong support from there to bring near term reversal.

In the bigger picture, EUR/GBP is seen as staying in long term range pattern started at 0.9304 (2016 high). The medium term range is set between 0.8620 and 0.9101. Downside break out of 0.8620 will pave the way back to 0.8302/12 support zone. Break of 0.9101 will bring retest of 0.9304/5 resistance.