Risk appetite dominates in a holiday shortened week

In a week that was shortened by the Presidents Day holiday in the United States, markets traded optimistically and risk appetite was the dominant theme.

By Emirates NBD Research

In a week that was shortened by the Presidents’ Day holiday in the United States, markets traded optimistically and risk appetite was the dominant theme. Equity markets performed well across the board. The S&P500 rose 1.71%, the Nasdaq gained 1.35%, the Nikkei posted a 2.51% gain and the DAX climbed 1.40%. A similarly positive performance was seen in commodity markets, with the Bloomberg Commodity Index rising 2.71% during the same period. These solid performances can, in a large part, be attributed to the tone of the FOMC minutes from January’s meeting. The minutes revealed that policy makers remained optimistic in their outlook of the U.S. economy and would remain patient with the pace at which they raise interest rates.

This solid performance in capital markets was also accompanied by more promising geopolitical developments. This was related to optimism over a U.S.-China trade deal, and hopes that the risk of a no-deal Brexit was decreasing. Over the last week, there has been increased speculation that Parliament will take control of the Brexit process, forcing the UK government to request an extension to negotiations and thus reducing the risks of the United Kingdom leaving the European Union without a deal.

At a glance:

EURUSD: While EURUSD was able to erase the losses of the previous week, the price was unable to close above the 200-week moving average. The close below this level for a third week demonstrates that the existing technical vulnerability remains. In addition, the price is likely to come under further pressure in the week ahead if U.S. data meets consensus expectations.
USDJPY: A solid performance in equity markets has encouraged risk appetite over the last week and as a result USDJPY has benefited. In the short term, we expect risk appetite to continue to be the principle driver behind USDJPY price action.
GBPUSD: The pound has rebounded as the market has once again taken the view that a no-deal Brexit might be avoided. However, we think it is once again too premature to entirely rule out the scenario of a no-deal Brexit occurring and consequently still see downside GBP risks.