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Yuan marches to fresh 6 month high; NFP in focus

By Lukman Otunuga, Research Analyst

It has certainly been a positive trading week for the Chinese Yuan thanks to renewed optimism over trade talks and a broadly weaker Dollar.

The local currency marched to a fresh 6 month high after the Federal Reserve struck a dovish tone with repeated Dollar weakness and trade talk optimism fuelling upside gains. With the USDCNY trading marginally below 6.70 as of writing, this is a poised to be a win for Yuan bulls ahead of the Chinese New Year holiday. Sustained weakness below 6.70 is likely to open a path towards 6.66 in the short to medium term.

A dovish Federal Reserve was bad news for the Greenback this week as the Dollar Index dipped towards 95.20 before rebound back towards 95.60. With the central bank reaffirming its position to be patient about raising interest rates due to the unfavourable global conditions and tepid inflation, the Dollar is in trouble. Expectations are set to mount over the Federal Reserve taking a pause on interest rates which will ultimately encourage further Dollar weakness.

The main event risk for the Dollar today will be the US jobs report which should offer fresh insight into the health of the US labour force. While a blockbuster NFP print and signs of accelerating wage growth may push the Dollar higher, upside gains are likely to be limited by Fed rate hike ‘pause’ speculation. In regards to the technical picture, the Dollar Index is likely to trade back towards 95.00 as long as 96.00 proves to be a firm resistance.

In the United Kingdom, Sterling is destined to remain highly sensitive to Brexit related headlines. Theresa May will be heading to Brussels to renegotiate the Brexit withdrawal deal with the European Union. With the EU warning that the backstop is “not open for renegotiation, the Prime Minister’s trip may end in complete disappointment. Expectations seem to be mounting over the government extending Article 50 in a bid to preventing a no deal outcome. While these speculations seem to be somewhat limiting the Pound’s downside losses, investors could be in store for a rude awakening if reality fails to mirror expectations.

It has been an undeniably bullish trading week for Gold thanks to a dovish Federal Reserve, geopolitical risk factors and Dollar weakness.

The yellow metal could extend gains today if the US jobs report fails to meet market expectations. With the Federal Reserve seen taking a break on rate hikes and global growth fears weighing on investor confidence, Gold is likely to remain in fashion. In regards to the technical picture, we could see prices challenging $1340 next week if a solid weekly close above $1324 is achieved. Bulls remain in firm control above the psychological $1300 level.

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