On Friday, the US official employment report for December is due in the United States. James Knightley, Senior Economist at ING explains the November report showed job creation well ahead of expectations, but he sees slower growth in December.

Key Quotes:

“After a remarkably strong November labour report, we expect to see a more muted yet still respectable set of jobs numbers for December. The November figure (266,000 with 41,000 upward revisions to the previous two months) was boosted by the return of formerly striking GM employees to the working population. It lifted the headline figure by around 46,000 directly with a further uplift from GM component suppliers who had put staff on temporary leave due to a lack of demand during the strike. Nonetheless, this was still well ahead of the consensus forecast of 180,000 and so helped cement the market view that there would be little need for the Federal Reserve to loosen monetary policy further after the three rate cuts seen in 2H19.”

“Consequently we see some scope for a mild data disappointment with payrolls predicted to rise 150,000 versus the 160,000 consensus. The range of analysts polled by Bloomberg is 125,000-210,000.”

“If we continue to see more of these economically disenfranchised people returning to the jobs market the upside for wage growth may continue to be rather limited. We look for wage growth of 0.2% month on month, 3.0% YoY.

“With the Federal Reserve seemingly content with its current monetary policy stance the prospect of any near-term interest rate moves appears remote.”

GOP senators introduce a resolution to change rules and dismiss Trump impeachment without articles, The Hill has reported.

Roughly a dozen GOP senators want to change the Senate’s rules and allow for lawmakers to dismiss articles of impeachment against Presedent Trump before the House sends them over.

Sen. Josh Hawley (R-Mo.) introduced the resolution on Monday, arguing the Senate's impeachment rules do not envision a scenario where the House would delay transmitting articles against a president, as Speaker Nancy Pelosi (D-Calif.) has done.

"The Constitution gives the Senate sole power to adjudicate articles of impeachment, not the House. If Speaker Pelosi is afraid to try her case, the articles should be dismissed for failure to prosecute and Congress should get back to doing the people’s business," Hawley said in a statement.

The resolution would give the House 25 days to send articles of impeachment over to the Senate. After that, a senator could offer a motion to dismiss "with prejudice for failure by the House of Representatives to prosecute such articles" with a simple majority vote, according to Hawley's proposal.

FX implications

That is good news for US stocks and should be bad news for the yen and gold. However, given the focus is on trade and war, the impeachment noise is taking a back seat currently.

The US army has told Iraq in an official letter that it is preparing to "move out", according to AFP News Agency. The growing calls for the departure of roughly 5,000 US troops may prove impossible to ignore.

This news comes following Iraq’s Parliament calling for the expulsion of US troops from the country on Sunday in reaction to the American drone attack that killed a top Iranian general. The news is in stark contrast to US Secretary of State Mike Pompeo's dismissal of the Iraqi Parliament’s vote Sunday.

“We are confident that the Iraqi people want the United States to continue to be there to fight the counterterror campaign. And we’ll continue to do all the things we need to do to keep America safe," Pompeo said on “Fox News Sunday, “We’ll have to take a look at what we do when the Iraqi leadership and government makes a decision,” he said. “But the American people should know we’ll make the right decision.”

There are, however, concerns that a pullout of the estimated 5,200 U.S. troops could cripple the fight against ISIS and allow its resurgence. It is unclear as to whether Trump will be now retracting his threats of sanctions on Iraq should US troops be expelled from the country. "We will charge them sanctions like they've never seen before ever," Trump said aboard Air Force One, according to a pool report. "It'll make Iranian sanctions look somewhat tame." Trump essentially wants to be paid back for the costs of being there and leaving. "We have a very extraordinarily expensive airbase that's there. It cost billions of dollars to build. Long before my time. We're not leaving unless they pay us back for it," Trump said.

FX implications

Risk-off remains the preferred approach to the FX space while markets sit back and wait to see whether Iran and proxies in Iraq (such as the Shia militias) will follow through with their retaliation threats.

  • Mexican peso recovers strength after Friday’s slide versus US dollar.
  • USD/MXN keeps testing the 18.80 support area, remains in range.

The USD/MXN jumped on Friday to 19.03, the highest level in over two weeks amid Middle East tensions. Today it reversed and bottomed at 18.79, the lowest intraday level since May. As of writing, it trades at 18.85, off lows but still in negative territory for the day.

Market concerns ease, US dollar weakens

Market sentiment reversed during the European session and improved, helping the demand for emerging market currencies. Wall Street indexes are now modestly higher, after opening in negative.

US yields also rebounded, helping the DXY to move off lows. As the greenback recovered ground or stabilized against majors, it printed fresh lows versus some emerging market currencies, like the Mexican peso.

Levels to watch

The USD/MXN remains in a consolidation range. On Friday it peaked at 19.02 but failed to hold. The rally found resistance at the 20-day moving average and around the 19.00 zone.

Currently, the pair is testing the lower bound of the trading range located at 18.80. If it drops firmly below it will likely test the 2019 low at 18.74. Under that level, the next support is seen at 18.60. On the upside, a close above 19.00 would suggest more strength ahead for the greenback.

British Prime Minister, Boris Johnson, is due to meet with the new president of the European Commission Ursula Von der Leyen in London on Wednesday for the first post-election Brexit trade talks. Ursula von der Leyen will meet the Prime Minister on Wednesday in Number 10 to discuss the opening positions of the EU and the UK in the upcoming negotiations.

The visit comes ahead of Britain’s expected exit from the EU on January 31, and will provide the first opportunity for Johnson to outline the UK’s opening position in talks, which are set to officially begin in February or March.

FX implications

The pound is set to move lower should negotiations point to a hard Brexit scenario. There could be volatility on each and every related headline at the extreme depending on sentiment.

  • GBP/USD Price Analysis: Pound pressuring the 1.3172 resistance vs. US dollar

Qatar Emir, Sheikh Tamim bin Hamad al-Thani, spoke with Iraqi prime minister to discuss efforts to reduce tension to maintain the security and stability of Iraq and the entire region – Qatar’s Amiri Diwan said in a statement.

They discussed the developments of events on the Iraqi scene and the efforts made to reduce tension to maintain the security and stability of Iraq and the entire region, the statement said.

The phone call came after the killing of a top Iranian military commander, Qassem Soleimani, that has sparked a major escalation of regional tensions.

Markets implications

There is growing speculation, and outright hope, that the situation will not escalate beyond, perhaps, some form of proxy retaliation from Iran for which the US will be less likely to respond with 'disproportionate' measures. Therefore, the case for lower oil prices is on the cards.

  • Upward pressure on oil prices to be short lived – ABN AMRO

  • JPY loses strength as market sentiment improves in American session.
  • Wall Street's main indexes turn positive after opening deep in red.
  • US Dollar Index pulls away from lows after upbeat PMI data.

The USD/JPY pair rose above the 108 handle during the early trading hours of the American session and continued to push higher as the improving market sentiment made it difficult for the JPY to find demand as a safe-haven. As of writing, the pair was up 0.25% on the day at 108.35.

In the absence of fresh developments that could hint at a further escalation of the conflict between the United States and Iran, the market mood turned positive in the second half of the day. Additionally, White House adviser Conway said that it was still possible for the US to renegotiate a nuclear deal with Iran.

After opening deep in the negative territory, Wall Street's main indexes climbed into the positive territory and the 10-year US Treasury bond yield, which slumped to its lowest level in a month at 1.757%, retraced its intraday drop and was last flat at 1.795%.

USD capitalizes on strong PMI reading

In the meantime, the IHS Markit's December Services PMI (final) came in at 52.8 in US to beat the market expectation of 52.2 and showed an expansion of activity in the sector at an accelerated pace. The US Dollar Index staged a modest rebound following the data and helped the pair cling to its recovery gains. As of writing, the index was still down 0.25% on the day at 96.65.

On Tuesday, the Jibun Bak Services PMI from Japan and the ISM Non-Manufacturing PMI from the US will be looked upon for fresh impetus.

Technical levels to watch for

  • USD/CAD bars in control as correlation remains positive to bullish oil prices.
  • USD/CAD is technically offered below key moving averages, trendline support and a long-term 38.2% Fibo.

The price of oil is elevated on speculation that there will be a disruption to world supply from the Middle East and further escalation of the tit-for-tat proxy war that just turned real between Iran and the US following the assassination of one of Iran's top generals.

This, in turn, will likely to continue to support the loonie and underpin a move to the downside in funds as markets factor in the likelihood of the Federal Reserve moving back onto the defensive foot. This would all depend on there being an inflection in the US and global economy, following either a breakdown in the US and Sino trade negotiations or a war in the Middle East with the threat of rising inflation.

"We caution against expectations for a sensational response from the Iranian regime, expecting instead that any response will be well measured as both sides seek to protect their core interests,"

– analysts at TD Securities argued. Which could mean oil prices will come back under pressure and subsequently weigh on the Loonie.

However, a response from Iran will open up a likely devastating blow to risk appetite. The question is how correlated the CAD will be when oil goes through the roof considering how bid the US dollar will likely become as well, at least in the knee-jerk. "In short, if World War Three kicks off, go long USD as you head for the shelters; and if US muscle-flexing prevents World War Three here, it’s, even more, the time to remember why the USD is still the USD," analysts at Rabobank argued.

USD/CAD levels

USD/CAD is below trend line support as well as the 200, 50 and 21-day moving averages. USD/CAD is now a 38.2% Fibonacci retracement of the late 2017 – YTD range and embarking on a 50% Fibonacci retracement, back to the 1.2860.

  • AUD/USD is starting the new year by pulling back down below the 0.7000 handle.
  • The level to beat for sellers is the 0.6929 support.

AUD/USD daily chart

AUD/USD is retracing down for the fourth consecutive day while below the 0.7000 handle and above the main simple moving averages (SMAs).

AUD/USD four-hour chart

The market is retracing down below the 50 and 100 SMAs as the spot is trapped in the 0.6960-0.6929 range as expected. Sellers would be looking for a break below the 0.6929 level and set their eyes on 0.6893 in the medium term. However, if bulls get a daily close above the 0.6970/0.6959 price zone, then the 0.7000 handle can be back on the radar, according to the Technical Confluences Indicator.

Additional key levels

"Brent oil prices touched USD 70/bbl on Monday as the tensions between Iran, Iraq and the US continued to escalate," noted ABN AMRO Senior Energy Economic Hans van Cleef and explained that oil prices' strong reaction is due to the fact that the region supply roughly 23 million barrels per day.

Key quotes

"As long as these tensions do not result in actual production disruptions, we judge that the upward pressure on prices will prove to be short lived. The forward curve pictures a steep backwardation, suggesting that the stress of possible supply constraints are anticipated to have only an effect in the very near term."

"Due to the global production oversupply – even despite an OPEC production cut – and ample global inventories as well as strategic oil reserves, there will be no shortages of oil in the near term. Furthermore, investors already extended their long positions since early December and are already therefore positioning for further price gains."

"If the tensions do not escalate, we expect that the market reaction will be short lived and oil prices will ease in the course of the coming weeks. In the unlikely event of an escalation which actually does affect oil production and exports in the region, oil prices will continue its rally. The first important technical resistance levels are USD 72-75 and USD 80/bbl."