The markets were rocked by three key events last week, UK Election, US-China trade deal and FOMC rate decision. Sterling ended as the strongest one last week as boosted by the Conservative’s landslide victory in UK election, removing a large of of Brexit uncertainty. Canadian Dollar followed crude oil higher, as partly boosted by US-China trade deal. Yen was the weakest one on strong risk appetite as US stocks extended record runs. Dollar followed as the second weakest after Fed Chair Jerome Powell dampened the chance of any rate hike soon, indicating that interest rate will stay at current level unless there is material surprise in inflation.

Meanwhile, actions in the markets late Friday suggested investor’s ecstasy might not last long. DOW showed hesitation in its upward push. 10-year yield suffered steep decline. Yuan’s rebound reversed while AUD/JPY also retreated sharply before close. We believe that a large part of investors were unhappy with the “tiny” tariff rollbacks brought by the US-China trade deal. The early part of the upcoming will be important to gauge the commitment of the optimists.

Brexit uncertainty largely removed by UK election

A large part of Brexit uncertainty should now be moved as Boris Johnson is set to return the Withdrawal Agreement bill for debate in the Commons before Christmas, and passage before January 31 Brexit deadline. As he also pledged not to extend the transition period beyond 2020, there would be just eleven month for UK and EU to complete the negotiations on future relationship, including trade. That’s a rather tight schedule, but for now, Sterling bulls have every reason to enjoy the ride first.

Markets seemed unhappy with the tiny tariff rollbacks

The completion of US-China trade deal phase one was another strong boost the the markets. According the the fact sheet by US Trade Representative, the agreement could cover areas including intellectual property, technology transfer, agriculture, financial services, currency, expanding trade and dispute resolution. Robert Lighthizer said he expected the 86-page agreement to be signed by him and Chinese Vice Premier Liu He in early January in Washington. The details will be released then.

One important thing to note is that markets seem to be very much dissatisfied with the “tiny” tariff rollbacks. The positive news was that the scheduled tariffs on USD 160B in all essentially untaxed Chinese goods are suspended indefinitely. The 15% tariffs on USD 120B tranche of Chinese imports will be halved to 7.5%. However, the 25% tariffs on USD 250B goods are left unchanged. That is, the tariff situation is not much better than it was six months ago. Reactions from DOW, treasury yield, Yuan and even AUD/JPY late Friday showed that investors weren’t too happy. It will take some more time for the reactions to “evolve” and let’s see.

DOW failed to close at record as some investors hesitated

All three major US stock indices hit extended long term up trend and hit new record highs last week. S&P 500 close at 3168.80 and NASDAQ’s close at 8734.88 were both records too. However, DOW’s at 28135.38 was indeed below the record close at 28164.00 made on November 27. That’s, to us, a sign of hesitation despite the trade deal.

Technically, DOW will be facing 100% projection of 24680.57 to 27398.68 from 25743.46 at 28461.57. Long term projection level of 61.8% projection of 15450.56 to 26951.81 from 21712.53 at 2820.30 is not to far away too. In case of further rally, we might see strong resistance between these two levels to bring pull back. Meanwhile, break of 27801.80 support will indicate short term topping and bring a test on 55 day EMA (now at 27475.84) first.

10-year yield failed to stand above 1.9 handle

10-year yield rebounded to as high as 1.924 on Thursday but then dropped sharply to close the week at 1.819. Nevertheless, overall outlook is unchanged. Consolidation pattern from 1.429 is in progress and would extended further. As long as 1.693 minor support holds, further rise through 1.971 resistance is in favor technically. That would be a real sign of optimism if happens. But even so, upside should be limited by 38.2% retracement of 3.248 to 1.429 at 2.123, which is close to 55 week EMA at 2.117. Meanwhile, break of 1.693 support will bring retest of 1.429 low.

Yuan bulls refused to commit despite trade deal

USD/CNH dived to as low as 6.9214 last week as off shore Yuan surged on news of trade deal. But the pair then recovered strongly to close above 7 handle at 7.0002. Outlook is unchanged that price actions from 7.1953 are merely developing into a corrective pattern. The channeling supports this view. In case of another fall, downside should be contained by 61.8% retracement of 6.6699 to 7.1953 at 6.8706 to bring rebound. On the upside, break of 7.0867 resistance will suggest that the corrective has completed and bring retest of 7.1953 high. But a firm break there is unlikely as it’s close to 100% projection of 6.0153 to 6.9868 from 6.2354 at 7.2069

. AUD/JPY failed take out 76.28 structural resistance

AUD/JPY is usually seen as a pair that gauges risk appetite well, in particular sentiments of Asian traders. The cross hit as high as 75.97 last week as rise from 69.95 resumed. However, it then failed to push through 76.28 structural resistance and retreated sharply to close at 75.18. It’s another sign of lack of commitment of risk seekers. With 76.28 resistance intact, we’d still treat rebound from 69.95 as a corrective move. Break of 73.82 low will turn near term outlook bearish for retesting 69.95 low. Nevertheless, sustained break of 76.28 will add to the case of medium term bullish reversal and target 80.71 key resistance is medium term.

GBP/JPY Weekly Outlook

GBP/JPY’s rise from 126.54 accelerated to as high as 147.95 last week and took out medium term trend line resistance decisively. As a temporary top was formed after subsequent retreat. Initial bias is neutral this week for some consolidations first. Downside should be contained above 142.47 support to bring rise resumption. On the upside, above 147.95 will target 148.87 structural resistance next.

In the bigger picture, rise from 126.54 could either be the third leg of the consolidation pattern from 122.75 (2016 low), or the start of a new up trend. In either case, further rally is expected as long as 139.31 support holds, into 148.87/156.59 resistance zone. Reaction from there should reveal which case it should be in. Rejection from there will extend long term range trading. Decisive break of 156.69 will carry long term bullish implications.

In the longer term picture, in spite of the current strong rally, there is no confirmation of long term bullish reversal yet. Focus is now on 156.59 key resistance. As long as it holds, another decline through 122.75 could still be seen. But firm break of 156.69 should at least bring further rally to 61.8% retracement of 195.86 to 122.75 at 167.93.