What you need to know for the open: Positive noises on trade to counter Persian Gulf conflict risks

• FX to open steady, weekend absent of market-moving news.
• Markets in consolidation, digesting NFP disappointment. 
• Key themes remain with geopolitics in the absence of central ban activity. 
• US, China and EU trade deals in focus, Persian Gulf risks to take a back seat, for now. 

Considering there have been no major escalations on the geopolitical front over the weekend, markets are likely to be steady in the open, lead by a subdued end to the week and weaker US stocks as markets digested a disappointment in the Nonfarm Payrolls data – a surprise to the downside in light of a strong ADP report for the same period.

Markets will be looking ahead to the signing of the phase-one trade deal between the US and Chinese officials gathering in Washington on the 15th Jan, a turning point in the 18-month tit-for-tat tariff standoff between the two largest economies in the world. 

Key topics

War averted between US and Iran, for now: After a risk-off start to the year, markets seem to be concluding that neither the US nor Iran have the appetite for war at present. The US and Iran were on the verge of out-right conflict following the assassination of top Iranian General Qassem Suleimani (for plotting attacks on US embassies in the region) and subsequent realisation on a US base in Iraq, where no US persons were harmed. US President Donald Trump responded to the attacks in an address on the nation that de-escalated the threat of war, warning Iran that, instead of military response, further sanctions will be imposed. Subsequently, the price of oil and gold dropped back from their daily peaks reached as a consequence of heightened tensions in the Persian Gulf – WTI oil (most correlated to war in the ME) spiked from a bit over $61 at the start of the year to $65.5/bbl on 8 January, but is now all the way down at $59/bbl. However, markets are monitoring the geopolitics with the ongoing rocket and mortar strikes reported in related territories for trigger points – The latest risk to emerge from all of this comes in the downing of a Ukrainian airline which took place over Iranian skies just hours after the missiles attack on the US airbase.

Iran has finally taken responsibility for the aeroplane downing while international investigations took place, but blame the US as the instigator of recent conflict. This could escalate into covert attacks on the US in retaliation for the humiliation Iran has felt in both the downing of the airline and losing one of their top generals. The downing of the airline has also sparked domestic riots a nation demanding the resignation of senior leaders. There are reports of gunshots fired by security forces in Tehran - something which the US condemns. Trump has warned Iranian leaders against killing demonstrators. Read more here: Iran admits to shooting down of Ukrainian aeroplane, rioters demand resignation of senior leaders, and here: Rocket attack in Iraq base hosting US troops and here: US Treasury Sec. Mnuchin: US imposes sanctions on Iran as result of attack on US

US Nonfarm Payrolls weaker than expected: Markets were disappointed by the Nonfarm Payrolls on Friday which rose in December by 145K and below the 160K consensus. However, most regard the data's trend remaining fairly strong. "Perhaps more notable was the weakness in hourly earnings; those data are also volatile but previous upward momentum seems to have at least temporarily faded," analysts at TD Securities argued. 

US dollar a touch softer on Friday: Following the release of the US jobs data, the US dollar stalled in its upside correction from the 96.35s to 97.58, a touch below the 200-day moving average and October downside resistance. The price is also struggling a the 200 4-hour MA.

USD/JPY best performer: USD/JPY has comfortably broken through the 200-DMA, flirting with a topside breakout above 109.70 hard resistance with eyes on the 110 handle. However, while the US dollar stalls and geopolitical tensions remain in the driving seat, an imminent breakout is unlikely. 109.20 (23.6% Fibo retracement) and the 21-day moving average at 109 the figure (38.2% Fibo 108.90) could be supportive into the highly anticipated so-called, 'phase-one' trade deal signing on the 15th Jan between US and Chinese officials. 

Positive noises on trade: White House economic advisor, Larry Kudlow, said that everything is in place on the China trade deal. Also, the US Treasury Secretary, Steven Mnuchin, has stated and confirmed that China's commitments in the Phase-one trade deal with the United States were not changed during a lengthy translation process – more on that here: US Treasury Secretary Mnuchin: There will be a phase two of China trade talks - Fox

Kudlow also stated that the US may start trade talks with the EU this week. "The latter could have the potential to generate some volatility given tensions over France’s digital tax, the lingering threat of US auto tariffs and disagreement on access to US government procurement markets and agriculture. For the moment, however, financial markets remain optimistic," analysts at ANZ Bank argued. 

Looking ahead for the week, key scheduled G10 events

• 13th Jan: Bank of Canada Business Outlook Survey, UK GDP.
• 14th Jan: US Consumer Price Index, NZIER Business Opinion Survey (Q4), China Trade data. 
• 15th Jan The signing of US/China phase-one trade deal to take place in Washington, with a high-level delegation from China attending.
• 16th Jan: US Retail Sales.

Chart of the week

• Chart of the week: USD/JPY testing bear's commitments at key resistance, 109.70/80