Markets To End The Year On A High?

US indices rose modestly on Thursday, supported by a final rally in tech stocks. Despite thin holiday volumes, the Dow added 0.2%, the S&P 0.1% and the Nasdaq 0.2% on the penultimate day of trading in 2017. Apple (NASDAQ:AAPL) led the indices higher, jumping to a session high of $171.85 after trading under pressure for the past few sessions.

Overall, we are seeing a slight slow down in the pace of gains in the US indices. This is not surprising given the impressive rate at which the US stock markets have rallied this year, with the S&P jumping 20% and the Nasdaq and Dow rallying 25% - 30% each. Despite the slowdown in this thin volume holiday trading period, we still consider there is more to come in 2018. The fundamentals are looking strong heading into the new year, with a strengthening economy and big corporate tax cuts to pave the way.

The dollar, however, doesn’t want to play ball. The dollar fell for its 4th straight session on Thursday, dropping over 0.8% so far this week. Mixed US economic data on Thursday did little to helping ebbing demand for the greenback. The trade deficit widened, and jobless claims also picked up slightly, overshadowing an improvement in business conditions as measured by the Chicago purchasing manager.

2017 has been the worst year for the dollar since 2010, however, one currency’s weakness is another currency’s gain. In 2017, the euro was the biggest gainer in the G10 and continued to capitalize on dollar weakness right up until the final trading sessions of the year. The euro continued its positive trajectory in the previous session, and in early trade on Friday, as investors eye up German inflation data – the only high impacting data point on the economic calendar.

German inflation is expected to have ticked down slightly in December to 1.5% on a year-on-year basis, from 1.8% in November. On a monthly basis inflation is forecast to have increased by 0.5%, from 0.3% in November. In the economic bulletin yesterday, the European Central Bank (ECB) expressed some optimism that eurozone inflation would continue to gradually climb. As long as Germany, the eurozone’s largest economy, doesn’t disappoint with the inflation reading, euro bulls could drive EUR/USD higher into the end of the year.

A strong reading could see EUR/USD look to overcome selling interest at around $1.1950/ 60 before heading towards the key psychological level of $1.20. However, given that it is the last trading day of the year prior to the new year extended weekend, there is also the risk that traders will look to book recent profits which could see the euro drop closer towards the $1.19 level.

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FTSE futures are pointing to yet another positive start on the last day of trading this year. After mining stocks helped lift the FTSE to another record high in the previous session, positivity from the US and Asia overnight look set to secure another record high in thin volume trading before the markets close for the new year break.

Written By: London Capital Group