- Annual core inflation in eurozone remained unchanged at 1.1% in January.
- EUR/USD pair pulls away from session highs after soft inflation data.
Inflation in the euro area, as measured by the Consumer Price Index (CPI), fell to -1% on a monthly basis in January and stayed unchanged at 1.4% on a yearly basis, the data published by the Eurostat revealed on Friday. These readings came in line with market estimates.
Further details of the report showed that the core CPI, which strips volatile food and energy prices, remained steady at -1.7% and 1.1% on a monthly and yearly basis, respectively.
After advancing to a daily high of 1.0820 on the upbeat PMI data earlier in the session, the EUR/USD pair lost its traction and was last seen trading at 1.0805, still up 0.2% on the day.
- DXY is facing some profit taking sentiment and recedes from YTD highs.
- While above the 200-day SMA there is still room for a test of 100.00.
The bullish momentum in DXY seems to have run out of steam in the proximity of the key barrier at 100.00 the figure on Thursday.
The current overbought levels in the dollar is also helping with the ongoing knee-jerk, although the underlying positive tone appears unaltered in the short-term horizon.
Looking at the broader picture, while the 200-day SMA at 97.81underpins, the index could still attempt a move to the psychological 100.00 neighbourhood.
DXY daily chart
The Department of Statistics will release January inflation data on 24 February and January industrial production (IP) data on 26 February. Strategists at Standard Chartered bank share their forecast. USD/SGD is sitting at 1.4000.
"We expect core and headline inflation to have remained subdued at 0.8% y/y and 0.9% y/y, respectively, both inching up a mild 0.1ppt from December."
“We expect IP to have fallen 15.2% y/y, versus a 0.7% y/y decline in December, largely due to the Lunar New Year calendar effect.”
“We think the coronavirus only had a partial impact, if any, on IP in January. The adverse impact of the virus should be felt more acutely in February due to supply chain disruptions.”
- The sharp recovery in EUR/JPY run out of steam in the vicinity of 121.50.
- Further upside now targets the 2020 highs near the 123.00 mark.
Following two consecutive sessions posting strong gains, EUR/JPY is now losing some momentum amidst some JPY-buying.
If the buying bias gathers extra impetus, then the YTD high in levels just below 123.00 the figure (January 16th) should emerge as the next target of relevance.
Above the key 200-day SMA, today at 120.38, the outlook on the cross is expected to remain positive.
EUR/PY daily chart
According to FX Strategists at UOB Group, there is still scope for USD/CNH to edge higher in the near-term.
24-hour view: “While we indicated yesterday that ‘there is still chance for USD to move above the February peak of 7.0230’, we did not anticipate the sudden acceleration as USD surged to high of 7.0548. The rapid rise appears to be running ahead of itself but there is room for the advance to extend to 7.0600 before the current strong upward pressure should ease. Support is at 7.0350 followed by 7.0250.”
Next 1-3 weeks: “We noted on Wednesday (19 Feb, spot at 7.0100) that the ‘consolidation phase could be close to an end’. However, the manner by which USD blew above the early February peak of 7.0230 was not exactly expected. From here, further USD strength is likely but at this stage, it is too early to anticipate a move the December’s peak at 7.0865 (there is another resistance at 7.0660). For the next few days, the ‘strong support’ level at 7.0150 is likely strong enough to hold.”
South Korea will announce January industrial production (IP) data on 28 February. Meanwhile, the Bank of Korea (BoK) will hold a meeting on 27 February. Economists at Standard Chartered Bank predict the result of these events. USD/KRW trades at 1209.20.
“We expect the Bank of Korea (BoK) to keep the policy rate unchanged at its 27 February meeting.”
“We think the BoK will wait for more data to gauge the impact of the coronavirus.”
“IP likely fell 2.1% m/m and 1.6% y/y, after having risen 3.5% m/m and 4.2% y/y in December, due to fewer working days than January last year (Lunar New Year was in January this year versus in February last year).”
- GBP/USD stages a goodish rebound from three-month lows set on Thursday.
- A modest USD pullback from multi-year tops remained supportive of the move.
- Mixed UK flash Manufacturing/Services PMI did little to provide any fresh impetus.
The GBP/USD pair maintained its bid tone near session tops – around the 1.2920-25 region – and had a rather muted reaction to the mixed UK macro data.
The pair managed to gain some positive traction on the last trading day of the week and built on the previous session's intraday bounce from near three-month lows amid a modest US dollar pullback from multi-year tops.
GBP/USD supported by retreating USD
Fears surrounding the outbreak of coronavirus beyond China triggered a fresh wave of the global risk-aversion trade and led to a sharp downfall in the US Treasury bond yields, which prompted some USD profit-taking.
Apart from the USD weakness, the uptick was further supported by stronger UK flash Manufacturing PMI, which remained in the expansion territory and came in at 51.9 for February vs. a dip to 49.7 expected.
The positive reading, to some extent, was offset by a slight disappointment from the UK flash Services PMI, which edged lower to 53.3 during the reported month as compared to 53.4 anticipated and 53.9 previous.
It, however, remains to be seen if the pair is able to capitalize on the recovery or meets with some fresh supply amid persistent fears that Britain might crash out of the European Union at the end of the transition period.
Technical levels to watch
The February PMIs beat expectations, but show early signs of spill-overs from the Wuhan virus outbreak to activity in the Euro area, analysts at Nordea reports. EUR/USD has jumped to 1.0815 with the news.
“The composite index rose to 51.6 from 51.3 last month, signaling steady expansion in business activity and beating expectations. Both the manufacturing and services components increased.”
“Manufacturing remained in decline, at 49.1, but climbed to a one-year high. This is partly due to undeservedly positive effects from an increase in suppliers’ delivery times, which normally means there is high demand and thus good news, but this time actually reflects the shock to supply from the Wuhan virus outbreak.
“A slower fall in new orders was a positive sign however, strengthening the case of a bottoming out in the industry.”
“Looking ahead, today’s numbers might ease some minds concerning the virus, they do appear to show early signs of disruptions which may weigh on especially the manufacturing sector in the coming months.”
India will release GDP data for Q3-FY20 (ended December 2019) and the second advance estimate for FY20 growth on 28 February. Analysts at Standard Chartered estimate a growth recovery in the third quarter. USD/INR trades at 71.923.
“We estimate that growth recovered to 4.8% in Q3 from a six-year low of 4.5% in Q2.”
“While GDP growth likely averaged 4.8% in the first three quarters of FY20, we are keeping our full-year growth forecast unchanged at 5% due to technical factors; FY19 growth was recently revised lower to 6.1% from 6.8%, which may lead to data revisions in quarterly growth rates and the second advance estimate for FY20. This may pose upside risks to our Q3 estimate.”
“While GDP growth appears to have bottomed out, we see risks from global headwinds, especially the coronavirus outbreak, which could weigh on India’s Q4-FY20 growth. The Reserve Bank of India estimates that a 50bps drop in global growth would shave off 20bps from India’s growth.”
The UK industrial sector is growing once again. Markit's Manufacturing PMI beat expectations with 51.9 compared with 49.7 expected, a significant positive surprise. The Services PMI marginally missed expectations with a score of 53.3 points versus 53.4 expected.
GBP/USD has extended its gains, hitting a high of 1.2927 at the time of writing. The forward-looking gauges indicate an economic recovery in the first quarter of 2020 after stagnation in the fourth quarter of 2019.
UK Public Sector Net Borrowing stood at around -£10.5 billion in January compared with around -£12 projected.
Markit's Manufacturing Purchasing Managers' Index was expected to drop from 50 – the break-even level 0 to 49.7 points. The Services PMI was projected to slide from 53.9 to 53.4 points. Both indicators rose in January in response to better business sentiment after the elections. The landslide victory of Prime Minister Boris Johnson provided some clarity after substantial Brexit turbulence.
GBP/USD advanced ahead of the publication and topped 1.29. The US dollar is taking a breather from its gains.
Coronavirus headlines continue worrying investors all over the world.
In 2019, Indonesian economic growth decelerated slightly to 5%. A path of growth close to its potential but still insufficient to increase significantly its GDP per capita. Without large structural reforms, Indonesia will grow old before it gets rich, Johanna Melka from BNP Paribas informs. USD/IDR trades at 13814.90.
“Over the past five years, Indonesia has confirmed its ability to withstand international shocks. Its growth has remained solid and its macroeconomic fundamentals have remained robust.”
“Behind these good results lies a more nuanced reality. The main structural constraints on growth are:
- The concentration of employment in agriculture
- The low level of education of the population in spite of the increase in expenditure
- The low share of women in the labour force
- Major infrastructure needs
- Institutional constraints.”
“Several laws will be presented to parliament during the year 2020. The ‘Omnibus law on job creation’ is the most controversial of these. By relaxing the rules governing the Indonesian labour market, it could help to attract more foreign direct investment.”
- EUR/GBP remains confined in a range despite stronger Eurozone PMI prints.
- A modest bounce in the pound negated positive factor and capped gains.
- The fundamental backdrop support prospects for some near-term recovery.
The EUR/GBP cross extended its sideways consolidative price action – below the 0.8400 mark – and moved little post-Eurozone PMI prints.
Following the previous session's intraday pullback from over one-week tops, the cross was seen oscillating in a narrow trading band through the early European session on Friday. The shared currency found some support from slightly better=than-expected German Manufacturing PMI, which largely negated a slight disappointment from Services PMI.
The intraday bid tone remained unabated, rather got an additional boost after the broader Eurozone PMI prints also came in stronger than consensus estimates. The positive factor, however, was largely offset by some recovery witnessed around the British pound and eventually led to a subdued/range-bound price action on the last trading day of the week.
Meanwhile, persistent market fears that Britain might crash out of the European Union at the end of the transition period later this year might keep a lid on any runaway rally for the British pound and might assist the cross to built on this week's recovery move from two-month lows.
Technical levels to watch
- EUR/USD pushes higher to the 1.0820 region, session highs.
- Flash manufacturing PMIs in Germany, EMU lift the mood around euro.
- USD-selling also favours the better tone in the pair.
The single currency is now trading on a better mood and is lifting EUR/USD to fresh daily highs in the 1.00820 zone at the end of the week.
EUR/USD up on better-than-expected data
EUR/USD appears to have stabilized in the lower end of the yearly range around the 1.0800 neighbourhood, always amidst the ongoing alternating risk appetite trends and generalized strength in the buck.
In fact, concerns around the Chinese coronavirus (COVID-19) remain far from abated and are expected to keep swinging the mood in the global markets via its impact on economic growth prospects.
The greenback, in the meantime, is seeing some profit taking on Friday and allowing some recovery in the risk-associated universe at the same time. The dollar, however, looks well supported by solid results in US fundamentals as of late, coronavirus fears and the steady Fed.
The euro met extra buying interest on Friday after German and EMU advanced manufacturing PMIs are seen improving to 47.8 and 49.1, respectively, during February, bettering consensus. Further data in the region showed Italian Industrial New Orders expanded at a monthly 1.4% in December while Industrial Sales contracted 3.0% MoM in the same period.
Across the pond, advanced PMIs, Existing Home Sales and another round of Fed-speakers should keep the interest on the buck later in the NA session.
What to look for around EUR
EUR/USD is seen some light at the end of the tunnel this week on the back of upbeat data in the euro docket, managing at the same time to put further sistance from recent YTD lows in the 1.0780/75 band. As usual, USD-dynamics are expected to keep ruling the pair’s price action for the time being along with the broader risk appetite trends, where the COVID-19 remains in centre stage. On another front, the ECB is expected to finish its “strategic review” (announced at its January meeting) by year-end, leaving speculations of any change in the monetary policy before that time pretty flat. Further out, latest results from the German and EMU dockets continue to support the view that any attempt of recovery in the region remains elusive for the time being and is expected to keep weighing on the currency.
EUR/USD levels to watch
At the moment, the pair is gaining 0.31% at 1.0817 and faces the next resistance at 1.0879 (2019 low Oct.1) seconded by 1.0892 (23.6% Fibo of the 2020 drop) and finally 1.0981 (monthly low Nov.29 2019). On the downside, a breach of 1.0777 (weekly/2020 low Feb.20) would target 1.0710 (monthly low Jan.5 2016) en route to 1.0569 (monthly low Apr.10 2017).
European banks are still suffering the cost of having reserves despite the tiering imposed by the European Central Bank at the end of last year, Laure Baquero from BNP Paribas reports.
“Tiering partially exempts excess reserves of the euro area banks from the negative deposit facility rate (-0.5%). It applies within the limit of an amount equal to six times their minimum reserves. Banks whose excess reserves do not exceed this multiple may, in addition, convert all or part of their deposit facility into excess reserves.”
“The amount of the deposit facility of the 19 banking systems in the euro zone decreased by 59% between September and December 2019, falling back to its spring 2016 level.”
“We estimate that tiering reduces the cost of negative interests by EUR 4.0 bn in the euro area and EUR 825 m in France. The annual cost of negative interest amounts to EUR 4.7 bn for the euro area banks, including EUR 3.5 bn attributable only to excess reserves and EUR 1.1 bn to the deposit facility.”
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