US Session Forex Brief, Jan 4 – The ECB Should Take Notice as Inflation and Services Soften Further in the Eurozone
Skerdian Meta • 4 min read
The European Central Bank (ECB) has started to shift its rhetoric to dovish as we have recently heard, although in my opinion they should sound even more dovish now that the economy of the Eurozone has softened considerably. On Wednesday, the manufacturing reports from the Eurozone countries showed that the manufacturing sector is still softening in Europe, with Italy and France in contraction.
Today, the final services reports from Germany and France missed expectations, showing that this sector is still cooling off in Europe, with France’s service sector remaining below the 50 level which means contraction. We heard ECB’s Coeure sound dovish this morning, saying that interest rates will stay low for as long as it takes, but after the soft services and inflation numbers released later, I think he should have sounded more dovish.
The headline YoY inflation report from the Eurozone lost 4 points, declining to 1.6% from 2.0% previously which should have ECB officials jumping in their chairs, but at least the core inflation number remained unchanged at 1.0% for the year. Later on when the US session starts, the Canadian and the US employment reports will be released and they will likely have a meaningful impact on the forex market, so let’s get started with the forex events during today.
The European Session
- UK Nationwide HPI – The house price index from Nationwide for November was revised higher to 0.4% from 0.3% previously. The number for December was expected at 0.1%, but instead it came at -0.7%. That’s the first decline since July and it is a pretty big one.
- ECB’s Coeure Sounding Dovish – The ECB governing council member Benoit Coeure said in an interview earlier today that interest rates are to remain low for as long as necessary. He added that there is always a risk of financial crisis. Although, he added that growth in the Euro area remains comfortable. I don’t know where he sees that.
- Eurozone CPI Inflation – France was the first to release the inflation report. CPI declined by 0.2% in November but it was expected to increase by 0.1% in December. Although, it declined again, this time by 0.1%. We saw a similar scenario in Italy as CPI inflation declined by 0.2% in November and it declined again in December by 0.1%. The Eurozone PPI (producer price index) also missed expectations as it came at -0.3% for December last year. PPI has been increasing pretty fast in the previous months, but now it turned negative. The headline YoY CPI number for the Eurozone declined to 2.0% in November and was expected to cool off further today to 1.8%. But, it cooled off too much as it fell to 1.6%. The core CPI number though remained unchanged at 1.0%.
- North Ireland DUP Party Hates the Backstop – Sammy Wilson of the DUP Party said early today that the Irish backstop is a con trick. They won’t support Theresa May’s plan and they are alarmed of what’s coming out of the EU regarding the backstop. He finished by saying that Britain should be relaxed about a no-deal Brexit. It seems like the UK will crash out without a deal since the DUP Party helps Conservatives form the majority in the British parliament.
- Eurozone Services PMI – The Italian and Spanish services PMI for December ticked higher to 54.0 points against 53.8 in Spain and to 50.5 from 50.2 points expected in Italy. But, German services missed expectations coming at 51.8 points against 52.5 points previously, while the French services came at 49 points, down from 49.6 points previously which means contraction. The services number for the whole of the Eurozone also came lower at 51.2 points from 51.4 points previously.
- UK Services PMI – The UK services PMI index has been declining constantly and in November it fell to 50.4 points which means almost flat. The report released today was anticipating an increase to 50.7 points but it increased further to 51.2 points.
The US Session
- Canadian Employment Report – The unemployment rate declined from 5.8% to 5.6% in Canada during November. Although, today’s unemployment report showing numbers from December was expected to increase to 5.7%. It remained unchanged though at 5.6%. The employment change also jumped massively in November by 94.1k, although today it was expected to increase by only 6.8k. It beat expectations increasing by 9.2k
- Canadian RPI – The prices of raw materials have been declining for three months and in October they fell by 2.4%. Today’s number, which was for November, was expected at 0.4%, but we saw yet another negative surprise. It declined by a massive 11.7%.
- US Average Hourly Earnings – Average hourly earnings missed expectations last month as they increased by 0.2% in November against 0.3% expected. Today, earnings were expected to have increased by 0.3% again in November, but they finally beat expectations for once increasing by 0.4% which gave the Buck a boost.
- US Non-Farm Employment Change – Non-farm employment change increased by 155k in November and today’s number for December was expected to come at 179k. Although, it posted a surprising jump to 312k. This is the biggest increase in nearly two years, just like the ADP report yesterday.
- US Unemployment Rate – The US unemployment rate was expected to remain unchanged as in the previous several months at 3.7%. But, it jumped higher to 3.9%, although the participation rate of people seeking unemployment jumped 2 points higher as well, so that has affected the unemployment rate.
- US Final Services PMI – The US final services PMI declined to 53.4 points in November and today’s number which is for December is expected to tick higher to 53.5 points. Although, we might see another positive surprise.
- FED Chairman Powell Speaks – The head of the Federal Reserve Jerome Powell is due to participate in a panel discussion titled “Federal Reserve Chairs: Joint Interview” at the American Economic Association’s Annual Meeting, in Atlanta. He will likely speak about the monetary policy, so it will be interesting to hear what path the FED is planning for this year.
Trades in Sight
- The trend has been bearish for 4 weeks
- The retrace higher is complete on the H4 chart
- The 50 SMA provided solid resistance
- The reverse is already underway
The 50 SMA (grey) is providing resistance
A while ago, we went short on NZD/USD. This pair has been on a strong downtrend for several weeks now but in the last few trading sessions it has retraced higher as the USD has retraced lower across the board. Although, the bullish retrace seems complete now since stochastic is overbought. The 50 SMA was also providing some strong resistance on the top side. The reverse lower is already taking place now and we missed our take profit target by just 1 pip after the US employment report was released, but the sellers seem to be in control now.
The US employment report seemed bad at first glance as unemployment jumped 2 points higher to 3.9%. But, that was due to the higher participation rate. The earnings and the new jobs posted some really decent gains so the Buck should resume the uptrend now. But, the price action is a bit slow which means that the market is in a bit of a doubt, so don’t bet your house on the Buck. Powell is coming shortly and traders might be waiting on the sidelines for him.