US Session Forex Brief, Jan 23 – Weakening Eurozone Economy and the ECB in Focus

The market sentiment seems to be leaning slightly on the positive side side today once again. Safe havens such as GOLD and the JPY have been losing ground as Gold reversed down from the 100 SMA on the H1 chart which used to provide support until last week. Now it seems to have turned into resistance sending Gold lower, while USD/JPY is heading higher. The GBP is continuing to stretch the recent bullish trend further to the upside as markets get increasingly convinced that there will not be a no-deal Brexit.

The positive sentiment can’t be observed on risk currencies today because there were some development in Australia during the night which has distorted the Aussie. The employment report form Australia released during the Asian session was pretty upbeat as new jobs grew more than expected, while the unemployment rate fell to 5.0% against 5.1% expected. But, the National Australia Bank (not the central bank) increased interest rates joining the others in the major four, which highlight the difficulties that the RBA (central bank) is facing regarding hiking interest rates. This is a long term problem and AUD/USD has lost around 70 pips today.

Although, the most important events today are on the European calendar. The German services and French manufacturing activity increased this month, but German manufacturing and French services declined, falling into contraction. Both the manufacturing and services figures for the whole of the Eurozone came lower than expected, falling close to contraction. The ECB left rates unchanged and the press conference is coming soon, so let’s see if they will will turn really dovish today.

The European Session

• China Denies Rumours of Cancelled Trade Talks – China’s Commerce Secretary spokesperson was on the wires early this morning speaking after we saw a report on the Financial Times a couple of days ago suggesting that talks between China and the US have been disrupted. He commented that the report on cancelled US-China mid-level trade talks is untrue. China and US are in close contact to prepare for Liu He’s trip later this month
• German Manufacturing and Services PMI – The services PMI for this month beat expectations coming at 53.1 points against 52.2 points expected, although last month’s number was revised lower. The manufacturing PMI missed expectations coming at 49.9 points against 51.4 points expected.
• French Manufacturing and Services PMI – The French manufacturing PMI came out of contraction that we saw in December, beating expectations of 50.0 points. The number for this month came at 51.2 points. The services declined once again coming at 47.5 points from 49.6 points previously, which was revised lower today to just 49 points.
• Eurozone Manufacturing and Services PMI – For the whole of the Eurozone, today’s reports were a double whammy to the downside. Services declined to 50.8 points against a slight increase to 51. 5 points expected. Manufacturing fell further to 50.5 points against 51.5 expected.
• SNB’s Jordan Seems Incapable of Doing Anything – The Chairman of the Swiss National Bank was speaking earlier and the main comment was that negative rates and intervention pledges have been insufficient. He added that the SNB still has some room to maneuver on interest rates, there are certain geopolitical risks for the global economy. No reason to change SNB monetary policy since uncertainties for global economy have increased. The SNB is to continue its current monetary policy for some time. Dovish remarks.
• EU Asks for Proposals from the UK Soon, Otherwise… – The European Parliament released a statement calling for Britain to clarify its position in the coming days. EU calls on British government to work with all political parties in the House of Commons to overcome Brexit deadlock and reiterates that the European Parliament cannot give its consent to Brexit withdrawal agreement without Irish backstop. Barnier also asked the UK to hurry up or they will end up with no deal.
• IMF’s Lagarde Still Trying to Put on a Happy Face – After sounding pretty positive yesterday, the IMF head Christine Lagarde said that China’s economic slowdown is legitimate and under control. But it would constitute a real issue if the slowdown is fast.
• BOE’s Carney Speaks – The Bank of England chairman Carney was speaking earlier saying that there is no magic level of interest for the BOE to turn to. It’s not automatic which way policy would go in the event of a hard Brexit but the central bank has policy room on both sides. There’s still stimulus going to the economy, but not much as speed limits of global economies have gone down.
• ECB Leaves Rates Unchanged – The ECB left main refinancing rate 0.00% and deposit facility -0.40%. The statement comments were to keep rates unchanged at least through the summer of 2019 or as long as was needed for inflation to converge towards the ECB’s target.

The US Session

• ECB Press Conference – ECB president Mario Draghi held the usual press conference after the interest rate decision. Here are some of his main comments: Underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth. But I’m not sure about that since core inflation is barely holding up at the lower limit of 1.0%, while headline inflation has tanked in the last few month, so don’t be so certain Super Mario. He accepts that the risks to the Eurozone have moved to the downside. Incoming data have continued to be weaker than expected. Slowdown is due to fall in external demand as well as some country-specific reasons. Still trying to hide the head in the sand, in my opinion.
• US Unemployment Claims – The unemployment claims have been in the 210k-220k region for many weeks. Last month they came at 213k against 219k expected. Today expectations were for a 219k reading again, but they came at 199k today, finally breaking the range.
• Wilbur Ross Not Confident About US-China Trade Talks – US Secretary of Commerce Wilbur Ross commented just now that the US and China are miles and miles away from a trade resolution. It’s too early to judge where US and China talks are headed. The loss of paychecks from shutdown is like a guaranteed loan for the US. Those affected can get low rate bridge loans. He adds: there is a fair chance we eventually get to a deal. I do believe US and China both want a deal. People shouldn’t think next week will be the solution to all the problems in the world
• US Flash Manufacturing PMI – Flash manufacturing numbers have been declining since October when they peaked at 55.9 points. The number for December has been revised lower to 53,8 points from 53.9 previously and today we are expected to see another decline to 53.5 points.
• US Flash Services – The US flash services have also been declining since they peaked at 54.7 points in October. Although, the number for November was revised higher today to 54.4 points from 53.4 points previously. This month’s number is expected at 54.0 points.
• US CB Leading Index – The CB leading index which shows the change in the level of a composite index based on 10 economic indicators increased by 0.2% in November, but it is expected to turn lower today and decline by 0.1% for December.

Trades in Sight

Bearish EUR/GBP

1. The trend continues to be bearish for this pair
2. The retrace higher is complete
3. The 20 SMA provided resistance

EUR/GBP still remains on the bearish trend

The trend for EUR/GBP has turned bearish two weeks ago after being on a strong bullish trend for two months. It continues to slide lower, picking up pace along the way as the markets get increasingly convinced that the UK will not end up leaving the EU without a deal. We saw a retrace higher earlier during the European session, but the 20 SMA (grey) provided resistance and after a doji candlestick, this pair turned lower again.

In Conclusion

The Euro has made a roller-coaster ride on Mario Draghi’s comments in the last 30 minutes. EUR/USD is still crawling higher despite the Eurozone economy heading into contraction/stagnation. Well, the comments from Wilbur Ross in the last hour have hurt the USD somewhat as the Buck declines across the board.