The ECB has done well to refrain from rate hikes thus far

US Session Forex Brief, Feb 21 – USD Trades Sideways After FOMC Minutes, While Com Dolls Tumble on China Statements

Posted Thursday, February 21, 2019 by
Skerdian Meta • 5 min read

Yesterday in the evening, the FED released the FOMC minutes from their last meeting which basically reinforced what the traders already knew. Slower growth and inflation abroad have muted domestic inflationary pressures, business investment has decreased, while downside risk appears to have increased, even as the labor market remains strong and inflation near target levels. Pretty much what forex traders already knew from recent comments by various FED members; uncertainty has increased but it hasn’t materialized too much in the US economy as it has done in other major global economies.

The USD declined before the minutes were released but it reversed higher after the publication as traders got relieved that the FOMC minutes weren’t any more dovish. Since then, the USD and the rest of the major currencies have traded sideways apart from the commodity Dollars. Reuters published an article saying that China closed the Dalia port to Australian coal imports which sent the Aussie 120 pips lower after a short lived jump on positive employment figures from Australia during the night. That has dragged the Kiwi lower as well. The Foreign Ministry of China said that they have no information on the ban, but the damage has already been done to the Com Dolls.

We had a round of economic data from Europe this morning which didn’t look too good, once again. Inflation declined in Germany and France while the decline in German manufacturing continues, which put the Eurozone manufacturing sector in contraction this month for the first time in a long period. The ECB released its minutes as well today where they highlighted that near-term growth momentum was likely to be weaker than earlier expected. Eurozone growth could be below potential for several quarters.

  • German and French CPI Inflation – The German final reading for the consumer price index in January came at -0.8% as expected. The French CPI came a bit higher at -0.4% against -0.5% expected. Well, the ECB didn’t look at these figures two weeks ago when the meeting of today’s minutes was held.
  • Eurozone Flash Services PMI – French services PMI came at 49.8 points today for February against 48.6 points expected. An improvement, but it still remains below the flat level at 50 points, which puts this sector in contraction since it has been below this level in the last three months. Services in Germany made a turnaround as well, coming at 55.1 levels from 53.0 points previously. That’s a decent reading and it helped increase the Eurozone services PMI number to 52.3 points from 50.8 previously, which was revised to 51.2 points today.
  • Eurozone Manufacturing PMI – French flash manufacturing PMI fell into contraction in December, but it has improved and today it came at 51.4 points against 51.0 points expected. Although, German manufacturing declined further to -47.6 points from 49.7 points previously which dragged the Eurozone number into contraction as well, as this indicator fell to 49.2 points.
  • More MPs on May’s Side Threaten to Leave the Party – The Guardian reported this morning that two more Conservative MPs would leave if May doesn’t change the Brexit course. Justine Greening and Dominic Grieve has said that they would not be able to support the government under a no-deal scenario. If they leave, Theresa May will be left with no majority.
  • UK CBI Industrial Order Expectations – The industrial order expectations turned negative again in January, coming at -0.1% after being positive for two months. Today, this indicator was expected to deteriorate further and come at -5 points, but it turned positive coming at 6 points.
  • Three Tory MPs Leave – Heidi Allen, Anna Soubry and Sarah Wollaston are said to have left the UK Conservative Party and joined the Independent Group. This makes 11 MPs in this newly formed group. I thought that made 10, but who can keep count of the British politics right now?
  • ECB’s Nowotny Speaking – The Governing Council Member Nowotny said earlier today that there’s a debate if policy normalization should go on. Markets don’t see a rate hike this year, I can’t see the need for more liquidity, and negative rates should have been ended earlier. So, no rate hike then, it’s confirmed.
  • China Promising to Buy More Agricultural Products From the US – China is said to propose purchasing $30 billion more in US agricultural products. That includes soybeans, corn and wheat. The offer would be part of the memorandum of understanding and these purchases would be on top of pre-trade war levels.

The US Session

  • FED’s Bullard Speaking – The headline comment was that the message is that rate normalization is coming to an end. That gave the USD a kick lower. The Fed is in a very good place, no urgency to act, rates are ‘a bit tight’ right now, the balance sheet decision is to hopefully come in ‘next couple of meetings’. He continued, interest rates are high in comparison to the global environment we’re in and he argued against a December rate hike. “I felt like we went too far” with December decision. The Fed might miss 2% inflation target again this year. Dovish comment for the USD from Bullard.
  • FED’s Bostic Speaks The headline comment was that the US economy is doing pretty good. There’s not much faster inflation than this, the Fed is close to neutral policy rate now and it is imprudent to project policy path given uncertainty. Hawkish on the economy, but dovish on the USD then.
  • Canadian Wholesales MoM Wholesale sales have been negative in Canada in three months out of the last four. They were expected to be negative for December as well, but instead they grew by 0.3% against -0.2% expected. That’s a nice turnaround, and the ADP Non-Farm Employment Change grew by 35.4 k after having declined in the previous reading.
  • US Unemployment Claims The unemployment claims used to be in the 210-220k region before, but they grew 20-30k higher in the last three months. Today, unemployment claims were expected to decline to 228k, but they fell further to 216k. The four-week average came at 235.7 5k versus 231.7 5k last week. This is the highest level for the average since January 20, 2018
  • US Durable Goods Orders Durable good orders posted a decent increase of 1.2% for December, albeit lower than the 1.6% jump expected. Core durable goods orders increased by 0.1% against 0.3% expected. At least they turned positive in December after a 0.4% decline we saw in November. But, capital goods orders non-defense excluding aircraft came at -0.7% against +0.2% expected. Prior capital goods orders for November were revised even lower from -0.6% to -1.0% while capital goods shipments non-defense excluding aircraft came at +0.5% against 0.0% expected.
  • US Philly Fed Manufacturing Index This manufacturing index has been declining in the recent months, although in January it jumped higher to 17 points. It was expected to turn lower again today to 14 points but the actual number came at -4.1%, showing a decline in manufacturing activity for this month.

Bullish USD/JPY

  1. The trend has been bullish for two months
  2. The pullback is almost complete
  3. The 200 SMA is providing support on the H4 chart

The 200 SMA is holding well in USD/JPY

A while ago, we went long on USD/JPY as this pair was retracing down on the H4 chart. The stochastic indicator is almost oversold which means that the pullback lower is nearly over. Besides that, the 200 SMA (purple) which used to be resistance before has now turned into support for this pair and it has been holding well during most of this week. Let’s see if the uptrend will resume soon again now.

In Conclusion

The US data was sort of mixed today, with the Philly FED manufacturing index falling into negative territory for the first time since May 2016. Although, the USD is reversing back up now. Flash manufacturing and services PMI report will also be released soon, so let’s see what direction they will give the USD.

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