US Session Forex Brief, March 25 – Big Picture Remains Gloomy for Eurozone Economy Despite Despite an Increase in Business Climate
Skerdian Meta • 5 min read
Last week the market sentiment turned negative again for the second time this month, after it did so for the first time at the beginning of March. In the first week of this month, it was geopolitics which turned the sentiment negative as the India-Pakistan and China-Australia tensions increased. Last week, economics hurt the sentiment as the FED became the fourth major central bank to shift from hawkish, to neutral or dovish.
Besides that, the manufacturing reports from Germany and the Eurozone showed a deeper contraction which made the bigger picture gloomier for the Eurozone economy. Donald Trump did his part as well, pushing for tariffs on European autos right after the terrible manufacturing numbers were released, so we left markets on quite a dovish mode as the week closed.
Today, the sentiment seems to have improved somewhat as stock markets and other risk assets climbed higher during the Asian session and the beginning of the European session. But, this looks just like a retrace because the fundamental situation remains unchanged and the economists from the European Central Bank (ECB) and the Ifo institute confirmed that today. Speaking of the Ifo, their German business climate indicator showed an improvement for this month, but the sentiment for the manufacturing sector remains in several-year lows. Besides, two ECB members pointed to further easing from the ECB if the economy continues to remain weak or deteriorates further.
- Don’t Expect the SNB to Hike Anytime Soon – Swiss National Bank made interest rates negative several years ago and they have been keeping them at that level since then, which stand at -0.75%. The economic situation in the Eurozone which surrounds Switzerland has become worse in the past year, so no one is thinking about hiking rates soon. Chairman Thomas Jordan has said recently that the negative interest rates are set to remain an important instrument for years to come and he stood by his word today repeating that no rate hikes are to be expected for a couple of years. But, the CHF trades the market sentiment more than economics, so CHF shorts should be careful right now.
- No FED Rate Hikes from Evans Either – The Chicago Fed president, Charles Evans was commenting early this morning that FED rates are at a good place and this is a good time to pause. He added that global growth concerns are another reason to hold policy, the slowdown in China adds to worries on global outlook, and negative shock risk is not unusually higher or lower. Yield curves have shown slightly higher chance of recession, Q1 growth looks like it’s going to be weaker but expects a rebound in economic activity in Q2. The monetary policy is almost at a neutral level. He is nervous that CPI pressures aren’t stronger, so low inflation expectations call for monetary policy to be paused.
- German Ifo Business Climate – March Ifo business climate index Germany increased to 99.6 points form 98.5 previously, beating expectations of 98.7 points as well. The headline looks good since it reverses the softening trend, but the details are still pointing to more weakness. The climate in the manufacturing sector remains pretty weak as the 6.6 point reading is the weakest posted since February 2016. Besides that, Ifo also notes that the expectations component of the manufacturing sector fell to its lowest level since November 2012. The comments from the Ifo were also dovish today.
- ECB Members Sound Dovish – ECB member Hanson took the stage initially today, saying that the Eurozone slowdown may continue in the medium-term, QE (quantitative easing) could be restarted in the event of a major shock. He expects the TLTRO-3 program terms to be ‘a bit less generous’ and tiered deposit rate hasn’t really been discussed. ECB’s Coeure also spoke today saying that the ECB is not at the limit of what it can do yet on monetary policy.
- One Rate Hike is the Maximum for FED’s Harker – Philly Fed President, Patrick Harker, was speaking in London earlier today. He see one rate hike ‘at most’ this year and remains in a ‘wait and see’ mode on policy changes. Economic risks tilt very slightly to the downside, but the outlook remains pretty good and positive. He expects US economic growth a bit above 2% this year and inflation running around Fed’s target, edging slightly downwards. Harker continued, dot plots not a commitment to what the Fed will do. Market has priced in less optimism than the FOMC and he sees neutral rate as being one or two moves away. Inflation is not running out of control, would want to see inflation rise and stay above 2% for a bit before hiking this year. Would also need to see strong labour market and he doesn’t see circumstances for a rate hike in the short-term.
The US Session
- Theresa May to Call for Third Meaningful Vote Tomorrow – ITV reported this a while ago and the Prime Minister’s office confirmed it, but only if there is a prospect of success. May’s spokesman added that the government understands there is no necessity to hold meaningful vote before March 29, May wants to change departure date in legislation as soon as possible. The sense from the cabinet is that it would be in Britain’s best interest to leave with a deal and the PM does not believe in revocation of Article 50. But May failed to convince the DUP Party to shift position as the spokesman also said that the DUP advised May that nothing had changed in their position on divorce deal.
- US Chicago Fed National Activity Index – The Chicago National Activity index has been negative for some time. In January, it declined to -0.43 points, while today it came a bit better at -0.29 points. Although, January’s number was revised higher to -0.23 points, which means that this index fell further in February, but let’s wait and see if February’s number will be revised higher later on.
- Belgian NBB Business Climate – Belgian Business climate has been deteriorating as well, just like in Germany and the rest of the Eurozone. Although, it was expected to get worse today and decline further to -2.0 points form -1.7 points previously. But, it beat expectations coming at -0.7 points, which is still negative but better than the previous figure.
- The trend turned bearish last week
- Fundamentals are pointing down for the Euro
- Moving averages are providing resistance
- The pullback higher is complete
Now the MAs look like a good place to sell this pair
A while ago we went short on EUR/USD. This pair turned bearish last week, especially aft the horrible figures from the German manufacturing sector. Although it has retraced higher during the Asian and the European sessions, the pullback seems complete now as stochastic suggests. The 20 SMA (grey) and the 200 SMA (purple) have been providing resistance on the top side for hours, and the previous candlestick closed as a doji which is a reversing signal.
The German and Belgian business climate showed an improvement for this month, but the ECB and other economists still see more weakness coming up for the Eurozone. So, the situation for the Euro remains fragile but the USD is not running away either as comments form FED members today suggest that the FED will remain in pause for quite some time.