The price action of last week, which was dominated by year-end cash flows and position adjustment from forex traders ahead of the new year, wore off as soon as we entered 2020 and yesterday markets were trading the sentiment. The sentiment was negative and risk currencies were retreating lower. Today, the sentiment deteriorated further pretty quickly, after a US drone killed the top Iranian military general, in Baghdad. Iran threatened with severe retaliation, which added further fuel to the fire.

Safe havens surged higher, with Gold ending up around $30 higher.Such comments kept the sentiment negative all day and in the afternoon, the US ISM manufacturing report added more fuel to worries for forex traders. This report was expected to show an improvement for December, but it showed that the manufacturing activity fell deeper in contraction. If next month’s number comes below 50, which it will, then we have a recession in this sector. The USD has turned bearish again after finding some bids as a safe haven earlier in the day.

The European Session

• UK December Construction PMI – Construction fell in contraction in the UK earlier this year and it bottomed at 44.2 points in October. We saw a slight improvement in November and it was expected to pick up again in December, to 45.8 points. But, it missed expectations, coming at 44.3 points instead.

• Pompeo Speaking on Soleimani’s Killing – Mike Pompeo said earlier this morning that the US wants to de-escalate the situation. Although he added later that the US strike on Soleimani was ‘wholly lawful’. He confirmed that the airstrike disrupted an imminent attack. More comments from him:

  • We don’t seek war with Iran
  • There is no doubt that US strike saved American lives
  • Soleimani was a guy with ‘enormous blood on his hands’
  • US got the strike right legally and strategically
  • US has anticipated a wide range of Iranian responses

• Germany CPI Inflation – German preliminary CPI for December came at +1.5% YoY against +1.4% expected. Below are the details of this report:

  • Prior +1.1%
  • CPI MoM +0.5% vs +0.4% m/m expected
  • Prior -0.8%
  • HICP +0.6% vs +0.5% m/m expected
  • Prior -0.8%
  • HICP +1.5% vs +1.4% y/y expected
  • Prior +1.2%

The US Session

• US ISM Manufacturing PMI – US ISM manufacturing report has been released and it is yet another disappointing number.
  • US December ISM manufacturing 47.2 points vs 49.0 expected
  • Lowest since June 2009
  • Prior was 48.1
  • New orders 46.8 vs 47.2 prior — lowest since April 2009
  • Prices paid 51.7 vs 47.8 expected
  • Prior prices paid 46.7
  • Employment 45.1 vs 46.6 prior
  • Full report
• Comments From ISM in the Report: 
  • “Backlog of orders is shrinking due to new order pace continuing to fall.” (Computer & Electronic Products)
  • “Due to sluggish sales, we have introduced promotions to generate increased sales.” (Chemical Products)
  • “Cautiously optimistic is the rule these days. Sales are decent, but we’re wondering what 2020 will bring. Still hedging that it will be successful – but maybe not as much as this year.” (Transportation Equipment)
  • “Starting to see suppliers try to pass on costs associated with tariffs. Uncertainty on the trade front continues to keep agricultural markets on the defensive.” (Food, Beverage & Tobacco Products)
  • “Down month-to-month, but up over last year.” (Miscellaneous Manufacturing)
  • “Anticipated large export orders did not materialize. As a result, expected U.S. production has decreased.” (Fabricated Metal Products)
  • “Dealer inventories have rebounded, and overall customer market has softened, resulting in corrections to near-term production schedules and a tentative forecast outlook.” (Machinery)
  • “Export markets continue to weaken for plastic resins – Mexican producers are actually trying to sell product back into the U.S. due to weak in-country demand.” (Plastics & Rubber Products)
  • “Our outlook for the first quarter of 2020 is positive. We have secured contracts from a number of former customers and expect sales growth of about 5 percent over Q4 of 2019.” (Textile Mills)
  • “The construction market seems to have slowed for end of year. Overall, it’s marginally up.” (Nonmetallic Mineral Products)
• US November Construction Spending – Last month’s report showed that spending in the construction sector declined by 0.8% in October, which was worrisome. But today’s report showed that US November construction spending increased by 0.6% against 0.4% expected. Below are the revisions from last month and the components of this report:
  • Prior was -0.8% and revised sharply higher to 0.1%
  • Construction spending rose 0.6% versus 0.4% estimate
  • private construction rose 0.4%
  • public spending rose 0.9%
  • private homebuilding rose by 1.9%
  • private nonresidential structures which includes manufacturing power plants dropped for the 3rd straight month. It fell -1.2% to the lowest level since November 2018
  • spending on public construction projects rose 0.9%
  • spending on local government construction projects rose by 0.8%
  • spending on federal government construction projects (which represent a small sliver of overall public construction) increase by 1.7%

Trades in Sight

Bullish EUR/USD

• The trend has ben bullish for more than 21 month
• The retrace down is complete
• The 100 SMA provided support
• Fundamentals turned bullish again after the ISM report

The 100 SMA held well on the H4 chart

EUR/USD has been bullish during December. The Euro doesn’t have many reasons to be bullish, but the USD turned bearish last month, due to the soft US ISM manufacturing report, as well as due to some year-end cash flows out of the US apparently.As a result, EUR/USD climbed from below 1.10, to 1.1240s during last month. But, in the last two days this pair has given back around 100 pips, particularly today. The sentiment has deteriorated today, after the killing of the top Iranian military general from the US.

Risk currencies have been making some sharp declines, while safe havens have surged higher. But, it seems now that the decline in EUR/USD has stopped. The price pierced below the 100 SMA (green) for a short while, but climbed above it again, which suggests that this moving average might have turned into support now.The 100 SMA provided resistance back in November for some time on the H4 chart, when this pair was bearish. The previous H4 candlestick closed as a spinning bottom/doji, which is a reversing signal, while the stochastic shows that this pair is oversold now. The price has bounced already and is now resuming the bullish trend after the soft ISM manufacturing report from the US.

In Conclusion

The sentiment turned quite negative today after tensions between US and Iran escalated again, following the air strike on Soleimani. The horrible US ISM manufacturing report for December hurt the sentiment further, especially for the USD, which has turned bearish again today.