The economy of the Eurozone has been weakening for a long time and fears of a recession increased by the middle of last year. The European Central Bank (ECB) turned dovish and cut deposit rates to -0.50% in September, while restarting the QE programme of 20 billion Euro purchases a month in November. Now, it seems like those measures are starting to show the effects, with inflation picking up from below 1% and remaining at 1.3% for December. Construction activity also posted some decent gains for November. We have heard ECB member made some positive comments recently, suggesting that the economy is stabilizing now, after the slowdown and recent figures point at that as well, including today’s inflation and construction reports. Nonetheless, EUR/USD kept declining today.

The UK economy on the other hand, used to hold well until the middle of last year, but it started weakening as well and the slowdown is picking up pace. Today, retail sales for December came in negative again, which is the fifth decline and last month’s contraction was revised even higher today. This is the worst run since 1996 and odds for the Bank of England cutting interest rates soon keep increasing, which have turned the GBP bearish.

The European Session

• UK December Retail Sales – The UK retail sales for December was released a while ago and it was yet another disappointing report. Retail sales posted another decline of 0.6% in December, which is the fourth decline in the last five months. The GBP has turned bearish immediately after that and has lost nearly 100 pips. Below are the details:
  • UK December retail sales -0.6% vs +0.6% m/m expected
  • Prior -0.6%; revised to -0.8%
  • Retail sales +0.9% vs +2.7% y/y expected
  • Prior +1.0%; revised to +0.8%
  • Retail sales (ex autos, fuel) -0.8% vs +0.8% m/m expected
  • Prior -0.6%; revised to -0.8%
  • Retail sales (ex autos, fuel) +0.7% vs +3.0% y/y expected
  • Prior +0.8%; revised to +0.6%

• Eurozone Final CPI December Inflation  – In recent months we have seen some signs of stabilization. The ECB has also seen that and we have heard certain members pointing at that in recent weeks. Inflation fell to 0.7%-0.8% earlier last year, but has picked up above 1% and is stabilizing there now.Today, the final CPI (consumer price index) reading came in and headline, as well as core CPI remained at 1.3%, which should remove some of the burden off the ECB.

  • Eurozone December final core CPI YoY +1.3% vs +1.3% prelim
  • Final CPI +1.3% vs +1.3% y/y prelim
• Eurozone November Construction Report – The construction output report released last month came in negative, showing a 1.0% decline in the activity, but that was revised higher today to -0.5%. The YoY number was also revised higher from 0.3% to 0.9%. For November, today’s report showed a 0.7% expansion that month and the YoY number increased to 1.4%.
• China Continues to Try Tackling the Economic Slowdown – The GDP report released in the Asian session from China showed a 6.0% growth YoY, which is the slowest pace of growth in China for a long time. Later this morning, Chinese premier Li Keqiang said that China has confidence, ability to cope with risks, challenges. China will continue to cut taxes on a large scale in 2020. To keep economic operation within a reasonable range. China will continue to open up in education, technology and other sectors.

The US Session

• FED’s Harker Sounds Confident About Inflation – FED member Harker said earlier that he believes that inflation nearing 2% target and he expected 2% US growth this year. Data show labor market doing incredibly well. US economy looking ‘pretty good’. Fed interventions in the repo market are temporary. Whether Fed offers a standing repo facility is a debatable point. Says he doesn’t wan the Fed to be the first choice for liquidity, but a backstop.
• US December Industrial Production – The industrial production has been pretty weak in the US as well, just like in the Eurozone. In November it turned positive, but it turned negative again in December, as today’s report showed.
  • US December industrial production -0.3% vs -0.2% expected
  • Prior was +1.1% (revised to +0.8%)
  • Capacity utilization 77.0% vs 77.0% exp
  • Manufacturing production +0.2% vs -0.1% expected
  • Prior manufacturing production +1.1% (revised to 1.0%)

   

• US Prelim UoM Consumer Sentiment – The consumer sentiment weakened last year, but it has improved in the last few months. Last month the University of Michigan consumer sentiment indicator jumped from 95.7 poin ts to 99.2, which was revised higher today to 99.3 points. Today’s report ticked lower to 99.1 points.

Trades in Sight

Bullish USD/CAD

• The trend has changed for crude Oil
• The 50 SMA has turned into support
• The USD is turning bullish
• The support at 1.30 is holding

The 50 SMA is acting as support today

USD/CAD turned bearish in December, as the CAD turned bullish, following crude Oil after OPEC+ decided to cut production again and place new quotas of 50k barrels/day, on top of the previous ones. As a result, USD/CAD remained bearish all months and lost nearly 400 pips from top to bottom. This pair slipped below 1.30 at the end of the month, but reversed higher this month. The tensions in the Middle East gave crude Oil a push higher, but tensions abated after the US didn’t decide to attack Iran back, after Iran retaliated on US military bases in Iraq.

So, crude Oil retreated lower, with WTI losing around 8 cents and as a result, USD/CAD turned bullish, climbing above 1.30 again. Last week, this pair climbed just abov 1.31, but it has been retracing lower this week. Although, it seems like a support level has formed at 1.30 and tghe retrace is now complete, so we decided to go long on this pair and opened a buy signal a while ago. Now, USD/CAD has bounced off the 50 SMA (yellow) after the positive US retail sales for December, so this trade seems to be going well now.

In Conclusion

Today, the USD found its feet again. Inflation is stabilizing in the Eurozone and we are seeing some green shoots in the data here and then after more than a year of disappointing figures, but the Euro kept declining against the USD. Risk currencies and safe havens have been retreating as well, so the USD seems to be resuming its long term uptrend.