Rates: Finally signs of improvement coming from EMU PMI’s?
Chinese markets are closed for week-long holiday because of Lunar NY. This week’s risk aversion related to the coronavirus eases. Core bonds yields hit first intermediate support levels. Today’s EMU PMI’s are expected to finally show an upside surprise/signs of improvement and prevent a break lower in yield terms.
Currencies: Warning lights flashing for EUR/USD. PMI to decide on further GBP gains
EUR/USD dropped below 1.1066 support yesterday. A really strong EMU PMI is probably needed today to change fortunes for the single currency. The UK PMI might be decisive input for next week’s BoE policy decision. An material improvement might support the recent sterling rebound.
The Sunrise Headlines
- US stock markets ended near flat (up to 0.20%) as the Chinese coronavirus and mixed Q4/2019 earnings reports kept a lid on markets. Asian markets are trading mixed with China closed for Chinese NY. India outperforms (+0.68%).
- China boosted its efforts to contain the new coronavirus by expanding the travel ban beyond the epicentre of the coronavirus outbreak. For now, the World Health Organisation (WHO) declares the virus a local emergency.
- Japanese inflation picked up in December to 0.8% (Y/Y) up from 0.5% in November. The higher October sales tax and a steadying of gasoline prices pushed prices higher. Core inflation also rose to 0.7% from 0.5% last month.
- Japanese factory activity contracted for a ninth straight month in January albeit at a slower pace. The manufacturing PMI printed at 49.3, up from 48.4, reflecting increased output and new orders amid easing trade tensions.
- US president Trump will sign the USMCA deal on Wednesday during a ceremony at the WH, Reuters reported citing an administration official. The trade agreement will take effect once it has been ratified by all member nations.
- New Zealand’s inflation was stronger than expected in Q4/2019. CPI inflation rose to 1.9% (Y/Y) in Q4 from 1.5% in Q3, providing the RBNZ breathing room following improved business confidence and additional fiscal support.
- Today’s economic calendar is quite packed. Flash PMIs for January are due in the EMU and the US. Markets expect timid pickups this month. UK readings will be closely watched ahead of the BoE’s meeting next week.
Currencies: Warning Lights Flashing For EUR/USD. PMI To Decide On Further GBP Gains
Warning lights are flashing for EUR/USD
Yesterday, uncertainty on the coronavirus dominated global FX trading, even as the risk-off eased later in US dealings. The yen outperformed. USD/JPY touched an intraday low near 109.27 (close 109.49). EUR/USD held a tight range just below 1.11 before the ECB press conference. The pair jumped briefly higher as ECB’s Lagarde mentioned a modest rise in underlying inflation. The gain was (more than) reversed later as Lagarde said that the ECB should decide on which part of the curve it should operate if growth doesn’t pick up. Does this suggest some kind of ECB curve control? Whatever, German yields and the euro dropped, with EUR/USD breaking the 1.1066 support (close at 1.1059).
This morning, Asian (equities) are entering calmer waters going into the China Lunar New Year (Mainland China and Korea closed). US yields show tentative signs of bottoming and so does USD/JPY (110.50 area). At the same time, the ‘cooling’ of the global risk off for now doesn’t help the euro. EUR/USD hovers near 1.1050.
Today, the focus for trading might shift from the coronavirus to the eco data with the preliminary EMU and US PMIs scheduled for release. The EMU composite PMI is expected to rise from 49.3 to 50.3. Consensus sees manufacturing improving and services unchanged. The euro probably needs a substantial positive surprise to abort the recent slide. US PMIs are expected more or less stable. Lingering political tensions in Italy ahead of this weekend’s regional elections might be a source of euro caution too. From a technical point of view warning lights are flashing. A sustained break of the 1.1066/40 area would paint a H&S pattern on the charts with targets near/below 1.09. A rebound above 1.1180 would call off the ST downside alert, but that looks difficult ST.
Today, might also be key for GBP-trading. Yesterday, sterling showed a mixed picture, losing a few ticks against the dollar but gaining against a broadly weaker euro (close EUR/GBP 0.8422). Today’s UK PMIs will provide decisive input as the BoE debates a rate cut next week. The market expects a rise of the composite PMI from 49.3 to 50.7. The jump in CBI confidence suggests that an upward surprise is possible. If so, market expectations of a rate cut might be scaled back further, reinforcing the rebound of sterling. A confirmed break of the 0.8450 range bottom would open the way to the 0.8277 correction low.
EUR/USD: technical alert as pair is at risk of falling below key support.