• Rates: German and US 10-yr yield lose first support levels
    The Chinese coronavirus took markets hostage yesterday, resulting in high-volume risk-off trading. Core bond yields and main European/US equity markets lost/test first important support levels. Tensions ease this morning in Asian dealings, but it’s too soon to call an end to this virus episode. Fed and BoE meetings will grab some attention later this week.
  • Currencies: EUR/USD stays under pressure. 1.099 area next support
    Yesterday, most smaller, less liquid currencies were hit quite hard as the corona related risk-off continued. Moves in the major cross rates including USD/JPY and EUR/USD remained smaller. Still, the gradual EUR/USD downtrend stays in place. The recent sterling rebound stalled as markets are counting down to the BoE policy decision

The Sunrise Headlines

  • WS suffered its worst day in over 3 months with losses up to -1.89% (Nasdaq) as worries about the economic impact of the coronavirus intensified. Losses in Asia are contained this morning apart from the ones returning from long weekend.
  • With the death toll from the coronavirus toping 100 and more cases being reported in China and abroad, the US raised its travel alert for China to level 3, the second highest and urges citizens to rethink traveling plans to the country.
  • US new home sales unexpectedly fell to 694K in December from 719K in November, in line with a drop in mortgage applications and a pickup in prices. Nevertheless, low rates and a robust labor market underpin housing demand.
  • ECB’s Yves Mersch warned the central bank’s extensive stimulus may stoke up asset bubbles, fuelling financial instability. Mersch urged for fierce vigilance regarding the monetary policy toolkit and its financial-stability consequences.
  • EU Brexit negotiator Michel Barnier announced the EU-UK trade deal will need significantly longer than the 11 months until the end-of-year deadline with many questions left open, warning for the risk of cliff-edge Brexit in 2021.
  • Canada’s government is the last party to kick off the ramification process for the new USMCA trade agreement and urges lawmakers to quickly approve the pact. President Trump is expected to sign the new deal into law tomorrow.
  • All eyes are on the US today with durable goods orders and consumer confidence data due. Investors will closely watch Q4 earnings and listen to ECB speakers. Greece, France, Italy, the US and the UK tap the bond market

Currencies: EUR/USD Stays Under Pressure. 1.099 Area Next Support

EUR/USD holding near recent correction low

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The risk-off due to the outbreak of the corona virus further spread through markets yesterday. In FX smaller, less liquid currencies (SEK, NOK, CE currencies like the HUF, PLN and the CZK) were hit the most, irrespective of their eco fundamentals. The Swiss Franc touched the strongest level against the euro since April 2017. In the major FX crosses (EUR/USD, USD/JPY and even EUR/JPY) price swings remained modest. USD/JPY held a sideways range near the 109 level (close 108.90). EUR/USD kept tentative negative bias. A mediocre German IFO didn’t help the euro. EUR/USD finished the day marginally lower at 1.1019.

Overnight, most Asian equity indices are losing further ground, but the pace of the decline slows. Headlines on the spreading of the virus and its consequences still dominate the news. The offshore yuan (USD/CNY 6.97) shows first signs of potential bottoming. The Aussie dollar was hit hard yesterday. AUD/USD currently stabilizes near 0.67. USD/JPY tries to regain the 109 handle. EUR/USD also gains a few ticks.

Today, headlines on the coronavirus will continue to dominate trading. At the same time, there are plenty of US eco data (durable orders, consumer confidence, Richmond Fed Manuf. index) and important corporate earnings. Question is whether/to what extent they will be able to counterbalance the corona-related risk-off. In case of good earnings/guidance from high profile corporates and solid confidence data, the risk-off might gradually ease. However, it’s not easy to draw conclusions for EUR/USD. Of late, the EUR/USD trend was south, a bit irrespective of the eco or other news. So, we look for technical signals. The EUR/USD technical picture deteriorated after last week’s break below 1.1066/40. It paints a H&S pattern with targets near/below 1.09, with intermediate support at 1.0990. A rebound above 1.1120 would be a first sign that downside momentum is easing.

The pond failed to extend its recent rally Friday, despite a strong PMI. For sterling longs, this was the trigger to turn more cautious going into this week’s Bank of England policy decision. Yesterday, EUR/GBP closed the day even marginally higher despite overall euro softness. Today, the CBI retail data could get some more attention than is usually the case, but we expect more technical, order driven trade for sterling. The 0.8388/0.84 area should be solid support going in the BoE decision.

EUR/USD: trend remains south. Intermediate support at 1.0990

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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