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by Charalambos Pissouros

China Virus Fears Hit Market Sentiment, UK Jobs Data in Focus

Market sentiment took a strong hit overnight, after a new strain of coronavirus in China resulted in the death of 4 people, and raised fears of a further spread as millions of Chinese are preparing to travel for the Lunar New Year Holiday. In Japan, the BoJ stood pat, but upgraded its growth forecasts, signaling no urgency for further stimulus at the moment. In the UK, GBP-traders are likely to turn attention to the UK employment data for November.

Equities Slide, Safe-Havens Rise on Fears of Virus Spread

The dollar traded mixed against the other G10 currencies on Monday and during the Asian morning Tuesday. It gained versus NOK, NZD, AUD and SEK in that order, while it underperformed against JPY, GBP and slightly against CAD. The greenback was found virtually unchanged versus EUR and CHF.

USD performance G10 currencies

The weakening of the commodity-linked currencies Aussie and Kiwi and the strengthening of the safe-haven yen suggest a risk-off trading environment. Indeed, EU indices pulled back, perhaps on profit-taking after the latest upside run, or because the IMF trimmed its 2020 global growth forecasts, although it noted that the manufacturing activity may soon bottom out. US markets were closed due to the Martin Luther King Jr Day, while the risk aversion intensified during the Asian session today, with Japan’s Nikkei 225 and China’s Shanghai Composite sliding 0.91% and 1.41% respectively.

Major global stock performance G10 currencies

The catalyst was a new strain of coronavirus in China, which resulted in the death of 4 people, while the number of cases reached 223, mostly in the central city of Wuhan where the outbreak began, but also in Beijing and Shanghai. This spread fears as millions of Chinese are preparing to travel to their hometowns for the Lunar New Year holiday, which increases the risk for more people being infected. This may have been a déjà vu for investors, as it may have brought memories from the 2002/2003 spread of the Severe Acute Respiratory Syndrome (SARS), a virus which started from China and killed nearly 800 people worldwide.

As for our view, as long as the risk of further spreading remains on the table, investor morale could stay downbeat, with equities keep correcting lower as participants divert their flows to safe-haven assets, like the yen.

Apart from the news over the virus, we also had a BoJ decision overnight. The Bank kept its ultra-loose policy and guidance unchanged, reiterating that it “expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost”. That said, they revised up their growth projections for 2020, citing the effects of the government’s economic measures. They also added that downside risks concerning overseas economies seem to be still significant, although they have decreased somewhat.

Although the Bank remained ready to ease further if needed, the cautious optimism enhances our long-standing view that there is no urgency for policymakers to hit the cut button. With little room to ease further, we believe that they may prefer to wait for the picture to worsen significantly before they eventually consider to act. The yen did not react at the time of the decision, confirming that, for now, its traders prefer to keep their gaze locked on developments surrounding the broader market sentiment, rather than domestic monetary policy.

Nikkei 225 – Technical Outlook

Last week, Nikkei 225 failed to move above its key resistance, at 24162, which is marked by the highest point of December. This morning, we are seeing a strong slide in the Asian equities, due to the China coronavirus outbreak. From the technical side, the price is below its medium-term upside support line taken from the low of August 25th, which could help the bears to drag the index a bit lower in the short run.

If the price continues sliding for a bit more and drops below the 23610 hurdle, which is marked near the highs of November 8th, 26th of 2019 and January 8th of this year, this could clear the path for a further move down. We will then consider a possible test of the 23359 obstacle, a break of which may set the stage for a push to the 22931 level, marked by the low of January 8th. Also, that level could be seen as a “neckline” of a potential double top pattern.

On the other hand, if the price makes a run above the 24162 barrier, which is the highest point of December, this would confirm a forthcoming higher high and more buyers could see this as a good opportunity to step in. Nikkei 225 may then rise to the 24478 hurdle, which is the highest point of 2018. If the buying doesn’t stop there, a break of that hurdle could send the index in the direction of the 25254 level, marked by the highest point of October, 1991.

Nikkei 225 cash index daily chart technical analysis

GBP Rebounds Somewhat Ahead of Employment Data

Flying from Japan to the UK, the pound was the second gainer inline, recovering the declines it saw during the Asian morning Monday, after UK finance minister Sajid Javid said that Britain will not commit to sticking to EU rules in trade talks during the transition period, as well as a portion of the losses it posted on Friday following the disappointing retail sales data.

Even though the British currency rebounded yesterday, it's hard for us to find viable reasons for the recovery to continue. With UK PM Boris Johnson insisting that a trade agreement has to be reached before December 2020 and EU Commission President Ursula von der Leyen saying that it would be “basically impossible” to agree on everything by then, Javid’s comments add to the element of uncertainty surrounding Brexit, keeping the risk a disorderly exit at the end of the year well on the table. On the economic front, last week, UK data disappointed largely. This combined with recent dovish remarks by several BoE policymakers, including Governor Carney, have increased speculation with regards to a rate cut, perhaps as early as at the Bank’s upcoming meeting.

As for today, GBP traders may pay attention to the UK employment report for November. The unemployment rate is expected to have held steady at its 45-year low of 3.8%, while average weekly earnings including bonuses are expected to have slowed to +3.1% yoy from +3.2%. The excluding bonuses rate is forecast to have ticked down as well, to +3.4% yoy from +3.5%. According to the IHS Markit/KPMG & REC Report on Jobs for the month, permanent starting salaries increased at the slowest rate since December 2016, while temp billing eased to a three-year low. This adds to the case for a slowdown in earnings, perhaps even more than the forecasts currently suggest. Something like that would increase the chances for a BoE cut, but what could seal the deal may be Friday’s PMIs for January, as they will be a first sign on how the economy has been performing in the post-election era.

UK real wage growth CPI average earnings

EUR/GBP – Technical Outlook

After reversing back to the upside in mid-December, EUR/GBP started slowly grinding higher, while trading above a short-term upside support line taken from the low of December 31st. At the same time, the pair is struggling to break above the 0.8595 barrier, which continues to keep the rate down from the end of December. Given that EUR/GBP is stuck in this position, we will remain cautiously bullish, as long as it stays above the aforementioned upside line.

Even if we see a rate-drop below yesterday’s low, at 0.8520, the bulls could still have a chance to jump in near the above-mentioned upside line. If so, EUR/GBP could drift back to the upside again, potentially overcoming the 0.8520 hurdle and targeting yesterday’s high, at 0.8553. If that area is no match for the bulls, a break of it might open the door for a move to some higher levels, like the 0.8577 hurdle, or even to the 0.8595 barrier, which is the current highest point of January.

Alternatively, if the aforementioned upside line breaks and the rate falls below the 0.8487 zone, which is the lowest point of last week, this may spook the bulls from the field and allow the bears to dictate the rules for some time. The pair could then drift to the 0.8470 obstacle, or even to the 0.8453 hurdle, marked near the lows of December 31st and January 8th. EUR/GBP might stall around there for a bit, or even correct back up slightly. That said, if the bulls find it hard to push the rate back above the previously-discussed upside line, such activity could lead to another round of selling, possibly bringing the pair back to the 0.8453 zone. If that zone eventually breaks, this may clear the path to the 0.8413 level, marked by the high of December 16th.

EUR/GBP 4-hour chart technical analysis

As for the Rest of Today’s Events

From Germany, we get the German ZEW survey for January. The current conditions index is expected to have moved higher, but to have stayed within the negative territory. Specifically, it is expected to have risen to -13.8 from -19.9. The economic sentiment index is also expected to have increased, to 15.0 from 10.7.

In politics, the impeachment trial against US President Trump is scheduled to begin, with Republicans and Democrats trying to find a resolution for setting the rules for the trial. The length of the process is unknown for now, but bearing in mind that the Republican majority in the Senate, we see the scenario of Trump being ousted as unlikely.

In Davos, Switzerland, the 50th annual meeting of the world economic forum begins and will last until Friday. Business leaders, key politicians and central bankers gather with the aim to improve the state of the world. Among attendees will be US President Donald Trump, US Treasury Secretary Steven Mnuchin, ECB President Christine Lagarde and German Chancellor Angela Merkel. The spotlight could fall on Donald Trump, who skipped the event last year.

As for tonight, during the Asian morning Wednesday, Australia’s Westpac consumer sentiment index for January is expected to have declined 0.8%, after falling 1.9% in December.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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