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by Charalambos Pissouros

Coronavirus Stays in Spotlight; EUR Slides on ECB, EZ and UK PMIs in Focus

Most major EU indices traded in the red for another day, and while the US ones managed to gain somewhat, the negative sentiment rolled over the Asian morning today. Investors stayed concerned over a coronavirus spread, as Chinese travel home and abroad due to the Lunar New Year long holiday. The ECB held policy steady yesterday, but Lagarde sounded more dovish that many may have expected. As for today, the economic releases that may attract the most attention may be the Eurozone an UK preliminary PMIs for January.

Investors Stay Concerned Over a Coronavirus Spread

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

USD performance G10 currencies

Once again, there is no clear pattern in the FX performance pointing to the direction of the broader market morale. However, turning our gaze to the equity world, we see that most major EU indices continued sliding on concerns surrounding the coronavirus.

The US ones managed to hit positive territory, with the exception being Dow Jones, which slid 0.09%. Nasdaq was even able to hit a new record closing, aided by the stellar rebound in Netflix, after sliding earlier this week due to disappointing forecasts. What may have helped the US equities may have been news that Gilead Sciences Inc. have been examining their experimental drug on Ebola as a possible cure for the new virus, as well as  the announcement of the World Health Organization (WHO), which said that was “a bit too early” to call for a global health emergency.

That said, the organization added “Make no mistake, though, this is an emergency in China”. Asian bourses traded slightly in the red today, with China’s National Health Commission announcing that the number of deaths has increased to 25, while the confirmed cases rose to 830. The exception was Japan’s Nikkei 225, which gained 0.13%. There were also reports suggesting that apart from Wuhan, other cities are taking similar measures in order to contain the outbreak. However, with the Lunar New Year Holiday already underway we still see high risk of the spread accelerating as millions of Chinese travel to their hometowns, but abroad as well.

Major global stock indices performance

Chinese markets will stay closed until next Friday due to the holidays, but headlines pointing to more deaths and cases could well leave their mark on other global indices. Risk-linked currencies, like the Aussie and Kiwi, may also feel the heat, while safe-havens may continue attracting flows. Thus, we repeat once again that AUD/JPY and NZD/JPY may be among the preferable currency pairs for those who want to track market sentiment through the FX world.

AUD/JPY – Technical Outlook

From January 17th, AUD/JPY continues to trade below a short-term downside resistance line drawn from the high of that day. Another slightly bearish aspect is that the pair is trading now below the 200 EMA on the 4-hour chart, which some bears might see as a good sign to stay in the game. As long as the rate remains below that downside line and the 200 EMA, we will stay somewhat bearish, at least in the short run.

Given that we saw AUD/JPY rebounding strongly from the 74.65 yesterday, in order to consider further declines, we will wait for a rate-drop below that hurdle first, as such a move would confirm a forthcoming lower low. This is when the path could be cleared towards the 74.42 obstacle, a break of which may lead the pair to the 74.08 area, marked near the closing and opening levels of January 7th and 8th respectively.

In order to consider the upside, at least in the short run, we need to see a push, not only above the previously-mentioned downside line, but also above the 75.36 barrier, marked near yesterday’s intraday swing high. Then the rate would also be placed above its 200 EMA, which some bulls might see as a positive. The pair could then travel to the 75.49 obstacle, a break of which could send it to the 75.66 zone, which is an intraday swing high of January 21st. Initially, AUD/JPY might stall around there, but if the buying doesn’t stop, a further uprise may bring the pair to the 75.89 level, marked by the high of this week.

AUD/JPY 4-hour chart technical analysis

Lagarde Appears more Dovish than Expected, EZ and UK PMIs Today’s Main Releases

Apart from the news surrounding the coronavirus, we also had an ECB policy gathering yesterday. The Bank kept is policy and guidance unchanged as was largely anticipated, with the focus falling on President Lagarde’s press conference, as well as the report over the Bank’s strategic review. The new ECB Chief repeated that they stand ready to use all their instruments if needed and that the risks are still tilted to the downside but less pronounced, as surveys and data still point to some stabilization. She also added that there are some signs of an increase in inflation, something that may have trigger the initial spike higher in the euro, but she continued saying that this is line with their expectations, with traders quickly abandoning the currency and allowing it to slide nearly 70 pips lower.

ECB interest rates

With regards to the strategic review, Lagarde said that the aim will be reviewed, as well as the Bank’s toolkit and how inflation is measured. “How we measure inflation is clearly something we need to look at,” she noted. This will be key for market participants trying to figure out how the Bank will act moving forward, as it may also result in a change in the target. For example, officials could signal commitment to the 2% rate, as most of the other major central banks, but this would mean more stimulus for hitting that goal, as any undershooting may not be dealt with the same tolerance as in the past. The review is expected to be completed in November or December, but Lagarde added that the Bank would stick to its current policy for now, which means that policy moves could still occur before a new strategy is adopted.

The euro tumbled, perhaps as investors may have been positioned for something more optimistic following the previous meeting, where Lagarde initially talked about the stabilization signs, as well as after the latest rebound in inflation. It would also be that, given that the Riksbank brought interest rates out of the negative waters, there may have been some hopes that Lagarde could hint that her Bank could start normalizing if things continue to improve in the bloc. The absence of comments on that front may have also served as a disappointment.

As for today, focus is likely to turn to Eurozone’s preliminary PMIs for January. The manufacturing index is expected to have risen, but to have stayed within the contractionary territory, while the services one is forecast to have held steady at 52.8. This would drive the composite index up to 51.2 from 50.9. A slight improvement could add to the case that the Bank may refrain from acting ahead of the strategic review’s completion, and thereby cause the euro to recover a portion of the losses it posted yesterday. However, a disappointment in the PMIs could work the other way, raising speculation that some more easing may be needed in the months to come.

Eurozone PMIs

We get preliminary PMIs for January from the UK as well. The manufacturing index is forecast to have ticked up to 47.6 from 47.5, while the services one is anticipated to signal contraction after last month’s stagnation. Specifically, it is expected to have declined to 49.4 from 50.0. Strangely though, the composite PMI is forecast to have risen to 50.5 from 49.3.

UK PMIs

Last week, UK economic data disappointed largely, which combined with recent dovish remarks by several BoE officials, including Governor Carney, raised speculation with regards to a rate cut, perhaps as early as at next week’s gathering. However, on Tuesday, employment data for November came in better than expected, with bets over a cut next week easing. Thus, it may be up to the PMIs to tip the scale and seal the deal on how the Bank may act. This would be a first sign on how the economy has been performing in the post-election era, and thus, a disappointment could force the pound to give back some of its recent gains and perhaps confirm the case for a cut next week. On the other hand, decent numbers could allow policymakers to delay such a decision, something that may allow GBP-bulls to stay in the driver’s seat for a while more.

EUR/GBP – Technical Outlook

Until the middle of this week, EUR/GBP was comfortably trading within the boundaries of a range, roughly between the 0.8457 and 0.8595 levels. But on Wednesday the pair broke below the lower side of it and slid closer to its next good area of support, which previously acted as resistance, at 0.8413, marked by the high of December 16th. The latest move has also established a short-term downtrend, on top of which we can draw a downside resistance line taken from the high of January 14th. Although we may see some correction back up at some point, as long as the rate stays below that line we will remain bearish.

If the rate slides below the above-discussed 0.8413 hurdle, this may attract more sellers, as such a move could clear the path to further declines. We will then aim for the 0.8380 zone, marked by the low of December 17th. Initially, the area might provide some decent support, from which EUR/GBP could rebound and correct slightly higher.  That said, if the bulls are not able to push the rate above the aforementioned downside line, this move higher could be short-lived, resulting in another slide, possibly bringing the pair below the 0.8380 zone. If so, this would confirm a forthcoming lower low and the next support area we may target could be at 0.8345, marked by an intraday swing low of December 16th.

Alternatively, if the pair manages to break above the aforementioned downside line and pushes above the 0.8487 barrier, marked by the low of January 17th, the bears could get spooked from the field temporarily and allow the bulls to jump behind the steering wheel. EUR/GBP might then drift to the 0.8520 hurdle, a break of which could set the stage for a push to the 0.8553 level, marked by the high of January 20th.

EUR/GBP 4-hour chart technical analysis

As for the Rest of Today’s Events

The preliminary January PMIs from the US will also be released. Both the manufacturing and services indices are expected to have ticked up t 52.5 and 52.9, from 52.4 and 52.8 respectively. Oddly, the composite index is forecast to have slid to 52.5 from 52.7.

From Canada, we get retail sales for November, with bot the headline and core rates expected to have rebounded 0.4% mom, after sliding 1.2% and 0.5% respectively.

As for the speakers, we will continue keeping an eye to the WEF in Davos, where Christine Lagarde will speak. Given that we heard from her yesterday, we don’t expect any bold comments on monetary policy. But again, she may clarify even further on the ECB’s plans.

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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