It’s been another difficult week for European markets after a positive finish to January, with the beginning of February seeing the old concerns of a slowing global economy, deflationary pressures and disappointing company earnings reasserting themselves, though we have seen a stabilisation in oil and other commodity prices, if you can call price swings in excess of 5% in a day stabilisation.
We haven’t seen new multi-year lows in oil prices which is progress of sorts, and a weaker US dollar could help in that regard, however we have seen further dovish talk from central bankers across the globe.
For all the jawboning this week from the Mario Draghi and Haruhiko Kuroda the respective heads of the European Central Bank and the Bank of Japan that there would be “no limit” to the measures taken to tackle the lack of inflation, both the euro and the Japanese yen look set to finish the week higher, as markets look to focus on what the next move from the US Federal Reserve might be.
This market indifference only serves to reinforce the reality that the US Federal Reserve is the only central bank that matters, and ultimately the weakness of the euro and the Japanese yen over the past few years appears to be now forcing Fed officials to wake up to the fact that the monetary policy divergence of the last few months is now starting to have some unwelcome spill over effects on the US economy, as well as the global economy as a whole.
This week we’ve seen both January ISM reports show a softening of economic activity along with weak employment components in both manufacturing and the services sectors. Furthermore we’ve seen evidence of slowing consumer spending as well as some dire durable goods numbers for December, which suggests US consumers have lost their appetite for big ticket items, and discretionary spending in general.
We’ve also seen a change in tone from Fed officials in the last few days from the beginning of the year. The tone appears to have become noticeably less bullish about the prospect of further rate increases, and this has cut the rug out from underneath the greenback, in what had become a somewhat crowded long US dollar trade.
This week’s comments from William Dudley of the New York Fed coming on the back of earlier comments from deputy Fed Chairman Stanley Fischer earlier in the week along with this week’s weak economic data have seen investors start to price out the prospect of further Fed rate rises this year, particularly given they are both permanent voting members.
There certainly seems to be some anxiety on the FOMC about a tightening of monetary conditions, the effect of a strong US dollar, and the slowdown in global growth prospects, and this could well keep the Fed on the side-lines in the short and medium term.
For most of last year all the market was able to focus on was the US jobs report to the exclusion to all else and while today’s January jobs report is also likely to be the main event, it would need to be a spectacularly good number now to shift market expectations about the slowly receding possibility of an imminent rate rise.
January tends to be a weak month anyway, it certainly has in the last two years, and this year is not expected to be any different with a number of 190k expected, down from the 292k seen in December. The November and December numbers tend to get boosted by seasonal hiring factors, which is then followed by a sharp drop off in January.
Such is the sharpness of the US dollar sell-off seen in the last couple of days, a poor jobs number, of anywhere near or below 150k, could well tip the greenback over the edge and send it even lower, particularly if we also get weak wage growth numbers as well.
EURUSD – the euro continues to make gains above the 200 day MA at 1.1050 hitting the 1.1200 target and with the potential to move towards the 1.1400 level. We need to stay above the 100 day MA at 1.0970 to keep the upward momentum intact.
GBPUSD – the pound continues to look strong pushing above the 1.4600 level with the potential to return to the 1.4800 area. For now pullbacks look set to find support at the 1.4480 level, having found a firmer base down at the 1.4220/30 area.
EURGBP – we appear to have found some support at the 0.7520 area and while above here the risk remains for a move back towards the recent highs at the 0.7755 level. A move through this level could well see a return to the 200 week MA at 0.7945.
USDJPY – the downside appears to be looking vulnerable with the 116.00 area a key support level. We need to get back through the 118.20 level to stabilise or run the risk of a deeper move towards 114.00.
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