Article by ForexTime
The main overnight news has been the latest China inflation data, where consumer prices rose 1.5% in December from a year earlier. This is a small increase from November’s five-year low at 1.4% but still substantially below the government’s 3.5% target and points towards the open possibility for monetary easing from the People’s Bank of China (PBoC) in the opening months of the year. Recent economic data from China has repeatedly pointed towards further signs of domestic momentum slowing and with inflation pressures easing, I see the potential for another interest rate cut to follow the one seen in November. The major signs of an economic momentum slowdown have been inspired by domestic data, therefore another interest rate cut could reinvigorate this side of the economy.
Economic data on Friday morning will be focused on the monthly German import and export data for November, with pressure on the European Central Bank (ECB) to introduce QE intensifying in recent days. Sterling bears will also be hoping for the UK Construction Output, Manufacturing and Industrial Production data to follow the declines we have seen in the past weeks Construction, Manufacturing and Services PMI which has just further reduced the lack of investor attraction towards the pound. Apart from this, the main event will be the afternoon US NFP release where the preliminary employment report released on Wednesday suggested 241,000 jobs might have been added by the US economy last month. However, the accuracy of the ADP has come under question in recent months and following a month when the US added an incredible 320,000 jobs, a figure above 215,000 should be still be seen as positive and reaffirm rate hike optimism.
The EURUSD once again recorded a fresh nine-year low at 1.1753 on Thursday, with the bears continuously squeezing as much out of the pair as possible. The EU economic sentiment is just further weakening on a near-daily basis, with the news that inflation turned negative with prices falling at an annualised 0.2% in December being its lowest since the recession. I remain unsure whether the deflation in December all but confirms QE is on the way, however it certainly has increased speculation over how the ECB will react. Either way, the divergence between both economic sentiment and monetary policy between the ECB and the US Federal Reserve is widening rapidly, and traders are pricing in further EURUSD declines as a result. The upside potential for the pair is extremely limited, with only potential USD weakness providing momentum for any significant bounce higher.
The correlation that if the EURUSD drops, the USDCHF jumps a beat is getting stronger, with the pair climbing to 1.0216 yesterday. When the euro comes under pressure, the Swiss National Bank (SNB) comes under intense pressure to defend the 1.20 EURCHF floor. With the pressure on the ECB to ease monetary policy further intensifying, the SNB will remain on front-line defence. The SNB has already moved into negative rates but this has not been enough, and we are looking for repeated efforts from the SNB to devalue the CHF.
In line with expectations, the GBPUSD has not yet found a floor with the most recent low being seen at 1.5034. As repeatedly mentioned, the GBP is just suffering from a lack of attraction. Factors such as the momentum for the UK General Election in May is weighing on investor sentiment, while it remains no hidden secret that the Bank of England’s (BoE) dovish views on inflation are dampening UK interest rate expectations and allowing the bears to further drag down the GBPUSD valuation. Increased signs of domestic growth slowing have also not helped, with Services Manufacturing and Construction PMIs in the past week all showing that sector activity is growing at a reduced rate.
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After yesterday’s low, it does appear that the GBPUSD will make a dash for 1.49 but whether it does so today would more likely be dependent on USD strength. The UK inflation data next week will provide a major event risk for the Pound, where the primary fear will be that UK inflation levels have dropped below an annualised 1%.
Optimism that oil has found a floor after bouncing slightly higher is premature. If you take a look at the daily candlesticks closely, you will see the daily highs are marginally above the opening price and has only risen after losses earlier in trading. The gains noticed have really been minimal at best, we could be looking at another small consolidation before the next leg lower here. The supply and demand equation remains overpowering and until the economic conditions faced by the oil markets changes, there is further potential for the price to continue moving in a bearish direction.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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