Delayed US normalization process, Japan's Manuf. PMI lower

Forex News and Events

Don’t expect the Fed to change their tune... yet (by Peter Rosenstreich)

There is growing concern that the Fed interest rate hike in December has “killed“ the US economy. Since the hike, sentiment has weakened significantly, while US manufacturing looks to be suffering from the strong USD and weak oil prices. Following a brief post-hike calm, US stocks and long-end yields (critical for real-estate prices) have fallen sharply and oil prices have tumbled. Next week at the FOMC meeting investors will look for any signal of regret by the dovish faction of the committee. We suspect that markets are confusing short-term external turbulence with a temporary soft patch in economic data. That said, we have always indicated that the Fed “dots” were overly ambitions based on optimistic inflation outlook but never argued for a reversal of hiking path.

Manufacturing is noticeably hurting due to the strong USD and spillover drag into real exports. The steady decent in manufacturing data indicates is a worry trend. While recently, the trend has been exacerbated by slowing global trade as emerging in markets growth decelerates. The Fed has mentioned the effects of the strong US in their decision making process and will be monitoring developments. It’s important to remember that the US economy depends on manufacturing for only slightly over 10% of GDP. Meaning, while soft is unlikely to derail the broader US economy. However, on the positive side, the US domestic economy is humming along. The robust labor market and low inflation environment suggests that the consumer sentiment remains strong. Which in turn, has supported private consumption and service sector (non-manufacturing PMI in expansion territory). The US expansion remains healthy and in a positioned to handle marginal higher interest rates.

Japan Manufacturing PMI declines slightly (by Yann Quelenn)

Preliminary January figures for Japan's PMI have been released at 52.4 - below an expected 52.8 but still above 50 for the seventh consecutive month. A print of this threshold indicates an underlying expansion of the economy. However, we remain sceptical especially when we look at sub-index, new exports and new overall orders. Our belief is that domestic demand may in fact be softening while exports are being spurred by a weak yen.

The deflationary battle is a hard one to win for Japan and the decline in raw prices is causing manufacturers to cut selling prices. We therefore believe that Japan’s current respite should be temporary. A weakening PMI will also push GDP further down. Deflationary pressures are definitely set to continue. Concerns regarding commodity prices will keep on adding downside risks on inflation against the backdrop of China’s slowdown. Amid the PMI release, the yen has weakened to 118 against the greenback on concerns for Japan's recovery and this shows no sign of stopping.

EUR/GBP - Bearish Breakout.

The Risk Today

Yann Quelenn

EUR/USD lies in a short-term downtrend channel. Hourly resistance may be found at 1.1096 (28/10/2015 low) while hourly support can be found at 1.0524 (03/12/2015). Expected to show further decrease In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD is now rising. Hourly resistance is given at 1.5242 (13/12/2015 high). Stronger resistance can be found at 1.5336 (19/11/2015 high). Expected to show further weakness below 1.4000. The long-term technical pattern is negative and favours a further decline towards the key support at 1.4231 (20/05/2010 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is rising for the third day in a row. Hourly resistance lies at 123.76 (18/11/2015 high). Expected to further bounce toward 120.00. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).

USD/CHF's uptrend momentum is lively and the pair remains in the upward channel. Hourly support is located at 0.9876 (14/12/2015 low) . Hourly resistance at 1.0125 (05/01/2015 high) has been broken. Expected to show continued strength. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.

Resistance and Support: