USD to recover with risk sentiment, soft Euro data

Forex News and Events

Don’t count the USD out just yet (by Peter Rosenstreich)

Financial markets have once again exposed their propensity to overreaction. In a span of less than three months, expectations for the Fed rate path in 2016 went from three to four 25bp hikes to none. While the US economic data has broadly disappointed it was the volatility in global markets and overall negative sentiment that, in our view, drove the shift in expectation. While the Fed’s rate strategy always seemed overly optimistic, there was still enough inflation pressure building to justify one or two rate hikes. By most economic terms US labor markets were at max levels (although some additional capacity was cited by Yellen) and wage growth had been trending steadily higher. The consumer, the heart of the US economy was healthy, deleveraged, with savings and solid labor sentiment to keep sentiment positive. Yet, financial markets have in general completely discounted these key factors. The USD remains on a back footing and front-end yields stuck near the lows. Even a more stable risk environment (in part to the collapse of US rate outlook and steady Fed policy) has failed to generate bullish dollar momentum. However, the soft patch in winter economic data is a pattern worth noticing (and not merely discounted as once-off weather related events). Also, US economic data has begun to pick up pace as the year progresses. Incoming data such as CPI has already started to improve. This week’s durable goods, new home sales, and PCE are also expected to show recovery. Given the current financial market backdrop, we suspect that even good data will be discounted by the market. However, as conditions fail to collapse and even improve and while Fed hikes start creeping back on to the table, the short USD position will become difficult to justify.

Soft Eurozone PMI data pressure ECB (by Yann Quelenn)

The preliminary figures of the Markit Eurozone PMI for February have been released. Data printed lower than In January. Manufacturing PMI dropped to 51 from 52.3. Yet, data is still lying above the 50 mark, indicating growth. A lower figure, on the other hand, shows recession.

The global economic slowdown continues, stocks markets have sharply declined since the beginning of the year. For example, the DAX has lost more than 10% during this period. Oil prices are still very low with WTI trading around $30 a barrel and there are growing uncertainties about the true state of the Chinese Economy.

We believe that deflation risk is set to continue increasing in this environment. As a result there is a strong likelihood that the ECB may intervene further at next meeting on March 10 by cutting its deposit rate further into negative territory.

EUR/CHF - Back To 1.1000.

The Risk Today

Yann Quelenn

EUR/USD has tested support at 1.1070 (04/02/2016 low) but has failed to hold below it. Yet, the short-term technical structure still suggest a further bearish move. Hourly resistance lies at 1.1260 (10/02/2016 high). Expected to decline. 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 has declined below 1.4200. Hourly resistance can be found at 1.4409 (19/02/2016 high). Hourly support can be found at 1.4150 (29/01/2015 low). The technical structure suggests further downside pressures. The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 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 trading mixed. Yet, the medium-term technical structure is clearly negative. Hourly support can be found at 112.31 (19/02/2016 low). Hourly resistance lies can be found at 113.22 (19/02/2016 high). Expected to further decline. The strong support at 115.57 (16/12/2014 low) has been broken and fully erased. We start favouring a long-term bearish bias. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USD/CHF keeps on pushing higher, only stopped by hourly resistance at 0.9985 (05/02/2016 high). Hourly resistance can be found at 0.9985 (05/02/2016 low). Hourly support is given at 0.9847 (16/02/2016 low). Expected to see further strengthening. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support: