Chinese stock market crash drives investors towards Dollar's safer havens

The first trading session of the year showed us why we stressed the importance of taking it slow during these early days of 2016. Volatility was high yesterday and with participation in the markets slowing coming back to its usual levels the price action in the major instruments was really impressive. 2016 will be an important year with a new interest rate policy in the US, underperformance in Europe and slow growth in Asia that will all drive volatility higher in the currency markets.

Yesterday it was the radical drop in Chinese stock markets that drove the price action in the currencies as investors looked for safer havens with the US Dollar gaining across the board. The Euro and the Cable suffered on the back of it and European stocks markets were in the red as a greater slowdown in the Chinese markets appears as one of the great risks of the new year. Even though the Fed mentioned this as one of their concerns fresh comments from US policymakers reaffirmed their confidence on the US economy.

Price action drove the Euro and the Pound to fresh lows yesterday and even though the Single currency is now trading just above the important 1.0800 support level its UK peer has no strong level of support around it to limit its decline. Both currencies appear oversold on a technical basis but given that it’s still early in the new year and market participants are still coming back to their desks we could see a continuation of this decline on the back of the limited trading volume.

Today the focus will be on the release of the German unemployment levels in the morning and the Eurozone inflation figures around the same time. Analysts expect both reports to print in a positive manner and that could help the Euro remain afloat above the 1.0800 support area. However we must note that the sentiment is bearish and yesterday’s lows could come under threat if traders look for Dollar’s safety and in this case the Single currency could drop towards the 1.0750 and 1.0700 figures.

Also in the morning the release of the Construction PMI report in the UK could help of harm the Cable, traders are more interested in finding out how the Services’ sector fared last month but this report could also take its toll. The Pound is weak at this time trading just above the 1.4700 figure and given that analysts expect the Services’ PMI report tomorrow to print lower than last month we could see fresh pressure on the UK currency. Fresh lows in the Cable will drive the rate towards the 1.4600 area as there is no major support until last year’s lows of 1.4565.