US 4Q GDP in focus, BoJ switches to negative rate

Forex News and Events

US GDP to slowdown in the fourth quarter (by Arnaud Masset)

The latest data from the US is once again disappointing. After clear evidence of subdued inflation pressure in December - headline CPI contracted 0.1%m/m, while the core gauge rose 0.1%m/m, missing estimates of 0.2%. New orders for long-lasting manufactured goods, released yesterday, saw their biggest drop since August 2014, contracting -5.1%m/m, while inventories of durable goods climbed 0.52% as manufacturers struggle to export their goods in a strong dollar, low oil price and weak global demand environment. The cherry on the cake, the monetary policy divergence between the Fed and the rest of the world bumped up a notch today as Japan switched to negative interest rates. This decision will prevent the JPY from gaining more ground against the US dollar. Moreover, the BoJ’s move created another incentive for the ECB to proceed with further monetary easing which would add pressure on EUR/USD. All in all, it will become increasingly difficult for the Federal Reserve to push ahead with its tightening process with everybody else headed in the opposite direction. After hitting the top of its multi-day range, EUR/USD is trading lower, at around 1.09, with a short-term negative bias. US 4Q GDP is due later today and is expected to come in at 0.8%q/q (annualized) from 2.0% in the third quarter. Separately, the market anticipates core PCE to have eased to 1.2%q/q (s.a.a.r) from 1.4% in the previous quarter.

BoJ cuts interest rate (by Yann Quelenn)

In a surprise move, the Bank of Japan adopted negative rates last night for some deposits held in commercial banks in continued attempts to achieve 2% inflation target. It followed the release of some very weak data. The Tokyo CPI printed well below expectations at -0.3% y/y vs 0 and the December industrial production disappointed markets with a low read at -1.4% m/m. The central bank is very concerned about the true state of the Chinese Economy as it could raise the risk of deflation. The issue of low oil prices also adds some deflation pressures.

However, we also believe that in this case qualitative and quantitative easing has firmly failed. There is not a single sign to indicate that inflation will reach 2% and the country’s massive debt-to-GDP ratio does not help. For these reasons, the BoJ may even be willing to cut interest rates further. In our view, BoJ was in fact already all-in, in efforts to spur the economy. Like Draghi, Abe will also do “whatever it takes”.

It seems that only the United States is in a rate hike process when the whole world is struggling for sustainable growth. Therefore, we cannot see how the Fed could raise rates in March. Consequently, there are good chances that the current monetary policy divergence will pause.

USD/JPY - Sharply Higher.

The Risk Today

Yann Quelenn

EURUSD has exited the uptrend 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 very short-term increase. 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).

GBPUSD has exited the downtrend channel. Hourly resistance at 1.4367 (26/01/2016 high) has been broen. Another resistance can be found at 1.4969 (27/12/2015 high). Expected to show further increase. 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.

USDJPY has increased sharply. The pair is now back above 120.00. Hourly resistance lies at 123.76 (18/11/2015 high). Hourly support lies can be found at 115.98 (20/01/2016 low). Expected to show further increase toward resistance a 123.76. 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).

USDCHF has exited the uptrend channel. Hourly support is located at 0.9876 (14/12/2015 low) and hourly resistance can be found at 1.0199 (26/01/2015 high) and at 1.0328 (27/11/2015 high). 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: