EUR/USD: Profit Taken At 1.0880 After Inflation Data

Do you want to know which are the Current Trading Positions of our contributors? Get a glance here.

USD/JPY: Falling Stocks Revive Demand For JPY

• The Commerce Department said consumer spending increased 0.5% in January, the largest gain in 10 months, as households ramped up purchases of a range of goods and a return to normal winter temperatures boosted demand for heating. Consumer spending rose by an upwardly revised 0.1% in December.

• The pick-up in consumer spending stimulated price pressures last month, which will most likely increase Fed officials' confidence that inflation will move toward the US central bank's 2% target despite low inflation expectations. A price index for consumer spending edged up 0.1% after dipping 0.1% in December. In the 12 months through January, the PCE index rose 1.3%, the largest increase since October 2014, after advancing 0.7% in December.

• Excluding food and energy, prices rose 0.3%. That was the largest increase since January 2012 and followed a 0.1% gain in December. The so-called core PCE price index increased 1.7% in the 12 months through January, the largest rise since July 2014.

• One of the Federal Reserve's most dovish policymakers Lael Brainard said that the strong rise in January inflation is not about to change her view that the Fed should be very cautious in raising interest rates.

• The University of Michigan said its consumer sentiment index rose to 91.7 in February after slipping to 90.7 early in the month. It was slightly down from January's 92.0 reading.

• US GDP increased at a 1.0% annual rate in the fourth quarter. The economy was previously reported to have grown at a 0.7% pace in the fourth quarter and market had expected that GDP growth would be revised down to a 0.4% rate. The economy expanded at a 2.0% pace in the third quarter.

• Businesses were less aggressive in their efforts to reduce unwanted inventory. Businesses accumulated USD 81.7 billion worth of inventory in the fourth quarter rather than the USD 68.6 billion reported last month. As a result, inventories subtracted only 0.14 percentage point from GDP growth instead of the previously reported 0.45 percentage point. The bigger inventory build may be bad news for first-quarter GDP growth because it means businesses will have little incentive to place new orders, which will continue to hold down production. First-quarter GDP growth estimates are above a 2.0% rate, but the risks are tilted to the downside.

• US data on Friday had been more bullish. We used stronger USD to get short on the USD/JPY at 113.70. Today concerns around Brexit and Chinese equities slumping to 15 month lows strengthened the yen, traditionally investors' safe haven of choice in times of global economic tension. The People's Bank of China said it would cut the reserve requirement ratio by 50 basis points for all banks, taking the ratio to 17% for the country's biggest lenders. The JPY weakened slightly after the decision but the reaction was short-lived. We have lowered the stop-loss on the USD/JPY position.

• Japan's industrial output rose a seasonally adjusted 3.7% on month in January, marking the first rise in three months, accelerating from a 1.7% drop logged a month earlier. Factory output came in ahead of median market forecasts for a 3.2% increase. The growth in production marks the quickest increase since the same month a year ago, but on an annualized basis factory output contracted 3.8% on year in January, following a 1.9% drop in December. Retail sales fell in Japan 1.1% in January from a month earlier and were down 4.3% from the previous year, stoking concerns about decreasing consumer spending.

• A raft of economic data is due out Tuesday, including wage-related figures, household spending and the jobless rate in Japan.

EUR/USD: Profit Taken At 1.0880 After Inflation Data

• Eurozone annual inflation fell by more than expected and into negative territory in February, increasing pressure on the European Central Bank to ease monetary policy further next week. CPI amounted to -0.2% yoy in February vs. 0.3% yoy in January.

• Core inflation, to which the ECB pays close attention, also fell more than expected. The figure, which excludes the volatile prices of unprocessed food and energy, declined to 0.8% in February.

• The dip in consumer prices was driven mostly by the energy sector where prices decreased by 8.0% in February, Eurostat estimated, much more than the -5.4% recorded in January. The energy price decline was the steepest since October.

• The ECB Governing Council meets on March 10. It is expected to cut its inflation estimates and unveil a package of measures including a cut to its already negative deposit rate and tweaks to its asset-buying programme.

• We took profit on EUR/USD short at 1.0880 today. In our opinion some profit taking is possible now on recent EUR-selling positions ahead of the ECB meeting, which should push the EUR/USD higher. The ECB easing is widely expected and already priced in. What is more, investors may be cautious in getting short ahead of the ECB meeting, bearing in mind the EUR/USD reaction in December. We got long at 1.0890 and set the target at 1.1090.