Warning lights are flashing for EUR/USD

KBC Market Research Desk KBC Bank

Yesterday, uncertainty on the coronavirus dominated global FX trading, even as the risk-off eased later in US dealings. The yen outperformed. USD/JPY touched an intraday low near 109.27 (close 109.49). EUR/USD held a tight range just below 1.11 before the ECB press conference. The pair jumped briefly higher as ECB’s Lagarde mentioned a modest rise in underlying inflation. The gain was (more than) reversed later as Lagarde said that the ECB should decide on which part of the curve it should operate if growth doesn’t pick up. Does this suggest some kind of ECB curve control? Whatever, German yields and the euro dropped, with EUR/USD breaking the 1.1066 support (close at 1.1059).

This morning, Asian (equities) are entering calmer waters going into the China Lunar New Year (Mainland China and Korea closed). US yields show tentative signs of bottoming and so does USD/JPY (110.50 area). At the same time, the ‘cooling’ of the global risk off for now doesn’t help the euro. EUR/USD hovers near 1.1050.
Today, the focus for trading might shift from the coronavirus to the eco data with the preliminary EMU and US PMIs scheduled for release. The EMU composite PMI is expected to rise from 49.3 to 50.3. Consensus sees manufacturing improving and services unchanged. The euro probably needs a substantial positive surprise to abort the recent slide. US PMIs are expected more or less stable. Lingering political tensions in Italy ahead of this weekend’s regional elections might be a source of euro caution too. From a technical point of view warning lights are flashing. A sustained break of the 1.1066/40 area would paint a H&S pattern on the charts with targets near/below 1.09. A rebound above 1.1180 would call off the ST downside alert, but that looks difficult ST.

Today, might also be key for GBP-trading. Yesterday, sterling showed a mixed picture, losing a few ticks against the dollar but gaining against a broadly weaker euro (close EUR/GBP 0.8422). Today’s UK PMIs will provide decisive input as the BoE debates a rate cut next week. The market expects a rise of the composite PMI from 49.3 to 50.7. The jump in CBI confidence suggests that an upward surprise is possible. If so, market expectations of a rate cut might be scaled back further, reinforcing the rebound of sterling. A confirmed break of the 0.8450 range bottom would open the way to the 0.8277 correction low.

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KBC Market Research Desk

KBC Bank

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