- Rates: Some dovish tweaks by Fed Chair Powell
The Fed kept the target band for its policy rate unchanged between 1.5% and 1.75%, but hiked the IOER by 5 bps to 1.6% in a technical adjustment. The fresh statement included some minor dovish twists. US Treasuries gained more ground. They extend their rally this morning in a risk-off (coronavirus) move and could get more support from a disappointing Q4 US GDP. - Currencies: Will data finally help a EUR/USD bottoming process?
EUR/USD came close to the 1.0989/81 area yesterday, but the support area ‘survived’, at least for now. Today, the data might be slightly EUR/USD supportive. In particular soft US Q4 growth could be a USD negative. At the same time, uncertainty on the Coronavirus didn’t help the euro much of late. The BoE decision will decide on the next move of sterling.
The Sunrise Headlines
- WS traded mixed following a slew of mixed earnings results and cautious remarks by the Fed’s Powell. Asian markets are posting steep declines as worries over the coronavirus intensify. Taiwan underperforms (-5.75%) as it reopens after the LNY holiday’s.
- The Fed stood pat but increased the IOER and overnight repo rate with 5bps to resp. 1.6% and 1.5%. Powell warned for some downside risks and hinted the Fed would pull out all the stops to oppose an inflationary downward spiral.
- The WHO called a meeting of its Emergency Committee today to decide whether to declare the outbreak of the coronavirus a global emergency as the death toll of the virus jumped to 170 and the number of cases accelerated.
- The EU parliament gave its final approval to UK PM Johnson’s Brexit deal, paving the way for Brexit to take place tomorrow. Officials on both sides agree that negotiating a trade agreement over 11 months could prove to be tough.
- US pending home sales unexpectedly dropped 4.9% (M/M) in December, the steepest decline since 2010. The drop in home sales could represent a blemish for an otherwise growing US housing market.
- US president Trump signed the USMCA trade agreement into law yesterday, replacing the ‘NAFTA nightmare’. Canada is the only party left to ratify the deal, which is expected to happen very soon according to USCS Wilbur Ross.
- All eyes are on the Carney’s final policy decision as governor of the BoE. Today’s calendar is packed with growth and claims data due in the US. Inflation, employment and confidence data are due in Europe. Italy taps the bond market
Currencies: Will Data Finally Help A EUR/USD Bottoming Process?
Will data help to put a floor for EUR/USD?
The coronavirus and the Fed decision were the main drivers for global (FX) trading yesterday. Equities struggled to preserve Tuesday’s gain. The coronarelated uncertainty continues to linger. US data were weak, but with only limited impact on the dollar. EUR/USD extensively tested the 1.10 level, but the 1.0989/81 support survived. The Fed left its policy unchanged. Communication was broadly in line with previous guidance, but small tweaks in the wording confirmed that the bar for a rate hike is very high. The Fed indicated it will keep ample liquidity in place to allow a smooth working of money markets. The USD lost a few ticks during the press conference. EUR/USD closed at 1.1010. USD/JPY finished near 109.
Overnight, (North-East) Asian equities are again coming under pressure as investors fear a wider spreading and bigger consequences of virus on the economy. The WHO is said to consider issuing a global alarm. The off-shore yuan weakened to the 6.99 area. The gain in the yen is modest (USD/JPY 108.90) given the loss on equity markets. EUR/USD is holding north of 1.10 but there is no sign of a sustained rebound yet.
The calendar is well filled today with EC confidence data and German inflation and the first estimate of US Q4 GDP. Evidently, question is how much attention/weight the data will get as the coronavirus takes again centre stage. Better EC confidence and a (base-effect-related) rise in German inflation might be EUR/USD supportive. At the same time, US Q4 growth probably will be tempered by mediocre consumption and investment growth. So, data theory might be EUR/USD supportive. That said, the established EUR/USD rend was down of late, irrespective of the news flow. So, we look out whether the data might help to put a floor for EUR/USD. The EUR/USD technical picture deteriorated after its break below 1.1066/40. It paints a H&S pattern with targets near/below 1.09 and interim support at 1.0990/80. Regaining 1.1120 would be a first sign that downside bias is easing.
EUR/GBP hovered in the mid 0.84 area as investors awaited today’s BoE policy decision. The market sees an almost equal chance of a rate cut or unchanged decision. After poor end-off year data, timely indicators post the election suggest better times ahead. On the other hand, inflation data were soft. Whatever the decision, we seen risk for an asymmetric reaction with sterling gaining on an unchanged decision and potentially only a moderate loss in case of a rate cut.
EUR/USD nears 1.0989/81 support. Data to help to put a floor?
