Euro Supported by Germany Political and Upbeat Bundesbank, But Sterling Stronger

Dollar trades broadly lower today as the shutdown of US government extends into the third day. But loss is limited as it’s held above Friday’s low. Reactions in other financial markets are also muted. Euro is getting some support from positive political news from Germany, as well as an upbeat Bundesbank monthly report. But Sterling, Aussie and Kiwi are trading firmer. In particular, EUR/GBP dips through last week low and could be accelerating towards recent low at 0.8688.

Bundesbank: Economy expanding as a very fast pace

Germany’s Bundesbank said in the monthly report that the economy is "continuing to expand at a very fast pace." Also, "industry orders and conditions on the labour market are as excellent as the mood of companies and consumers." It also noted that the jump in inflation from 0.4% in 2016 to 1.7% in 2017 was mainly due to surge in energy prices. And in 2018m the impact of energy prices to inflation will likely to be low. Considering the overall tone of the report, Bundesbank is not stepping up its call for ECB stimulus exit.

SPD approved coalition talks

Staying in Germany, the Social Democrat Party (SPD), with 362-269 vote, in favor of a new Grand Coalition government with the CDU/CSU. This should help end the political deadlock in the Eurozone’s largest economy since the September election, after which the CDU/CSU failed to secure an agreement to form a government with the FDP. The next focus should be on the potential CDU/CSU/SPD government’s stance on EU reform.

Looking ahead, ECB rate decision will be a key to watch in Eurozone. Also, Germany will release ZEW and Ifo while Eurozone will release PMIs too.

SNB Jordan: Franc still significantly overvalued

SNB Chairman Thomas Jordan said today that "since the summer of 2017, the significant overvaluation has been reined in a bit. " However, "the franc remains highly valued." He added that "Swiss inflation is still very low, significantly under 2 percent, actually even under 1 percent." Thus, there is "no need to such things" to change monetary policy, that is, SNB’s negative interest rates policy. Besides, "it makes no sense to reduce the balance sheet, only to later be forced to intervene and then have to loosen up monetary policy again." Jordan emphasized that "we must move carefully, to be able to predict the effects a balance sheet reduction will have on monetary conditions."

BoJ in focus in upcoming Asian session

BoJ rate decision will be a key to watch in the upcoming Asian session. Market speculations have heightened that BOJ might be preparing for the beginning of policy normalization as the central bank trimmed its JGB purchases earlier this month. We expect policymakers to reiterate its commitments to keep its policies accommodative and shrugged off a discussion of reducing stimuli. Indeed, we believe BOJ’s reduction in JGB purchase was aimed as yield curve steepening. Meanwhile, it also reflect that BOJ’s policy tool has been shifted to mainly yield curve control.

EUR/GBP Mid-Day Outlook

Daily Pivots: (S1) 0.8796; (P) 0.8820; (R1) 0.8839; More…

EUR/GBP’s decline continues today and dips to 0.8795 so far. Intraday bias stays on the downside. as noted before, rebound from 0.8688 could have completed 0.8928 already. Deeper decline would be seen back to retest 0.8688 first. Firm break there would resume whole fall from 0.9305 to retest 0.8303/12 key support zone. On the upside, above 0.8845 minor resistance will turn intraday bias neutral first. But outlook will remain bearish as long as 0.8928 resistance holds, even in case of recovery.

In the bigger picture, there are various ways to interpret price actions from 0.9304 high. But after all, firm break of 0.9304/5 is needed to confirm up trend resumption. Otherwise, range trading will continue with risk of deeper fall. And in that case, EUR/GBP could have a retest on 0.8303. But we’d expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside.

Economic Indicators Update