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by Charalambos Pissouros

EUR Jumps on EU Migration Deal; China to Ease Foreign Investment Limits, EZ CPIs and US Core PCE in Focus

 

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EUR Jumps on EU Migration Deal; Eurozone CPIs Under the Microscope

The euro traded higher against all but one of the other G10 currencies. It gained the most against JPY, SEK and NZD in that order, while it traded somewhat lower versus CAD.

EUR perf 290618

The common currency shot up overnight after EU leaders managed to find common ground on migration, after 10 hours of talks over the matter, which has endangered European unity and resulted in a political standoff in Germany, putting Chancellor Merkel’s position under risk. After the talks, Merkel said that it’s a good sign that they agreed on a common text, but divisions remained among member states. “We still have a lot of work to do to bridge the different views," she added.

As for today, euro traders are likely to turn their attention back to economic releases and Eurozone’s preliminary CPI data for June. Expectations are for the headline rate to have risen to +2.0% yoy from +1.9% in May, but the core rate is anticipated to have ticked down to +1.0% yoy from +1.1%. That said, given that the German headline inflation slowed somewhat, to +2.1% yoy from 2.2%, we see the risks surrounding the bloc’s headline print as tilted to the downside.

Ger EZ CPIs 290618

At its latest policy gathering, the ECB signaled a QE-tapering after September and a clear end to the program in December, but the decision was subject to incoming data. What’s more, the Bank noted that interest rates are expected to stay untouched “at least through the summer of 2019 and in any case for as long as necessary”, which came as a disappointment to those expecting a hike in mid-2019. In our view, the interest rate guidance means that rates are likely to start rising in September 2019 the earliest.

Although preliminary PMI data last Friday suggested that the Euro area economy may have started to turn the corner, we believe that accelerating inflation in both headline and core terms is needed for the case of a Sep-19 hike to strengthen. A slowdown is likely to come as a disappointment and may prompt investors to push their expectations somewhat back.

EUR/CHF – Technical Outlook

EUR/CHF has rebounded overnight, moving away from its upwards moving support line, taken from the low of the 29th of May. This could be taken as a positive sign and more bulls could get interested in joining in the action.

Looking from the short-term perspective, we still believe that there is a decent possibility of a potential move higher. This idea is supported by the fact that the pair broke through its strong level of resistance at around 1.1565. EUR/CHF had tested the 1.1585 level, which is another good area of resistance. If the pair breaks that level and continues push higher, then the next potential strong area of resistance could be seen at around the 1.1650 zone, which held the price from moving higher at the beginning of June.

That said, there could be a scenario where EUR/CHF moves back down, to test the aforementioned upside support line, which could act as a bouncing ground for another move higher.

The RSI supports our upside scenario. It stands above 50 and looks to be heading towards the 80 zone. The MACD is also helping by moving above both the zero and trigger lines. Both indicators showing signs of strength for the near-term.

Alternatively, if the bears decide to take the driver’s seat and break the upside support line, this could lead to a decline towards the 1.1490 level. If that level is not able to withhold the rate from dropping further, we could aim for the next support zone, near the 1.1460 area.

2018.06.29 EURCHF 240 logo

China Decides to Ease Foreign Investment Limits; USD-Traders Wait for the Core PCE Index

The dollar traded lower against the majority of the other G10 currencies. It gained only against JPY, while it lost the most ground against CAD, EUR and NOK, in that order. The greenback ended the day virtually unchanged against GBP, NZD and SEK.

USD perf 290618

The sole loser was the yen, as investors diverted flows out of the safe-haven currency following reports that China decided to ease foreign investment limits, a move that helped trade fears to subside, at least for now. The Japanese currency came under additional selling interest after EU leaders reached consensus on the critical matter of migration, something that confirms the currency’s sensitivity to the broader market sentiment. The other safe haven, the Swiss franc, did not follow yen’s footsteps. As a European currency, it strengthened against its US counterpart on the positive EU headlines. Indeed, at the time of the announcement, apart from the euro, all the other European G10 currencies (GBP, CHF NOK, and SEK) spiked up against the dollar.

As for the equity markets, Asian indices rebounded from their lows following the headlines regarding China’s decision. This, combined with the news that came out from the EU, suggests that, barring any news of more tensions in the global trade arena, the positive market sentiment is likely to roll over into the European and US sessions.

Today, focus for USD traders is likely to fall on the release of the core PCE index, the Fed’s preferred inflation gauge. The index is anticipated to have accelerated to +1.9% yoy in May from +1.8% in April, something that is supported by the uptick in core CPI rate for the month.

US CPIs 290618

At its latest meeting, the FOMC decided to increase the Federal funds rate by 25bps, while the new “dot plot” pointed at two more rate increases by year end, instead of just one as the previous plot suggested. This was due to the fact that one of the policymakers who previously supported a total of three hikes in 2018 has changed his mind and called for four. Thus, an accelerating core PCE index would support the case for two more rate hikes by year end and may increase the chance for more Fed members to raise their dots at the September meeting. Currently, according to the Fed funds futures, the market assigns a 72% chance for the next increase to come in September, while there is a 43% probability for getting another one in December.

USD/JPY – Technical Outlook

After a red Monday, we can see that USD/JPY was on a rise since then. From the mid-term perspective, the pair continues to trade above the upwards moving support line, drawn from the 29th of May. Also, we can see that USD/JPY is getting its support from the short-term uptrend line taken from the Tuesday low. This shows that the bulls are still looking confident in driving the pair a bit higher. That said, they might lose a bit of steam around the key area of resistance at 110.90, marked by the high of the 15th of June.

Until the aforementioned uptrend line is broken, we remain positive on USD/JPY. A break above the 110.90 level could open the door for some higher levels that were seen in May. On its way towards those levels, the pair could meet the 111.20 area first and then eventually the 111.40 zone, marked by the highest point of May.

The RSI and the MACD are currently supporting this scenario, as the RSI continues to push higher above the 50 line, and the MACD is above both its zero and trigger lines.

As mentioned above, we remain bullish for the short run as long as the short-term trendline is intact. If the line get’s broken, then we will aim for the recent lows that we have seen this week. The first good area of support could be around the 110.15 level, a break of which could send USD/JPY towards the 109.70 level. Slightly below that lies the previously mentioned upwards moving support line drawn from the low of the 29th of May, which could act as a strong area of support again.

2018.06.29 USDJPY 240 Logo

As for the Rest of Today’s Events

During the European morning, besides Eurozone’s inflation data, we have the final UK GDP for Q1. Expectations are for the final print to confirm the second estimate and show that the UK economy slowed to +0.1% qoq from +0.4% in the last three months of 2017. That said, we would treat this release as outdated. At its policy meeting last week, the BoE reiterated its optimism that the Q1 slowdown was temporary and noted that it expects economic growth to have rebounded to +0.4% qoq in the second quarter. Thus, we believe investors are likely to stay focused on data hinting at how the UK economy performed during the second quarter in order to assess whether the Bank was right and whether it will indeed proceed with hiking rates in August.

Later in the US, alongside the core PCE index for May, we also get personal income and spending data for the month. Personal income is forecast to have accelerated to +0.4% mom from +0.3% in April, while spending is anticipated to have slowed to +0.4% mom from +0.6%. The case for accelerating income is supported by the rise in the monthly earnings rate for the month, but the pick-up in May’s retail sales suggests that the risks surrounding the spending forecast are tilted to the upside.

From Canada, we get GDP data for April and expectations are for a slowdown to +0.1% mom from +0.3% in March. At its latest policy gathering, the BoC laid down the ground for a July hike, but a slowdown in GDP, combined with the disappointing CPI and retail sales data last Friday, is likely to bring the prospect of such a move into question.

Tonight, during the Asian morning Saturday, China’s manufacturing and non-manufacturing PMIs for June are due to be released. The manufacturing PMI is forecast to have declined to 51.6 from 51.9 in May, while the non-manufacturing index is anticipated to have slid to 54.7 from 54.9.

Apart from the data, today is the second day of the EU summit and with the migration issue out of the way, it would be interesting to see whether we will get any headlines on trade, or even Brexit.

 

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