EUR/USD Outlook: Resilience at 1.07 Signals Euro Strength Ahead

Warren Takunda

Traders' Opinions

Economic

Forex

Summary:

The EUR/USD pair holds steady above 1.07 as Dollar momentum wanes. Market awaits Eurozone PMI and German GDP data for further direction.

As financial markets gear up for another week of trading, the Euro to Dollar exchange rate remains a central focus, drawing keen interest from investors and analysts alike. Amidst recent market volatility and shifting global economic dynamics, the performance of the EUR/USD pair serves as a barometer for sentiment towards both currencies and broader market conditions.

Reflecting on recent trends, the Euro has displayed notable resilience, finding solid support above the psychologically significant threshold of 1.07 against the US Dollar. This resilience comes against the backdrop of a sustained appreciation of the Dollar throughout 2024, driven by a combination of factors including expectations of tighter monetary policy in the United States and concerns surrounding the economic outlook in the Eurozone.

However, cracks in the Dollar's armor have begun to emerge, with the Euro managing to hold its ground despite a barrage of positive economic data releases from the US. This suggests that the Dollar's upward momentum may be losing steam, paving the way for a potential reversal in the EUR/USD pair.

EUR/USD Outlook: Resilience at 1.07 Signals Euro Strength Ahead_1

From a technical perspective, the Euro appears to be gaining momentum, with key support levels at 1.0755 and 1.0690/00 providing a solid foundation for further upside potential. Notably, the Euro exhibited resilience following the release of US retail sales data, with buying interest emerging as the currency approached the critical 1.0700 threshold. This suggests that investors are becoming increasingly confident in the Euro's ability to weather external headwinds and potentially stage a comeback against the Dollar in the days ahead.

Looking ahead, market participants are closely monitoring a series of economic data releases from the Eurozone, with particular attention on Thursday's preliminary PMI survey for February. Analysts are expecting figures below the 50-mark, signaling contraction, which could exert downward pressure on the Euro. However, given the prevailing pessimism surrounding the Euro, it would likely require a substantial downside surprise to trigger a notable decline.

In addition to PMI data, investors will be paying close attention to Friday's release of German GDP numbers and the IFO survey, which provide insights into the health of Europe's largest economy. UniCredit Bank anticipates an improvement in the IFO Business Climate Index for February, driven by both business expectations and current conditions, suggesting a potential turnaround in sentiment.

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Cohen

Forex

Economic

Global Markets Brace For Yuan Big Bang When China Holidays End_1

For the offshore yuan, short-dated implied volatility gauges have been declining since their October 2022 peak. Both one- and three-month implied vols are now at or near two-year lows, meaning that option buyers can scoop up inexpensive protections. Nine-month implied vol — which spans the US presidential election on November 5 — hasn’t fallen as much as its front-end peers. Still, the measure now trades around 5.3%, approaching levels last seen in August 2022 before volatilities soared. Global Markets Brace For Yuan Big Bang When China Holidays End_2

Global Markets Brace For Yuan Big Bang When China Holidays End_2

“All the political points are to be earned bashing China at this point,” said Brent Donnelly, President of Spectra FX Solutions LLC and a veteran FX trader with previous stints at HSBC, Citigroup and Nomura. He recommended in early February a one-year 7.60 USD/CNH call to clients when the pair was trading at 7.2250 — an inexpensive hedge that’s likely to work well no matter who wins in November. China’s own economic woes are also putting its currency in a bind, with many paths to depreciation and very few ways to strengthen, he added.

Societe Generale strategist Kiyong Seong echoed that sentiment last week, telling clients to take advantage of “multi-year low” prices and buy three-month USD/CNH risk reversals as a depreciation hedge. The yuan’s low volatility stems largely from PBOC fixing, which hasn’t moved much over the past couple months, according to the French bank. The currency is allowed to move 2% in either direction of the daily reference rate and it would be “inevitable” for the central bank to devalue its fixing if the yuan weakens past 7.25 — the weak side of the band, Seong noted. “The subsequent bearish market reaction would be strong, pushing USD/CNH toward the closely guarded 7.30-7.35 range.”

US data last week also underscored persistent price pressure, dimming hopes of a Fed cut in the first half of 2024 and ramping up pressure for a weaker yuan. Citigroup, Societe Generale and former Treasury Secretary Larry Summers are all telling investors to brace for the potential of Fed hikes, instead of cuts that are already in the price.

Source:Bloomberg

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Ukadike Micheal

Economic

Commodity

Oil prices retreated from a three-week high as ongoing concerns about the demand outlook counteracted tensions in the Middle East. Brent crude dropped below $83 per barrel, having surged nearly 8% in the previous two weeks, while West Texas Intermediate traded near $79. The International Energy Agency's warning of potential oversupply throughout the year and apprehensions about China's economic slowdown have contributed to the downward pressure on oil prices.

Despite these demand-related worries, geopolitical tensions in the Middle East, such as attacks on shipping in the Red Sea and the Israel-Hamas conflict, have prevented a significant decline in prices. Israel's announcement of a possible ground offensive in Gaza by mid-March if hostages are not released adds another layer of uncertainty. The conflicting forces of bearish demand indicators and bullish geopolitical factors have led to a relatively stable oil market with reduced volatility.

Analysts, like Vivek Dhar from the Commonwealth Bank of Australia, highlight that sustained premiums in oil prices due to Middle East tensions would require actual disruptions in physical oil supply. There is anticipation that Brent futures might relinquish their recent gains in the coming weeks as concerns over supply take precedence.

Bullish sentiment for Brent has surged to levels not seen since 2021, propelled by heightened geopolitical risks in a region responsible for approximately a third of the world's crude production. The focus on fuel markets intensifies, given one of the most active trading periods for refined products in several years, where year-to-date price gains for refined products outstrip those for crude.

As Chinese markets resume activity after the week-long Lunar New Year holiday, crude prices in Shanghai have experienced an uptick. However, the overall landscape suggests a delicate balance between geopolitical influences and demand-related factors that continue to shape the trajectory of oil prices. Investors and market participants closely monitor these dynamics, adjusting their strategies to navigate the evolving conditions in the global oil market.

The tug-of-war between demand concerns and geopolitical tensions underscores the complexity of the current oil market. While fears of oversupply and economic slowdowns weigh on prices, geopolitical events in the Middle East provide a counterbalance. The coming weeks will likely reveal the predominant force influencing oil prices as market participants assess the evolving landscape and its implications for both crude and refined product markets.

Source: Reuters

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Warren Takunda

Economic

Traders' Opinions

Investors eagerly anticipating a series of interest rate cuts from the U.S. Federal Reserve to bolster equity markets and deflate the Dollar are in for continued disappointment, according to recent indications. The Fed, previously viewed as poised to act decisively in favor of stimulating economic growth, now appears to be exercising caution in light of evolving economic data.

A surge in inflation and activity metrics has sown doubts within the Federal Reserve regarding the trajectory of inflation, throwing into question the feasibility of achieving the targeted 2% mark. This skepticism has translated into a shift in market expectations, with the anticipated timeline for rate cuts being pushed further out into the year.

Tuesday's rally in the Dollar, spurred by unexpected inflation figures outpacing forecasts, underscores the renewed confidence in the currency amidst mounting evidence of widespread inflationary pressures. Analysts now project the first 25 basis points rate reduction to materialize in September, with subsequent cuts anticipated in December and early 2025.

The divergence between market sentiment at the onset of the year, where a rate cut was expected as early as March, and the current consensus underscores the recalibration of expectations driven by robust U.S. economic indicators. This adjustment has been accompanied by an uptick in bond yields and bolstered the Dollar's position in global markets.

Should this revised timeline prove accurate, the Dollar is poised for further appreciation, posing challenges for equity markets already grappling with shifting monetary dynamics. While markets have thus far absorbed the adjustment in rate expectations, the prospect of tightening financial conditions looms large, particularly as lending rates creep higher.

Diminishing expectations for rate cuts are expected to exert upward pressure on interest costs, effectively tightening financial conditions and fostering a more cautious investment landscape. Against a backdrop of geopolitical uncertainties, this prudent approach to capital allocation could temper inflationary pressures and promote economic stability.

By adopting a measured approach to monetary policy, characterized by modest rate cuts totaling 75 basis points, the Federal Reserve aims to strike a delicate balance between sustaining growth momentum and managing inflationary risks. This strategy acknowledges the economy's robust performance, marked by near-full employment and robust public spending, while mitigating the potential for overheating.

In conclusion, while investors may have to adjust to a delayed timeline for rate cuts, the prospect of a stronger Dollar and tighter financial conditions underscores the need for vigilance in navigating evolving market dynamics.

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Samantha Luan

Economic

South Korea’s job increases rose for a second straight month to a 10-month high in January thanks to higher employment of the older, although youth jobs fell for 15 months in a row amid the falling population, a key risk to long-term growth in Asia’s fourth-largest economy.

The number of employed rose 380,000 last month from a year earlier, the largest growth since March 2023, according to data released from Statistics Korea on Friday.

The payroll gains were mainly led by jobs taken by those in their 60s and above with a 350,000 on-year increase as the government hired 747,000, hired 28,000 more than its target, through its job creation project, which is mainly for older people.

The employment of those aged 15 to 29 declined by 85,000 from a year earlier, however, as the population of the age group fell by 218,000, the data showed.“The number of employed youth fell due to the decreasing population but the trend is favorable with their employment rate up for three straight months,” the Ministry of Economy and Finance said in a statement released after the job data.

The employment rate for the age group rose 0.2 percentage point to 46.3% in January from a year earlier after growing 0.2 percentage point, and 0.1 percentage point, respectively, in November and December 2023.

HEALTHCARE, SOCIAL WELFARE SERVICE JOBS LEAD

By industry, the healthcare and social welfare service sector, where older people are mainly employed, added 104,000 jobs as demand for care increased.The construction sector increased by 73,000 jobs on warmer weather although the industry remained sluggish, while payrolls in the professional, science and technology service sector reported a similar increase.Manufacturers added 20,000 jobs in January after increasing 10,000 payrolls in the prior month, although the outlook for industries remained mixed.

“Payrolls in the auto and medical industries are rising while jobs in the electronics and chemical industries are falling, although the trend is easing,” Seo Woon-joo, a director at Statistics Korea told reporters.

Source：The Korea Economic Daily

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Ukadike Micheal

Economic

Forex

Sweden witnessed a expected decline in its underlying inflation rate in January, aligning with the ongoing trend that has prompted the Riksbank to consider providing economic relief through potential reductions in borrowing costs. The closely monitored measure, excluding energy costs and the impact of interest-rate changes, increased by 4.4% compared to the previous year, consistent with economists' projections. The Riksbank, signaling a possible rate cut in the first half of the year, is grappling with uncertainty regarding the timing of easing measures, with concerns over a weaker krona and geopolitical unrest potentially influencing inflation. Deceleration in Swedish Core Inflation Supports Riksbank's Argument for Easing_1

Deceleration in Swedish Core Inflation Supports Riksbank's Argument for Easing_1

The release from Statistics Sweden on Monday confirmed that the country's inflationary pressures remained subdued, supporting the central bank's contemplation of interest rate adjustments to stimulate economic activity. Swedish businesses and households, particularly sensitive to short-term interest rate fluctuations due to fixed-rate loans, eagerly anticipate relief from the central bank.

A protracted 18-month campaign to curb inflation by raising interest rates has taken a toll on economic performance. Sweden is forecasted to experience the lowest growth rate in the European Union in the current year, as per European Commission estimates. The Riksbank's November forecasts suggest that its CPIF target measure for prices may fall below 2% by mid-year, with underlying inflation expected to trend lower to reach 2.1% by the end of 2024.

The potential easing of inflationary pressures could provide the Swedish government with more flexibility to support households, a move that was previously restrained to avoid exacerbating inflation concerns. In January, CPIF inflation accelerated to 3.3% on an annual basis, rebounding from a low outcome in December influenced by a year-ago spike in power prices. Price increases in January were widespread, encompassing various sectors like food, furnishings, household goods, recreation, and culture. The government's strategic adjustment of legal requirements on greenhouse gas emissions contributed to a drop in fuel costs.

As Sweden navigates these economic dynamics, the implications extend beyond domestic factors. The Riksbank's decision on interest rates and its assessment of inflation trends will have ripple effects in global financial markets. Investors will scrutinize any signals from the central bank regarding the timing and extent of monetary policy adjustments, influencing currency markets and investment strategies.

The nuanced economic landscape in Sweden, marked by declining inflation and potential central bank interventions, highlights the delicate balance between stimulating economic growth and managing inflationary risks. The market will closely monitor how these developments unfold, keeping an eye on the Riksbank's policy decisions and their cascading effects on broader economic indicators. As global economic interdependencies persist, stakeholders must remain agile in responding to evolving market conditions shaped by Sweden's economic policies and their repercussions on the international stage.

Source: Bloomberg

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Ukadike Micheal

Economic

Stocks

European stocks opened on a downward trend on Monday, led by French companies, as Finance Minister Bruno Le Maire announced a reduction in the country's economic growth forecast on Sunday. The Stoxx Europe 600 dropped 0.2%, Germany’s Dax declined 0.3%, and France’s Cac 40 fell 0.4% after the government cut its 2024 GDP growth forecast to 1% from 1.4%.

In London, the FTSE 100 slipped 0.1%, despite a 3.7% rise in shares of UK-based pharmaceuticals firm AstraZeneca following the approval of its cancer drug Tagrisso as part of a treatment plan in the US. Meanwhile, US markets were closed for the Presidents’ Day holiday.

The cautious tone in European markets reflects concerns over France's economic outlook, as evidenced by the downward revision in growth projections. The impact is evident in the Stoxx Europe 600 and major national indices, with investors adjusting their positions in response to the lowered GDP forecast.

As investors navigate these market shifts, it's essential to consider the broader implications of economic forecasts on equity markets. The negative sentiment observed in European stocks may lead to increased volatility and potential adjustments in investment strategies. This development emphasizes the importance of staying informed about economic indicators and government announcements that can influence market sentiment.

While individual stocks may experience fluctuations based on company-specific news, the overarching influence of economic forecasts on market indices cannot be overlooked. Understanding the interconnectedness of economic data and market movements provides investors with valuable insights into potential risks and opportunities.

Furthermore, the approval of AstraZeneca's cancer drug in the US serves as a notable highlight amid the broader market concerns. This positive development for the pharmaceutical company demonstrates the sector's resilience and ability to generate positive returns even in challenging market conditions.

Looking ahead, the closure of US markets for the Presidents’ Day holiday adds another layer of consideration for global investors. The subdued trading activity during this holiday can contribute to lower liquidity and potentially amplify market movements. Traders should remain vigilant and adapt their strategies accordingly to navigate the unique dynamics associated with holiday-related market conditions.

The initial decline in European stocks, driven by the downward revision in France's economic growth forecast, underscores the sensitivity of financial markets to macroeconomic indicators. Investors should monitor developments closely, considering both regional and global factors that could impact market dynamics. As market participants assess the implications of economic forecasts, maintaining a balanced and informed investment approach becomes crucial in navigating the ever-changing landscape of international financial markets.