Friday, November 29, 2019

US-China tensions risk escalating once again; did September’s monetary policy stimulus help the EU economy?

  • China
  • Yen
  • Euro
  • Pound
  • Stocks
  • European Central Bank

Market recap: Global stocks extends losses while US markets closes for Thanksgiving

US stocks and bond markets were closed on Thursday for the Thanksgiving holiday. But US equity futures continued to fall as China said on Thursday that it would retaliate to the US legislation backing Hong Kong protestors. Safe haven assets gained on escalating US-China tensions. Gold ended Thursday 0.13% higher. Japan's Industrial Production for October fell the most in the last five-and-a-half years, contracting 4.2% instead of the 2% contraction that economists forecast but the yen still strengthened 0.03% against the dollar.

November's German inflation (preliminary estimate) fell slightly short of expectations, staying constant with October at 1.1% instead of the expected 1.2% that economists forecasted, although the harmonized inflation rate measure jumped to 1.2% from a previous of 0.9% and beat economists’ expectations of 1.1%. The euro gained 0.09% against the greenback on Thursday as a result.

Stocks in Asia looks set to suffer losses for the second straight day on Friday. The Hang Seng Index and Straits Times Index started the day 0.70% and 0.04% lower. The Nikkei opened Friday’s trading session 0.38% higher but fell later in the day.

Today’s Analysis: EUR/GBP looks likely to continue its downtrend in the medium term

After the release of mixed inflation data in Germany on Thursday, investors will now focus on unemployment rate for October and inflation rate for November in the EU that will be released at 2pm today (GMT +4). Euro watchers will likely be looking to the data for more insight on the European Central Bank's (ECB) future decisions on monetary policy. During ECB President Christine Lagarde's first major speech last week at the Euro Finance Week in Frankfurt, she only reiterated the need for the central bank to review its monetary policy framework, failing to speak about her stance on Europe's monetary policy. Overnight index swaps tracking the central bank’s interest rate decision continues to indicate that it is highly probable that it will leave rates unchanged at Lagarde's first monetary policy meeting on December 11th. This is thanks to the already negative interest rates in the EU and the aggressive easing that the central bank conducted in September which saw a 10bps cut to its deposit facility rate (to -0.5%) and the reintroduction of its asset purchase program (at a monthly pace of 20bn euros from November 1st).

Economists expect unemployment to stay constant and inflation to pick up in the EU



While it is unlikely that today's data will change the outcome of December's monetary policy meeting, investors will be looking to inflation and unemployment as an indication on whether September's monetary policy easing has been effective. If inflation falls or unemployment rises in the EU, the euro is likely to weaken more against the pound, possibly breaking 0.8495's level, which will be a new seven-month low for EUR/GBP.


But sterling will likely be affected by the ongoing UK elections as well. Most recently, the Multi-level Regression and Post-stratification (MRP) poll (YouGov's MRP polls in 2017 correctly predicted that former British Prime Minister Teresa May would lose her majority when other traditional polls suggested that the Conservatives would secure a large win) commissioned by the YouGov group shows that the Tories may end up winning 359 of the 650 seats in parliament.

YouGov Election Polls signals that Tories’ still maintains its lead over rival parties


If the Tories can maintain or extend their lead in polls, then sterling is likely to continue to strengthen prior to the general election on December 12th. Also, if the general election’s outcome is in Tories’ favour, then the pound is likely to surge as the UK will be expected to make significant progress on Brexit during the latter part of December and in January next year. In this best-case scenario for the pound, EUR/GBP is likely to break 0.8495's support level and fall towards 0.8488 in the medium-term. But if the Tories fail to regain majority, Brexit is likely to be delayed yet again roughly around the January 31st deadline in 2020, although this is subject to EU officials' approval. EUR/GBP is then likely to spike up and break the 0.8572 resistance and rise towards 0.8602 in the medium-term.

Technical Analysis:         


Bears continue to pull EUR/GBP lower as the UK’s general election polls continue to favour the Conservative Party. The bears look likely to continue to dominate the currency pair in the near-term. But as the bulls retest the resistance level of 0.8531, they are unlikely to break past it if economic data from the EU beats expectations later today. If EU’s economy continues to weaken and Tories in the UK continue to dominate the British general elections, expect the bears to push EUR/GBP lower and break the resistance level 0.8495, to a new seven-month low. If the bears succeed, they are likely to continue strong downward pressure on the currency pair and attempt to make lower lows.

Support: 0.8495 / 0.8488

Resistance: 0.8531 / 0.8572 / 0.8602

EUR/GBP Chart (H4)