Tuesday, January 22, 2019

Euro and Pound in play today ahead of fresh data from Eurozone and the UK

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING 

Safe haven assets gain on the back of IMF's forecasts for slower global growth this year as the fund predicts 2019 will see the lowest rate in 3 years. The Yen is leading the gains while the Euro and the Pound are largely unchanged over the past 24 hours, ahead of the ZEW Survey data and the British unemployment figures. Even though the UK data might go unnoticed as traders are focused on the Brexit saga, the former report could put the Single currency under further pressure today. Equities are expected to open lower, Gold seems to be finding a bottom around the $1,280 mark and Oil pulls back after hitting $54 yesterday.

Today market participants will likely focus their attention on the European data with fresh reports from the Eurozone and the UK. The ZEW Survey from Germany and the Euro area will be released this morning and economists are expecting a softer reading on all components, further highlighting the challenges for the Eurozone in the face of the broader trade tensions. The Euro is trading around the 1.1360 level this morning, down from the 1.15 highs of last week and one would naturally expect the bearish ZEW data to send prices even lower.

However, we believe that any losses, should they come, will be short-lived as we expect that the Dollar will struggle to move further to the upside. Treasury yields are moving lower this morning after the US holiday yesterday and the broader macro outlook doesn't support an overly hawkish Dollar bias. As such, even though we may see a pullback towards the 1.13 level, this may be treated as an opportunity for longer-term focused Euro bulls to start placing long bets that will support a new leg higher for the shared currency.

The Pound sits just below the 1.29 mark ahead of the UK labor figures' release and investors clearly hope for a positive resolution to the Brexit issue. Still, Theresa May declines to take the option of a no-deal Brexit off the table, which leaves room for a tail risk scenario; however, this could also be regarded as a negotiating move against the European Union, in anticipation of some kind of improved last-minute offer from the European leaders to avert the catastrophe. Clearly, a high risk/high reward strategy. In any case, today's data should be a non-factor for the Pound, especially since we don't expect any changes to unemployment or wage growth. Unless we get a nasty surprise pointing towards a no-deal Brexit or snap elections in the UK, investors will keep pricing in a positive outcome to the Brexit story further pushing Sterling towards the 1.30 mark.

Gold moved slightly lower yesterday but seems to have found support around the $1,278 level and spent the day consolidating around this area. This is a key support level for the yellow metal and, as discussed yesterday, a rebound from here will lead to a consolidation between $1,280 and $1,295. In the opposite case of a break to the downside, prices could go all the way to $1,265 before finding new bidders. Oil pulls back after reaching $54 yesterday and is currently trading just above the $53 level. Oil producers and energy ministers are flocking to the World Economic Forum in Davos and further talks of production cuts should keep Oil supported; a break above the $55 mark will clear the path towards the $58 target.

Stock markets in Europe had a mildly negative start for the week yesterday while the US bourses were closed observing the Martin Luther King holiday. This morning the Asian markets are trading with a bearish bias, partially affected by the IMF global growth downgrade and latest Chinese economic figures. Futures in Europe and the US are pointing lower and after a spectacular rally for equities over the past 3 weeks or so, the question now becomes whether it's time for a correction.

MARKET EVENTS TO WATCH

  • UK Unemployment Rate – 1.30pm
  • Euro-Zone ZEW Survey (Economic Sentiment) - 2pm
  • German ZEW Survey (Expectations) - 2pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research