Friday, January 25, 2019

Euro hits 2019 lows: more downside ahead or an opportunity to buy low?

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

MORNING BRIEFING

The Euro ended the day at its lowest level for 2019 on the back of ECB's monetary policy decision as Mario Draghi disappointed those hoping for a positive spin in his remarks. On the flip side, the Pound rallies further as news that the DUP has decided to back PM May's Brexit plan increases the odds of an orderly exit from the EU, even at a delayed date. Equities were mostly positive as investors seem to think that US and China are closer to a trade deal, which certainly doesn't seem to be the case. Finally, Gold remained unchanged but Oil is scoring gains again trading just shy of the $54 mark.

Mario Draghi's press conference was not what the Euro bulls were hoping for. The head of the ECB acknowledged the slowdown in the Euro area, warned that the risks to growth have moved to the downside and suggested that stimulus should remain in place for an extended period of time. He couldn't really do otherwise as the recent data from Germany and the periphery of the Eurozone was clearly bearish, with the fresh PMI figures released before his speech printing significantly softer than expected.

The Single currency traded all the way to 1.13 and the key question again becomes: does our medium-term outlook for the Euro change? The answer is still no, but we may have to be more patient before we actually see the shared currency staging a meaningful rally higher. We continue to believe that the factors behind Europe's current weakness are transitory rather than long-lasting: China's slowdown is a concern but with recent steps taken by the Chinese authorities we believe that demand for exports will continue, and possibly pick up. Trump's trade war has taken a toll on business sentiment but again we don't see this lasting for the duration of 2019 and domestic political issues also seem to have subsided - especially if a soft Brexit is achieved this will boost optimism for the Euro as well.

At the same time, we continue to expect more weakness ahead for the US Dollar which should act as another positive catalyst for Euro's prices. The US' twin deficit, its late-cycle economic phase and the lack of bi-partisan support for the US President create an unfavorable outlook for the greenback. Finally, from a technical perspective the current price levels look favorable for longer-term investors to position themselves for a positive 2019 for the Euro and should this come to play we think that the way forward points higher. Our forecast for the end of Q1 stands at 1.16 to 1.18.

Gold has seen little action over the past 72 hours consolidating between $1,280 and $1,285 and we expect this to continue to be the case until the end of the week. What is positive for the yellow metal's outlook is that it has managed to stay above the $1,278-80 support level and this increases the odds of a further rally higher; however, for this to materialize we need fresh soft US data and until we see this we will remain patient and play the ranges for now. Oil makes another run towards $54 overnight and the crisis in Venezuela creates another supply risk that is boosting prices. At the same time, reports that OPEC's production and shipment figures will decrease further is another reason to remain bullish on Oil with $58 our medium-term target.

Equities were rather positive yesterday and most US and European markets ended the day in the green. Tech earnings didn't excite investors but rumors that US and China are making progress in their negotiations outweighed the disappointment. For the time being, investors prefer to focus on hopes for a US-China deal and the futures in Europe and the US are pointing towards a positive opening bell. Nevertheless, we see no evidence that the two sides are closer to a deal so we remain cautious. Citi downgraded US stocks to neutral, expecting a “mid-cycle slowdown” but we think that the US is a lot closer to a late-cycle phase and we expect this to be reflected on the upcoming data releases.

MARKET EVENTS TO WATCH

  • German IFO Expectations – 1pm
  • German IFO Current Assessment - 1pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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