Proceeding at a medium pace

​​​​​Today's news headlines:

  • ‘Japan’s GDP shrinks at 6% rate after consumption tax hike’. Japan’s GDP contraction for Q4 2019 came in at an annualised 6.3%, far worse than analysts’ expectation of a 3.7% contraction. The impact of a rise in consumption tax, which came into effect last Autumn, outweighed stimulative policies to help cushion the blow from tighter fiscal policy. The result has raised fears of recession in Japan and adds pressure on the central bank to inject monetary stimulus this year. (Financial Times)
  • ‘UK Brexit negotiator to set out goals after EU warnings’. The UK’s chief Brexit negotiator, David Frost, will make a speech in Brussels today outlining Britain’s goals over its future relationship with the EU. Boris Johnson said the UK wants a deal similar to those agreed with other countries outside the EU. French foreign minister, Jean-Yves Le Drian has warned of a fierce clash as both parties try to negotiate their post-Brexit relationship. (Bloomberg)

Steady as she goes

As we head into today’s US Dollar holiday, we’re seeing a continuation of last week’s general themes, albeit in a more subdued fashion. The market is starting to experience Coronavirus-fatigue, yet it hasn’t stopped spreading and the potential for escalation is still very present. Roughly 3,000 holiday-makers that had been stuck on infected cruise ships are beginning to head home to more than 40 countries, which has fuelled fears of an acceleration in the spread of the epidemic. Meanwhile, China’s central bank has sought to get ahead of the potential shock of the virus, offering looser lending conditions to commercial banks by cutting interest-rates for medium term loans. Bear in mind that this could just be the beginning of action by the PBOC, as China assess the likely economic impact of the virus.

Meanwhile, the US Dollar has had its strongest start to a year since 2015, climbing roughly 2% to-date, supported by increased demand for safe-haven currencies whilst uncertainty over the virus remains. The Greenback has also benefitted from solid US economic data and consistent demand for US treasuries, despite falling interest rates. We’ll need to see a broad pullback in the US Dollar before we start talking about a rebound in global growth conditions as resource-related currencies like the Aussie Dollar have tumbled on China fears.

Bottom line: Sentiment will continue to hinge on Coronavirus news, with little else able to break currencies out of their respective trading ranges today. Tomorrow and the rest of the week will be a different story, with a slew of economic data to come. It’s worth noting that the Dollar index is around the top of its current range. This could spell good news for Sterling and the Euro as the week progresses.

GBP/USD

Sterling closed last week above the 1.30 figure against the US Dollar, after testing the level during Friday’s session. This could prompt another push higher for the pair, particularly as the US Dollar may top out of its recent rally on fading Coronavirus concerns. On Friday, the 50-daily moving average at 1.3068 provided resistance for the pair which could come into play again today.

GBP/EUR

The pair closed last week 2% higher on a combination of Sterling strength and Euro weakness. The combined move translated to a high of 1.2055 and opens this week around the 1.2030 mark. With little reason to be optimistic about the Eurozone economy, a weaker Euro could persist throughout the week supporting the pair at the 1.20 level. However, Sterling’s recent move places it at the top of its index’s two-month trading range, so a move lower might be expected.

EUR/USD

The Euro closed last week below the 1.0850 level for the first time since May 2017, as poor economic data undermined signs of a recovering Eurozone and Coronavirus fears boosted the US Dollar. With little in the way of European data and US markets closed due to President’s day, price action may be limited in today’s session. Fading Coronavirus fears weighing on the US Dollar may be the most likely cause of a rebound in the common currency if Eurozone data continues to disappoint.