Things were looking up

​​​​​​Today's news headlines:

  • ‘China reports sharp rise in Coronavirus cases’. The Chinese government announced a sharp rise in new Coronavirus infections and related deaths following a change in the methodology to diagnose the disease. Shortly after the announcement, authorities sacked the top two officials in Hubei, the province at the centre of the virus outbreak. (Financial Times)
  • ‘Britain beyond Brexit, Johnson reshapes government’. Boris Johnson is set to reshuffle his cabinet on Thursday, but the changes are not expected to be as radical as once thought. According to a source in Johnson’s office, the Prime Minister will seek to promote junior ranks of government, particularly women, while rewarding his loyal supporters who helped secure a majority last year. (Thomson Reuters)

Mission not accomplished

Things were looking up, weren’t they? The end of the US-China trade war and the UK’s departure from the EU was supposed to usher in a return to global growth in the new decade. However, it looks as though the hole we’re stuck in may be much larger than originally thought. Yesterday, data for December’s Euro-Area Industrial Production highlighted the scale of the challenge ahead; the 2.1% drop was the worst reading since 2012 and the second worst reading since the Global Financial Crisis. Combine this with daily reminders that the Coronavirus threat isn’t likely to fizzle out in the near-term – China has already cancelled April’s F1 Grand Prix – and there’s little wonder that the Euro has slipped to a two-year low against the Dollar. Yesterday, the European Central Bank’s chief economist, Philip Lane, said that the economy could suffer a “pretty serious short-term hit” as a result of the outbreak. Considering the region is forecast to grow just 1.1% this year, the Central Bank may consider additional policy stimulus in the short-term.

Over in the US, the Federal Reserve’s Chairman, Jerome Powell, also spoke about the Coronavirus while fielding questions from US Senators. He said that the impact on the economy will show up in the economic data soon, but it’s still too early to judge whether there would be a material change in their view. Powell did, however, admit that persistently low interest rates are now a fact of life for the Fed who must be prepared to use their tools aggressively in the next downturn. His comments prompted a flurry of US 10-year treasury activity as yields fell to 1.62%, raising fears that longer-term yields could eventually fall to zero.

Bottom line: The ongoing divergence in data between the Euro-Area and US has certainly contributed to the longer-term downward trend of the EUR/USD pair. The spread of Coronavirus has also presented a new risk for Central Banks of how to find the ever-elusive uplift in price pressures. Unless global growth picks up there is little impetus for depreciation of the Greenback, whose assets are greatly valued in uncertain times.

GBP/USD

The pair erased overnight losses this morning, edging closer to the 1.30 level that was resisted in yesterday’s session. Yesterday, the Sterling index closed above its 50-daily moving average which may provide a floor for the currency in today’s session, ahead of this afternoon’s US inflation data. Meanwhile, the US Dollar index ticked lower this morning, further supporting a move higher for Cable.

GBP/EUR

The currency cross posted two-month highs this morning before retreating to the 1.19 figure ahead of a light day in the economic calendar. The Euro index ticked higher having potentially found a floor to its recent move lower, while Sterling remains range bound but supported by its 50-daily moving average. This could hold the currency pair above the 1.19 level in today’s session.

EUR/USD

This morning, the pair edged higher after reaching two-and-a-half year lows at 1.0865 overnight. The pair could test the 1.09 level today as the US Dollar ticks lower on a trade-weighted basis. This afternoon’s US inflation data may be the main driver of the pair’s price action after German inflation data came in as expected early this morning.