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European Open Preview – Dollar sinks to 3-year low; UK retail sales eyed
February 16, 2018 9:26 amVideo
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Here are the latest developments in global markets:
Major movers: The dollar’s slide continues; Kuroda secures another term as BoJ Governor
The US dollar continued to bleed on Thursday, extending its losses during the Asian trading session Friday, even though the yields on 10-year US Treasuries touched a fresh four-year high yesterday. The inability of the greenback to draw any support from the bond market lately is quite perplexing, and likely reflects the fact that yields may be rising for the “wrong reasons”.
Namely, instead of the surge in yields being driven by expectations that a healthy US economy will lead the Fed to raise rates more aggressively, it may be largely owed to investors reducing their exposure to Treasuries amid concerns that widening US deficits will make the nation’s debt trajectory even more unsustainable. Indeed, today’s release of flow data from the Japanese Ministry of Finance adds credibility to this argument, as it confirmed that Japanese investors continued to sell off foreign bonds in the week ended February 9. The repatriation of these funds in light of the Japanese fiscal year ending soon may be one of the major factors behind the yen’s recent gains.
Speaking of the yen, it gained nearly 0.3% against the dollar today to briefly touch the 105.50 area, a fresh 15-month low for dollar/yen, even despite relatively dovish news coming out of Japan. Haruhiko Kuroda has been reappointed for another term as Bank of Japan (BoJ) Governor, while the government also nominated another two deputy Governors to join the BoJ, both of which are seen as policy doves. This suggests that the Bank is very likely to keep its ultra-loose policy framework in place for a while longer, which in isolation, is a negative development for the yen. Nonetheless, in an environment where Japanese funds are repatriating money, and where the currency may enjoy increased inflows due to its safe-haven status amid this equity turbulence, this may not matter all too much in the near-term.
Elsewhere, aussie/dollar is 0.4% higher, with the pair remaining largely unfazed by some comments from Reserve Bank of Australia Governor Philip Lowe overnight, who said that he would prefer a lower AUD to a higher one.
Day ahead: UK retail sales, US housing data and University of Michigan consumer sentiment survey among Friday’s releases
Dominating attention during morning European trading hours (at 0930 GMT) will be the release of UK retail sales for the month of January. Both headline and core retail sales – that exclude fuel for automotives – are projected to rebound on a monthly basis following December’s contraction. In 2017, UK retailers experienced their worst year since 2013 as inflation outstripping wage growth – translating into weaker purchasing power for households – weighed on consumer spending and consequently on retail sales. Should the readings move convincingly towards offsetting weakness from the past, then market participants are likely to interpret them as yet another factor supporting the case for a Bank of England rate hike being delivered sooner rather than later, potentially pushing sterling higher versus other currencies.
US housing data due at 1330 GMT are also of importance. Housing starts were affected by cold weather conditions in December, recording their sharpest monthly fall in around a year. January’s print is interesting to watch as the extreme weather effects are dropping out of the data. Building permits and import prices for January will be made public at the same time.
Another release attracting interest in the US is the University of Michigan’s preliminary survey on consumer sentiment for the month of February. Not much of a change in consumer sentiment is expected relative to January. The survey will be made public at 1500 GMT. Investors may also look at another aspect of this survey, inflation expectations, to either confirm or disprove the recent narrative that higher US inflation is around the corner.
Canadian manufacturing sales for the month of December due at 1330 GMT will be gathering loonie traders’ attention.
In politics, US Secretary of State Rex Tillerson will be meeting Turkish Foreign Minister Mevlüt Çavuşoğlu. The meeting could be interesting given the rising tensions between the two countries. Also of interest – amid Brexit negotiations – might be a meeting between UK PM Theresa May and German Chancellor Angela Merkel in Berlin.
Oil traders will be paying attention to the US Baker Hughes oil rig count due at 1800 GMT.
The earnings season remains in full swing, with Coca-Cola being among companies releasing quarterly results in the US.
Technical Analysis: EURGBP looking increasingly neutral in short-term ahead of UK data
EURGBP retreated a bit after hitting a one-month high of 0.8919 on Wednesday. The Tenkan-sen line remains above the Kijun-sen line – a positive short-term signal – though both lines have flatlined, perhaps pointing to a lack of direction in the short-term. The RSI seems to have halted its advance as well, lending support to a mostly neutral short-term picture.
UK retail sales data due later have the capacity to move the pair in either direction. Stronger-than-anticipated readings are likely to push it lower. Support in this case could come around the current level of the 100-day moving average at 0.8855. The area around this level also encapsulates the Ichimoku cloud as well as the 50-day MA (0.8831), while not far below lie the Tenkan-sen (0.8825) and Kijun-sen (0.8806) lines; given the proximity of all these points, they could in essence be viewed as one broad range of support.
Weaker-than-projected data on the other hand, are expected to be met with price advancing. In this scenario, the area around Wednesday’s high of 0.8919 (including the 0.89 handle which may be of psychological significance) might act as a barrier to the upside. In case of an upside break, the 0.90 handle would be eyed next. The range around this point includes a number of peaks from the recent past.
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