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European Open Preview – Dollar slides while stocks climb; jobless claims and IP gathering attention in the US
February 15, 2018 9:26 amVideo
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Here are the latest developments in global markets:
Major movers: Dollar tanks while US stocks close higher, even despite CPI beat
To say that markets moved sharply after the US data releases yesterday is an understatement. In terms of inflation, both the headline and the core CPI rates remained unchanged at 2.1% and 1.8% respectively in yearly terms, beating their forecasts for modest declines. However, retail sales disappointed notably, with the headline rate dropping instead of rising as anticipated, while last month’s prints were also revised lower.
The market response was fierce. Initially, the knee-jerk reaction was a stronger dollar as the yields on 10-year Treasury bills surged to reach 4-year highs. The opposite was true for US equity indices, which dropped on speculation that the Fed may raise rates more aggressively due to robust inflation, and the prospect of softer corporate earnings amid signs that consumption may be waning.
However, this all reversed within the following minutes. The dollar quickly gave back all its gains to trade much lower against its major counterparts, while US stocks recovered to finish the day even higher. There was no clear catalyst for the reversal. A plausible explanation is that despite the signs of strong inflation, the FOMC may not pick up the pace of normalization, amid signs of slowing consumption in the economy. Indeed, in the aftermath of the data, the Atlanta Fed GDPNow model revised down its GDP forecast for the first quarter to 3.2%, from 4.0% previously. Some large option expiries at that time (especially in euro/dollar) may have helped to initiate the reversal in the dollar, and once it was underway, the break of some key technical levels likely aided as well.
Overall, the reaction to this data set confirms that despite some consolidation in recent days, the negative sentiment surrounding the dollar remains in full force, amid concerns over rising budget deficits and the sustainability of the US debt trajectory, among others. Judging by yesterday’s moves, dollar/yen appears to be a good proxy for further dollar weakness. Besides the dollar tanking, the yen is enjoying safe haven inflows amid all of this havoc, causing the pair to break below key technical barriers. Moreover, Japanese officials do not appear to be particularly worried with the currency’s appreciation, so far at least, with Finance Minister Taro Aso noting overnight that the yen’s strength is not abrupt enough to warrant intervention. Another key pair to watch is euro/dollar, which is now hovering very close to its recent highs around 1.2530. Should the bulls manage to overcome that barrier, it would be a bullish signal that may carry larger upside extensions.
Day ahead: US initial jobless claims & industrial production on the agenda
The US will be on the receiving end of relatively important data during Thursday’s trading. Initial and continued jobless claims for the week ending February 10 will be made public at 1330 GMT. First-time benefit claimants are expected to stand at 230k, this being higher by 9k relative to the week that preceded, though yet again below the 300k threshold that’s linked to a healthy labor market. Other data released at the same time include February’s New York Fed manufacturing survey and the Philly Fed business index for the same month, as well as data on producer prices for the month of January.
US industrial production data for January are also of significance. Those are scheduled for release at 1415 GMT. Industrial production is expected to ease, growing by 0.2% on a monthly basis, after beating expectations in December to expand by 0.9% m/m. Manufacturing output, a subset of industrial output, will also be watched, while figures on capacity utilization are also due at the same time. Lastly, February’s National Association of Home Builders Housing Market index will be made public at 1500 GMT.
Out of Canada, the ADP’s nonfarm employment change due at 1330 GMT might attract some interest.
ECB executive board member and chief economist Peter Praet will be participating in a discussion at a conference organized by the French Treasury and the IMF at 1045 GMT. Sabine Lautenschlager, herself an ECB board member, is scheduled to give a speech at Dutch Banking Day 2018 at 1200 GMT. Norway’s central bank governor, Oystein Olsen, will be giving a keynote speech at 1700 GMT. Lastly, Bank of Canada Deputy Governor Lawrence Schembri will be talking at 1830 GMT.
In equities, companies releasing quarterly results will be attracting attention.
Technical Analysis: USDJPY hits fresh 15-month low; RSI oversold
USDJPY recorded a fresh 15-month low of 106.17 during Thursday’s trading after losing significant ground in previous sessions.
The short-term bias is clearly negative. The RSI is well into bearish territory below 50 on the four-hour chart and is heading lower. Notice though that it has entered oversold territory below 30.
Should Thursday’s data out of the US come in stronger than expected, then the pair might receive a boost. In this case, the area around the 107 handle – a level of potential psychological significance – could act as a barrier to the upside. Stronger bullish movement would shift the focus to the middle Bollinger line – a 20-period moving average line – at 107.71.
Weaker US data could see USDJPY extending its losses. Support could be taking place at the moment around the lower Bollinger band at 106.16 (including the 106 handle that might hold psychological importance). A violation of this area would turn the attention to the range around 105.
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