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Currency Market Analysis

Jan 24, 2020 | Currency Market Analysis

Global Themes

  • Will PMIs make or break BOE rate cut?
  • Euro falls after ECB, PMIs eyed
  • US PMIs could drag EUR/USD even lower
  • Market mood remains cautious


Will PMIs make or break BOE rate cut?

A lot of hype has been building about the flash UK PMIs released at 9:30am today. While recent upbeat UK jobs data and business optimism helped reduce the odds of a Bank of England (BOE) rate cut, market participants look to PMI Friday for final clarification before the BOE meeting next Thursday.

Money markets currently price around a 50% chance of a rate cut next week, which falls in line with the many market analysts’ split opinion on the matter. Arguably, traders have priced in a fair portion of the good news anticipated for the PMIs considering the inspired CBI optimism numbers this week. Diminishing political uncertainty is likely the cause for the spike in confidence and if this transpires into improved output results, the pound should climb higher, the question being how high?

  • GBP/USD is expected to lift to $1.32 and GBP/EUR could spike beyond €1.19. However, upside may be limited due to the uncertainty surrounding future UK trade deals hoped to be struck during the transition period, which begins Feb 01.

Euro falls after ECB, PMIs eyed

The European Central Bank’s (ECB) first policy decision of the year failed to impress the struggling Euro yesterday. A more dovish tone was delivered by ECB President Christine Lagarde, which pressured EUR/USD to fresh 6-week lows and GBP/EUR to new 5-week highs as a result.

As expected, the ECB left its main borrowing rate unchanged at zero, but Ms Lagarde stated growth risks remain tilted to the downside despite receding geopolitical and international trade uncertainty. Economists had been encouraged by recent European data readings, but the cautious rhetoric of Ms Lagarde, had investors interpreting this as low interest rates for longer. German bond yields fell as a result, and the Euro weakened across the board, with EUR/USD falling towards the $1.10 handle.

  • Flash PMIs dominate the data calendar today. Market consensus is positive, with expectations that the manufacturing sector should show signs of improvement. If so, this should help stabilise the Euro’s recent decline.

US PMIs could drag EUR/USD even lower

Across the pond, flash US PMIs wrap up what’s been a busy week for the markets. At 14:45, traders await what are forecast to be upbeat activity figures from the world’s largest economy. The US Dollar has clocked another strong start to the new year with its index, which measures the value of the dollar against a basket of major currencies, flirting with 4-week highs.

The stronger dollar has contributed to the fall of the EUR/USD in recent days, dragging the currency pair below key support levels and into territory that could spur a rapid decline under $1.10. The catalyst to drive such a move could be today’s interpretation of the PMI numbers from Europe and the US. Which economy looks healthier and how will this impact the economic outlook and future monetary policy projections?

  • EUR/USD is set to suffer four weekly losses on the bounce and being the most traded currency pair in the world, this can have knock on effects across currency markets. Notably, GBP/EUR is up 0.4% this month due to the weaker Euro, whereas GBP/USD is down 1% on the month due to the stronger dollar.

Market mood remains cautious

The spread of the China coronavirus globally is having a risk-off impact across financial markets. Investors seek asset classes deemed to be less risky in times of heightened global uncertainty. In the currency market, the Japanese Yen is one of the biggest beneficiaries of these investment flows.

The Lunar New Year holiday has begun, with China, Taiwan, South Korea and Indonesia exchanges closed today. With increased travel over this time period, there is a growing concern the virus could quickly spread. Despite the World Health Organisation refraining from declaring this as an international crisis, the outbreak is already expected to negatively impact economic growth in the region due to reduced tourism and industrial production.

  • The so-called safe-haven Japanese Yen is up over 0.6% against the US Dollar this week after two weekly losses to the American currency. However, due to the positive pound sentiment, GBP/JPY is on track for a third week of gains in a row.

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