EUR/USD

European Central Bank President Mario Draghi acknowledged on Thursday that economic growth in the euro zone was likely to be weaker than earlier expected due to the fall-out from factors ranging from China's slowdown to Brexit

The economic slowdown raises questions over whether the ECB will be able to increase interest rates for the first time in a decade later this year as its current guidance indicates.

The ECB left that guidance and interest rates unchanged at its meeting on Thursday. But Draghi's downbeat comments, including a reference to "downside" risks, will fuel market speculation that the bank will delay any rate hike.

"The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties," Draghi told a news conference, citing trade and geopolitical threats and emerging market volatility. "The near-term growth momentum is likely to be weaker than previously expected."

Despite citing the rising risks, Draghi nonetheless reeled off reasons for not changing policy now, notably the strength of the region's labour market and rising wage growth, which he said would help push underlying inflation up over the medium term.

"The key factor to assess is the persistence of the uncertainty," he said, adding he was confident that those uncertainties - ranging from the outcome of Brexit to China's slowdown and trade protectionism - were being addressed.

"The Governing Council will give itself more time to assess whether all these risk factors have affected confidence and we are going to have another discussion in March when we will also have the new projections."

Draghi said the Governing Council was unanimous both in acknowledging the growth slowdown and the factors causing it but some policymakers were less optimistic than others about the economic outlook.

Having ended a bond purchase scheme just weeks ago, the ECB said it still expected to keep interest rates at record lows "through" the summer, sticking with its long-standing guidance even though markets now see a much later move.

With Thursday's decision, the ECB's deposit rate, now its main benchmark, remains at -0.40% while the main refinancing rate, its key rate during normal times, stands at 0.00%.

European Central Bank policymakers promised on Friday to tread carefully in removing stimulus any further, just as two fresh surveys pointed to an even bigger-than-projected slowdown in the euro zone's growth.

"We remain committed to maintaining interest rates very low, which is good for the economy," French central bank chief Francois Villeroy de Galhau said. "Progressively we are withdrawing monetary stimulus ... but it is very progressive and depends on improvement in the economy. We'll take the time it takes.”

"The slowdown has surprised us ... we have to be very careful to monitor the data," ECB board member Benoit Coeure said, arguing that the jury was still out on whether this growth dip is temporary.

On Thursday EUR/USD saw the second biggest one-day drop in January to register a daily close below two key levels. The close below both the daily cloud base at 1.1377 and the 1.1351 Fibonacci level, a 61.8% retrace of the 1.1216 to 1.1570 (November to January) rise, means the bearish sentiment has grown. On the other hand, we see a long white candlestick today, that suggests that yesterday’s dovish statement had been widely priced in.

The EUR fell ahead of a European Central Bank meeting in which policymakers may express caution about slowing economic growth.

The European Central Bank is all but certain to keep policy unchanged today but may acknowledge a sharp slowdown in economic growth, raising the prospect of any further policy normalisation being delayed.

The ECB last month ended a bond purchase scheme and maintained its guidance that an interest rate hike is likely late this year. But growth appears weaker than thought just a few weeks ago, suggesting that its next move could even be an easing of policy rather than a tightening.

Germany, France and Italy, the euro zone's biggest economies, barely grew in the fourth quarter and ECB President Mario Draghi has already acknowledged that the slowdown could be longer than expected, setting up the ECB for a dovish meeting.

With much of its firepower depleted, Draghi will use his few remaining tools sparingly, suggesting Thursday's meeting will be more about words than action. The problem with downgrading the risk assessment is that such a change in the bank's guidance would naturally raise expectations of policy action. But the ECB is not yet ready to tweak its stance, so any change in the guidance would risk creating an impression that policy is not in sync with policymakers' assessment of the economy.

Draghi could also opt to stick with the bank's December formulation that growth risks are still broadly balanced, even if they continue to shift to the downside.

The problem is that a growth dip, seen as temporary just a few months ago, shows no sign of going away. Manufacturing contracted near the end of 2018, export growth slowed and sentiment indicators are falling towards multi-year lows. A predicted rise in underlying inflation has also failed to materialise and employment growth is slowing, a worrying sign for wages and inflation.

Some of the weakness may be temporary, like the struggles of the German auto industry to adjust to new emissions standards, investor caution ahead of Brexit or the drag on sentiment from protests against French President Emmanuel Macron.

If a drag on growth persists, the ECB will be pressed to signal record low rates for even longer, providing more stimulus by delaying a hike. It could also offer long-term loans to banks on more generous terms and may tweak its guidance on how long it plans to invest cash from maturing bonds back into the market. Policymakers can afford to wait before taking more concrete steps, hoping for growth to pick up in the coming months and letting markets do its work for now by shifting rate hike expectations as data disappoint.

Bears suffered a setback on Wednesday as the market broke but failed to register a daily close below the 1.1351 Fibo, a 61.8% retrace of the 1.1216 to 1.1570 (November to January) rise. We can see another attempt to close below this level today. Tenkan and kijun lines are negatively aligned, meaning there remains a marginal negative bias. Investors are focused on today’s ECB statement. Market expectations are dovish and we can see a strong EUR/USD upward move if the ECB keeps its December formulation that growth risks are still broadly balanced.

EUR/USD: Financial markets have been ahead of the curve in their worries over the Eurozone growth outlook, and have reduced significantly their view on lift-off this year. Draghi used the December meeting to explain that he viewed market expectations as focused on a thinking that the economy will worsen but importantly "they well understood our reaction function". While the market’s focus is on the date-dependent nature of forward guidance, Draghi is likely to emphasise the state-dependent aspect. It is too early to adjust rate forward guidance, but if it happens it should not be a complete surprise. The ECB meeting this week is likely to have a mild dovish tilt as the ECB focuses more on downside risks to growth but is still unwilling to officially shift risks to the growth outlook which will likely remain “broadly balanced”.

Investors expect a dovish statement from the ECB this week. But in our opinion it is too early to significant shift in ECB policy and the EUR/USD is likely to appreciate if the ECB is less dovish than expected. We opened EUR/USD long at 1.1355 today.

GBP/USD: British workers' pay growth hit a new 10-year high and employment grew by much more than expected in the three months to the end of November, as the labour market remained robust despite other signs of an economic slowdown ahead of Brexit.

Average weekly earnings, including bonuses, rose by 3.4% on the year, the Office for National Statistics said on Tuesday, the biggest rise since mid-2008 and compared with a median forecast of 3.3%. Excluding bonuses, earnings rose by an annual 3.3% in the three months to November. Adjusted for inflation, total pay rose at the fastest pace for two years.

Employment increased by the largest amount since the three months to April, although it is unclear whether businesses will maintain hiring at these levels as uncertainty around Brexit mounts.

British Prime Minister Theresa May sought to break a parliamentary deadlock over Brexit on Monday by proposing to seek further concessions from the European Union on a plan to prevent customs checks on the Irish border.

With little time left until the United Kingdom is due to leave the EU on March 29, there is no agreement in London on how it should leave the world’s biggest trading bloc, and a growing chance of a dramatic ‘no-deal’ exit with no provisions to soften the economic shock.

Still, the Bank of England has said it will need to raise interest rates gradually to offset inflation pressures from the labour market.
The GBP rose on Tuesday after strong employment data suggested Britain's labour market remained robust despite an economic slowdown ahead of Brexit.

The GBP/USD remains above the 7-day exponential moving average. The pair broke above the 50.0% Fibo of September-January fall and the next hurdle is 61.8% Fibo at 1.2970. We stay sideways despite bullish signals coming from technical analysis. Short-term moves are unpredictable and the pair could be volatile due to uncertainty over Brexit.

USD/CAD: The Canadian dollar weakened against the USD as investors worried about progress on trade talks between the United States and China and after the International Monetary Fund cut its world economic growth forecasts.

The IMF predicted the global economy would grow 3.5% in 2019 and 3.6% in 2020, due to weakness in Europe and some emerging markets, and it said failure to resolve trade tensions could further destabilize a slowing global economy.

China's economic growth cooled slightly in the fourth quarter from a year earlier as expected, weighed down by weak investment and faltering consumer confidence as Washington piled on trade pressure, leaving 2018 growth the weakest in 28 years. Canada exports many commodities, including oil, so its economy could be hurt by a slowdown in the global economy.

The decline for the loonie comes after data on Friday showed a pick-up in December in Canada's annual inflation rate but stable underlying price pressures that could forestall additional interest rate hikes from the Bank of Canada over the coming months.

Canadian retail sales report is due on Wednesday.

We used today’s rise to get USD/CAD short at 1.3350, in line with our strategy. In our opinion the corrective move of January drop is coming to an end – the pair is currently near 38.2% Fibo of January move (1.3365).

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