Fundamental Forecast for the Euro: Neutral
– The first revisions to the Q4’18 German and Eurozone GDP reports should show a greater slowdown in growth than initially measured.
See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.
The Euro had another run-of-the-mill week, gaining ground against three currencies, while losing ground against the other four. A breakdown of the various EUR-crosses showcases a clear shift in risk appetite. EURUSD was the worst performing pair, dropping by -1.17%, followed by EURJPY at -0.96%. Meanwhile, the Euro’s best performance came against the Australian and New Zealand Dollars (EURAUD +1.09%; EURNZD +1.17%). That the three safe haven currencies were the top performers and the three commodity currencies were the worst performers should be a warning sign, one that portends of potentially more weakness to come in risk-correlated, high beta assets.
Revisions to GDP Data to Showcase Weakening Environment
One of the main drivers of Euro weakness in recent weeks has been the widening gap between the European Central Bank’s growth expectations and how actual data have materialized. The coming week’s top economic data releases should further underscore the need for the ECB to keep its extraordinary monetary stimulus in place, despite the Governing Council’s best laid plans to raise rates by sometime around “summer 2019.”
The revision to Q4’18 German GDP is due to show that the Eurozone’s largest economy only grew by +0.8% in 2019, down from the +1.1% rate initially reported. A significant decline in the German reading should weigh down the Q4’18 Eurozone GDP reading, which first checked in at +1.2% (y/y). After last week’s economic figures, the Citi Economic Surprise Index remained deep in the red at -80.1, down from -77.3 at the end of last week, and only slightly higher than where it was one month ago at -88.6.
Brexit, Trade Wars, US Government Shutdown All in Play
While most of the EUR-complex has been trading largely along the lines of global risk dynamics – the safe haven crosses and commodity crosses are moving in opposite directions – two pairs are still under the sway of significant exogenous influences that could cause them to decouple. EURGBP, of course, continues to be guided by Brexit (and for that matter, all of the GBP-crosses are in the same boat). Any single development that materially changes the odds of a no deal, ‘hard Brexit’ will dictate outcomes for EURGBP, regardless of whatever is happening with Eurozone economic data. Elsewhere, EURUSD brief reprieve away from US political influences is now over, with another US government shutdown possible at the end of the week and the deadline for the US-China trade war détente in three weeks.
Euro Weakness Mirrors Decline in Inflation Expectations
Market-measures of inflation expectations remain under significant pressure, which have historically – and currently – been glove-in-hand with a more difficult trading environment for the Euro. The 5-year, 5-year inflation swap forwards (ECB President Mario Draghi’s preferred market-measure) finished last week at 1.440%, a fresh 52-week low. To this end, this measure of inflation peaked in January 2018 at 1.774%. Between the underwhelming GDP figures and ongoing deterioration in inflation expectations, it’s seems if it’s only a matter of time before the ECB takes on a more dovish tone.
Positioning Data Being Released Once More, but Still On a Delay
The US government shutdown from December 23 to January 25 is still having an impact on the release schedule for the CFTC’s COT report. As such, the CFTC’s COT report released on Friday was for the week ended January 8, and it showed that speculators had decreased their net-short Euro positions to 40.5K contracts from 58.5K net-short contracts reported for the December 25 period. The CFTC’s COT report is still not a reliable source of positioning at present time; instead, traders may want to look to the IG Client Sentiment Index.
FX TRADING RESOURCES
Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at firstname.lastname@example.org
Traders Net-Short Are 63.3% Higher from Last Week
TRADERS REMAIN NET-SHORT
US 500: Retail trader data shows 24.6% of traders are net-long with the ratio of traders short to long at 3.07 to 1. In fact, traders have remained net-short since Jan 07 when US 500 traded near 2473.53; price has moved 11.9% higher since then. The number of traders net-long is 1.7% higher than yesterday and 1.6% lower from last week, while the number of traders net-short is 5.2% higher than yesterday and 63.3% higher from last week.
For more in-depth analysis, check out the Q1 2019 Forecast for Equities
S&P 500 SUGGESTS STRONG BULLISH BIAS
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger US 500-bullish contrarian trading bias.
— Written by Nancy Pakbaz, CFA, DailyFX Research
Follow Nancy on Twitter @NancyPakbazFX
On to the Next Big Levels of Resistance
S&P 500/Dow Jones/Nasdaq 100 Technical Highlights:
- S&P 500 nearing 2800-area, several swing-highs from last year
- Dow Jones 26k-ish stands between it and record highs
- Nasdaq 100 trading around resistance already
Check out the forecasts for Global Stock Indices and other markets on the Trading Guides page.
S&P 500 nearing 2800-area, several swing-highs from last year
The S&P 500 is continuing to show impressive strength since its v-bottom began the day after Christmas, with it having a few points along the way where it could have been stopped in its tracks. But it wasn’t, and this has levels prior to the December swoon in view. The area surrounding 2800 is a big one.
From 2800 up to 2817 there were three peaks created from failed rallies, a logical area, with the rally having come this far, to look for stocks to weaken from. Watching price action will be key, as always, but especially around the levels just ahead.
While resistance looks likely to get tested soon, the upward channel structure over the past month will keep stocks pointed higher for as long as it holds. If the S&P is rejected off resistance, to further bolster the notion of a sizable retracement we’ll need to see the underside parallel undermined.
For now, the top-side must be respected, but the time for material weakness may be nearing…
Stocks are rallying, but will it last in the long-term? Find out where our analysts see stocks headed in the Global Equities Forecast.
S&P 500 Daily Chart (2800/817 big spot)
Dow Jones 26k-ish stands between it and record highs
The Dow is nearing the 26k-area, a spot which is basically the equivalent of what 2800 is to the S&P 500. The zone runs up to near 26300. The focus is primarily on the S&P right now as it is the broader index, but depending on how price action plays out, the Dow may be the better index to short at some point if it shows relative weakness to the broader market.
Dow Daily Chart (26k-ish stands in the way)
Nasdaq 100 trading around resistance already
The Nasdaq 100 continues to lag behind, which is something to continue monitor given it was the bull-market leader with its leading group of stocks – FAANG – dominating price action and sentiment. The NDX is trading around the 200-day and near late-year swing highs equivalent to the ones discussed with regard to the S&P 500 and Dow. So far, relative weakness is making the 100 the preferred fade if the S&P finds material selling off resistance surrounding 2800/17.
Nasdaq 100 Daily Chart (trading around resistance)
To learn more about U.S. indices, check out “The Difference between Dow, Nasdaq, and S&P 500: Major Facts & Opportunities.” You can join me every Wednesday at 10 GMT for live analysis on equity indices and commodities, and for the remaining roster of live events, check out the webinar calendar.
Tools for Forex & CFD Traders
Whether you are a beginning or experienced trader, DailyFX has several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.
—Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX
Aussie Dollar Falls on RBA Minutes, US-China Trade Talks Eyed
TALKING POINTS – AUSSIE DOLLAR, RBA MINUTES, ZEW, TRADE WARS, CHINA
- Aussie Dollar, commodity bloc FX down on downbeat RBA meeting minutes
- Germany’s ZEW survey may compound worries about slowing global growth
- Trade wars in focus on US-China negotiations, fears of US auto tariff hike
The sentiment-linked Australian, Canadian and New Zealand Dollars weakened in otherwise quiet Asia Pacific trade. The move appeared to be inspired by an ominous tone in minutes from February’s RBA policy meeting. Meanwhile, the US Dollar corrected gently higher.
RBA officials cited “significant uncertainties”, noting that trade tensions and cooling domestic demand have increased negative knock-on risks from China. They added that consumption may fall if domestic house prices fall much further. They suffered the worst drop since 1983 in the three months through January.
TRADE WAR DEVELOPMENTS, GERMAN ZEW DATA MENACE MARKETS
Looking ahead, Germany’s ZEW survey of analyst sentiment may compound the downbeat mood, especially if it echoes the disappointing trend in regional data outcomes since September. A small improvement in the forward-looking Expectations index is nevertheless expected to keep it within a hair of six-year lows.
The tone of US-China trade negotiations may also be formative as a delegation from Beijing arrives in the US for continued talks. Both sides painted a rosy picture earlier in the week, but the Trump administration may be preparing a spoiler as the President ponders raising auto import tariffs.
What are we trading? See the DailyFX team’s top trade ideas for 2019 and find out!
ASIA PACIFIC TRADING SESSION
EUROPEAN TRADING SESSION
** All times listed in GMT. See the full economic calendar here.
FX TRADING RESOURCES
— Written by Ilya Spivak, Currency Strategist for DailyFX.com
To contact Ilya, use the comments section below or @IlyaSpivak on Twitter
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