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Mid-Day Report: Dollar Maintains Bullishness, Except Versus Euro

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Dollar stays firm against most major currencies on speculations of Fed March hike. Nonetheless, the greenback trades lower against Euro as EUR/USD defended 1.0493 near term support. Fed fund futures are pricing in more than 77% chance of a March hike after a wave of hawkish comments from Fed officials. The focus will now turn to Fed chair Janet Yellen’s speech, as well as that of vice chair Stanley Fischer today. Traders would be eager to get confirmation on their expectations. Meanwhile, next Friday’s non-farm payroll report could be the final piece of data policymakers would watch before FOMC meeting on March 14/15.

UK services growth slowed

Sterling weakens against Euro today after weaker than expected services data. UK PMI services dropped to 53.3 in February, down from 54.5 and missed expectation of 54.0. Markit noted that “UK service sector firms remained in expansion mode during February, but growth momentum eased further from the 17-month peak seen at the end of 2016.” And, “the slowdown mainly reflected a softer pace of new business growth, which some respondents linked to more cautious spending among consumers.” At the same time, Markit chief business economist Chris Williamson said that “inflationary pressures remained the highest for six years as firms struggled with rising costs associated with the weak pound, but optimism about the year ahead remained elevated by recent standards.”

Also released from Europe, Eurozone retail sales dropped -0.1% mom in January. Services PMI was revised down to 55.5 in February. Germany services PMI was finalized at 54.4 in February. German retail sales dropped -0.8% mom in January. France services PMI was revised down to 56.4 in February. Italy services PMI rose strongly to 54.1 in February.

Japan CPI ticked up in January

Japan national CPI core rose to 0.1% yoy in January, up from -0.2% yoy, above expectation of 0.0% yoy. That’s also the first uptick in 11 months. Tokyo CPI core, however, dropped -0.3% yoy in February, unchanged from prior month’s reading, and missed expectation of -0.2% yoy. The jump in National CPI core is seen mostly as a recent of energy prices. There is still no clear evidence of momentum in underlying inflation, including wages. And, the reading is still far below BoJ’s 2% target. It’s difficult for BoJ to start scaling back the massive monetary stimulus any time soon. Unemployment rate dropped 0.1% to 3.0% in January. Household spending dropped -1.2% yoy. Consumer confidence dropped 0.1 to 43.1 in February.

Daily Pivots: (S1) 1.0550; (P) 1.0590 (R1) 1.0616; More…..

EUR/USD recovers ahead of 1.0493 after forming a temporary low at 1.0494. Intraday bias remains neutral as the pair is still bounded in range of 1.0493/0630. Overall near term outlook stays bearish with 1.0630 resistance intact. Downside breakout is expected sooner or later. Fall from 1.0828 is resuming the larger down trend. Below 1.0493 will target 1.0339 low first. Break will confirm our bearish view and target parity. However, break of 1.0630 will dampen our view and turn focus back to 1.0828 resistance instead.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

EUR/USD 4 Hours Chart

EUR/USD Daily Chart

MT
Ccy
Events
Actual
Consensus
Previous
Revised
23:30
JPY
Jobless Rate Jan
3.00%
3.00%
3.10%

23:30
JPY
Household Spending Y/Y Jan
-1.20%
-0.30%
-0.30%

23:30
JPY
National CPI Core Y/Y Jan
0.10%
0.00%
-0.20%

23:30
JPY
Tokyo CPI Core Y/Y Feb
-0.30%
-0.20%
-0.30%

1:45
CNY
Caixin PMI Services Feb
52.6

53.1

5:00
JPY
Consumer Confidence Feb
43.1
43.5
43.2

7:00
EUR
German Retail Sales M/M Jan
-0.80%
0.30%
-0.90%

8:45
EUR
Italy Services PMI Feb
54.1
52.8
52.4

8:50
EUR
France Services PMI Feb F
56.4
56.7
56.7

8:55
EUR
Germany Services PMI Feb F
54.4
54.4
54.4

9:00
EUR
Eurozone Services PMI Feb F
55.5
55.6
55.6

9:30
GBP
Services PMI Feb
53.3
54
54.5

10:00
EUR
Eurozone Retail Sales M/M Jan
-0.10%
0.30%
-0.30%
-0.50%
15:00
USD
ISM Non-Manufacutring Composite Feb

56.5
56.5

Global Stocks Dip ahead of Yellen’s Speech

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Global stocks were pressured during Friday’s trading session, as scepticism over the sustainability of the Trump-fuelled market rally and a sense of caution ahead of Yellen’s speech kept investors on edge. Asian equity markets swiftly surrendered gains, while European shares descended into red territory as participants re-evaluated the likelihood of higher US interest rates. The bearish domino effect from Europe, coupled with risk aversion may limit gains on Wall Street later today.

Although the stock market rally has been phenomenal this quarter, investors should remain vigilant as the bearish attributes for a selloff still linger in the background. The political risks in Europe, Brexit woes and ongoing Trump uncertainties could still trigger a wave of risk aversion. While the upside momentum may continue to elevate global stocks to gravity-defying levels, an unexpected catalyst could trigger a selloff that brings an end to the overextended market rally.

Sterling slides to seven-week low

Sterling bears were unleashed on Friday following the unexpected decline in UK services in February, rekindling concerns that ongoing Brexit woes are negatively impacting the economy. The visible slowdown in UK services which fell to 53.3 has added to the cocktail of soft economic releases this week that continue to pressure Sterling. With sentiment towards Sterling firmly bearish, further downsides may be expected as anxiety heightens ahead of the Article 50 invocation this month. From a technical standpoint, the GBPUSD is heavily bearish on the daily charts and a breakdown below 1.2200 could encourage a further selloff lower towards 1.2050.

Janet Yellen in focus

The Greenback has been explosively bullish this trading week as expectations mount over the Federal Reserve raising US interest rates in March. The hawkish chorus of Fed officials suggesting an imminent US rate increase has made the Dollar king, while positive US economic data continues to ensure the currency remains buoyed. Much attention will be directed towards Yellen’s speech this evening, which could cement expectations of a March rate hike if she reiterates a similarly hawkish mantra as other Fed officials.

Technical traders may pay attention to how the Dollar Index reacts around the 102.00 regions. There is a possibility that previous resistance at 102.00 could transform into a dynamic support, which in turn encourages a further incline higher towards 102.50.

Gold under fresh selling pressure

The growing speculation of the Federal Reserve raising US interest rates in March has exposed Gold to downside shocks, with the metal booking its biggest one-day loss of 2017 during Thursday’s trading session. Sellers have exploited the repeated hawkish comments from Fed officials to pressure the yellow metal, while a strengthening Dollar continues to cap upside gains. A scenario where the Greenback continues to appreciate amid the improving sentiment towards the US economy could leave Gold vulnerable to further losses. Although the concerns over political risks in Europe, Brexit woes and Trump developments attract investors to safe haven assets in the medium to longer term, bears currently remain in control on the daily charts. From a technical standpoint, further weakness below $1220 could encourage a selloff lower towards $1200.

Commodity spotlight – WTI Crude

Oil markets were vulnerable to losses on Thursday following reports that Russian crude production remained unchanged in February, rekindling concerns of weak compliance in the global output cut deal. The sharp selloff was fuelled by US government data showing that domestic crude inventories ascended to record highs last week. Oil prices may come under increased pressure from the combination of oversupply fears resurfacing, US shale pumping oil incessantly and a strengthening Dollar. From a technical standpoint, the breakdown below $53 on WTI Crude may open a path lower towards $52.

Pound Slides Continues on Soft Services PMI

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GBP/USD has posted losses in Friday trade. Currently GBP/USD is trading at 1.2220. On the release front, British Services PMI dipped to 53.3, short of the estimate of 54.4 points. In the US, today’s highlight is ISM Manufacturing PMI, which is forecast to remain unchanged at 56.5 points. The markets will be listening closely as four FOMC members deliver remarks on Friday, including Federal Reserve Chair Janet Yellen.

Market sentiment continues to heat up regarding a Fed rate hike. Federal Reserve policymakers continue to sound hawkish about a rate move on March 15, when the Fed next meets for a policy meeting. Earlier in the week, FOMC members William Dudley and John Williams both hinted at an imminent hike by the Fed. Dudley said the case for a hike is compelling, while Williams noted that a rate increase will be up for “serious consideration” at the March policy meeting. The markets are taking these statements at face value, as the odds of a March move have increased dramatically. The Fed Rate Monitor Tool (Investing.com) is currently pricing a move at 82%, compared to 18% just a week ago. Why the huge jump in odds? One reason is that policymakers are now saying they don’t need to wait for Donald Trump to outline tax reform or other economic packages before making a monetary move. This is a significant departure from a few weeks ago, when the Fed sent out signals that it would stay on the sidelines until it had a clearer picture of the economic stance of the new administration.

The pound’s troubles continue, as the currency has fallen 1.4 percent this week. Earlier on Friday, GBP/USD dropped to a low of 1.2214, marking its lowest level since January 17. The pound has responded negatively to this week’s key PMI reports. Manufacturing and Services PMIs both missed expectations, and Construction PMI continues to point to weak expansion. The softer Services PMI reflects more cautious spending by British consumers, who remain concerned about the ramifications of Brexit on the economy and their pocketbooks.

US Manufacturing Activity Expands More Than Expected Last Month

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‘Growth is being driven by robust domestic demand, stemming in turn from buoyant consumers and increased investment spending by the energy sector in particular.’ – Chris Williamson, IHS Markit

US manufacturing activity rose at a stronger-than-expected pace in February, official figures showed on Wednesday. The Institute for Supply Management reported its Purchasing Managers’ Index for the manufacturing sector advanced to 57.7 points last month, the highest level since December 2014, following the previous month’s 56.0 points. Meanwhile, analysts anticipated a mild increase to 56.2. Wednesday’s survey suggested that the US economy expanded for 93rd straight month. Data also showed the New Orders Index climbed to 65.1 last month from 60.4 in January. However, the Employment Index fell to 54.2 in February from the prior month’s 56.1, surpassing analysts’ expectations for a decline to 55.9. Furthermore, the ISM survey showed the Prices Paid Index dropped to 68.0 points last month, meeting forecasts and following the preceding month’s 69.0. Although the reading above 50 point level still indicated higher raw materials prices. The figures indicated strong growth of sales and demand, and painted a positive outlook for the manufacturing sector over the upcoming months. After the release, the EUR/USD pair rose from 1.0529 to 1.043. Nevertheless, the Greenback’s gains on Wednesday were actually driven mostly by Donald Trump’s address to Congress, which boosted investor optimism.

USD Continues Ascent As We Await More Fed Comments

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  • Brainard comments the icing on the cake;
  • Mester the latest Fed official to speak ahead of tomorrow’s busy schedule;
  • Strengthening dollar weighing on resilient Gold;
  • Commodity currencies could remain under pressure today.

A day after their biggest daily gains of the year so far, US equity indices are heading for an unchanged open on Thursday as investors await more commentary from the Fed ahead of its blackout period.

The language from the Fed has become far more hawkish over the last couple of weeks and yesterday’s comments from Lael Brainard – arguably the most dovish policy maker – was the icing on the cake. Not only is March now on the table, in many people’s eyes it’s the base case scenario which is a massive change from even a week ago. Regardless of whether the Fed opts to raise rates in two weeks or not, it’s quite clear now who is guiding who.

In what has already been quite a busy week on the Fed calendar, we’re still yet to hear from Loretta Mester today – a non-voter this year – and Chair Janet Yellen, vice Chair Stanley Fischer, Jerome Powell and Charles Evans tomorrow –all of which are voters. Needless to say, expectations are likely to fluctuate a lot between now and close of play Friday, at which point the Fed’s blackout period will begin. With rate hike expectations now above 70% for March, the job of the remaining officials should be straightforward if keeping March on the table is in fact their aim.

The sudden change in rate hike expectations has been accompanied by a strengthening of the dollar, which is of course to be expected, which is once again today putting pressure on Gold. The yellow metal has until now been very resilient to dollar strength, possibly a reflection of the political risk environment with Trump, Brexit and the French elections making investors a tad uneasy. Gold is trading around half a percentage point lower today and should we see a break below yesterday’s low – around $1,236.45 – it could trigger a sharper sell-off.

In the absence of much economic data today – jobless claims being the only notable release – attention is likely to remain on what the Fed is doing and what we expect it to do in two weeks. It will be interesting if the dollar builds on its gains ahead of all the Fed speeches tomorrow, which could continue to weigh on commodities and the related currencies such as the AUD, CAD and NZD.