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Dollar Soft in Holiday Trading, Sterling Extending Rebound

Dollar remains soft in mixed, quiet market in Asia. Trading is subdued, on holiday mood, with no reaction to Chinese data, nor the surprised PBoC RRR cut. Calendar is light today too, with PMI manufacturing final reading from, Eurozone, UK and US. There is little change in the weekly picture that Sterling is currently the strongest, followed by Canadian and then Yen. Dollar is the weakest one, followed by New Zealand Dollar and then Euro.

Technically, Sterling’s rebound is looking more promising now. GBP/USD, currently at around 1.3240, is on track to extend the rise from 1.2905 to retest 1.3514 resistance. GBP/JPY’s rebound from 141.15 also resumed after brief set back, and is targeting 147.95 high. EUR/G also breaks 0.8476 minor support, indicate that recovery from 0.8276 has completed at 0.8591. USD/JPY would be a focus for the rest of the week as it’s eyeing 108.27 support. As long as this support holds, we’d still expect larger rebound from 104.45 to extend through 109.72 at a later stage. But decisive break will suggest near term bearish reversal. That would also align near term bearish outlook with Dollar pairs.

In Asia, Japan is on holiday. Hong Kong HSI is up 1.00%. China Shanghai SSE is up 1.48%. Singapore Strait Times is up 0.46%.

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China cuts RRR by 50bps, releasing CNY 800B in funds

China’s PBoC announced yesterday to cut the reserve requirement ratio (RRR) by 50bps to 12.5%, effective January 6. That’s the eight cuts since early 2018, for releasing more funds for lenders to support the slowing economy. The reduction is expected to release around CNY 800B (USD 115B) of long term liquidity. Also, the move would offset cash demand ahead of Lunar New Year, keeping the liquidity of the banking system stable.

Outlook seemed to have improved recently as data showed stabilization. Meanwhile, China is expected to sign the phase one trade deal with the US, likely on January 15. Yet, more support measures are still expected as growth would likely cool further in 2020.

China Caixin PMI manufacturing dropped to 51.5, room for recovery with trade deal

China Caixin PMI Manufacturing dropped to 51.5 in December, down from 51.8, missed expectation of 51.7.

Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said: “China’s manufacturing economy continued to stabilize in December, although the expansion in demand was not as strong as the previous two months.

Positive changes included improved business confidence, and strengthened willingness to increase production and inventories, which are beneficial to the job market. Subdued business confidence was a major factor behind the economic slowdown this year.

As the phase one trade deal between China and the U.S. has sent out positive signals, there is room for a recovery in business confidence, which should be able to help stabilize the economy.”

Looking ahead

Manufacturing data will be the major focuses for the rest of the day. Eurozone and UK will release PMI manufacturing final. US will also release PMI manufacturing final and jobless claims Canada will release PMI manufacturing too.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.3240; (P) 1.3256; (R1) 1.3265; More….

GBP/USD’s rebound from 1.2905 is still in progress and intraday bias stays on the upside for retesting 1.3514 high. Break will resume whole rally from 1.1958 low. On the downside, break of 1.3105 minor support will extend the correction from 1.3514 with another fall. Intraday bias will be turned back to the downside for 38.2% retracement of 1.1958 to 1.3514 at 1.2920.

In the bigger picture, rise from 1.1958 medium term bottom expected to extend higher to retest 1.4376 key resistance. Reactions from there would decide whether it’s in consolidation from 1.1946 (2016 low). Or, firm break of 1.4376 will indicate long term bullish reversal. In any case, for now, outlook will stay bullish as long as 1.2582 resistance turned support holds.

Economic Indicators Update

GMTCcyEventsActualForecastPreviousRevised
1:45CNYCaixin Manufacturing PMI Dec51.551.751.8
8:15EURSpain Manufacturing PMI Dec47