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Risk Aversion Continues on US-Iran Conflicts

Risk aversion is the dominant theme today, with deep selloff in global equity markets. Treasury yields took a dive while gold and oil prices surge. Sentiments are rocked by abrupt escalation in Middle East tensions, after US military had killed Qasem Solemaini, the head of Iran’s Islamic Revolutionary Guard Corps — Quds Force. In the currency markets, Yen and Dollar are overwhelmingly the strongest ones. Australian and New Zealand Dollar are the weakest, but Euro and Sterling are not too far away.

Technically, GBP/USD’s break of 1.3105 suggests that recovery from 1.2905 has completed at 1.3284. Retest of 1.2905 could be seen next. GBP/JPY’s corrective fall from 147.95 should be resuming for 139.77 fibonacci level. AUD/USD breaches 0.6938 resistance turned support but could sustain below yet. This will be a focus for the rest of the session. Firm break there will be an early sign of near term bearish reversal.

In other markets, DOW future is currently down -270 pts. In Europe, FTSE is down -0.28%. DAX is down -1.69%. CAC is down -0.43%. German 10-year yield is down -0.060 at -0.280. Earlier in Asia, Japan was on holiday. Hong Kong HSI dropped -0.32%. China Shanghai SSE dropped -0.05%. Singapore Strait Times dropped -0.41%.

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German CPI accelerated to 1.5%, beat expectations

German CPI rose 0.5% mom in December, above expectation of 0.3% mom. Annually, CPI accelerated to 1.5% yoy, up from 1.1% yoy, beat expectation o f1.4% yoy.

Unemployment rose 8k to 2.279m in December, more than expectation of 0k. The rise in unemployment was also the highest Since May. Unemployment rate was unchanged at 5.0%, slightly above record low of 4.9% recorded earlier in 2019. Labor Office head Detlef Scheele said that “the weak economic cycle is leaving visible marks”.

Also released, Eurzoeon M3 money supply rose 5.6% yoy in November, slightly below expectation of 5.7% yoy. From Swiss, SVME PMI rose to 50.2 in December, up from 48.8, beat expectation of 49.1.

UK PMI construction dropped to 44.4, but Brexit clarity could deliver boost ahead

UK PMI Construction dropped to 44.4 in December, down from 45.3, missed expectation of 45.7. The index has been below the 50 no-change mark for the eighth consecutive month. It’s the longest period of contraction for almost a decade. Markit added there was the sharpest fall in civil engineering activity since March 2009. New business decreased for the ninth month in a row. Input cost inflation eased to the lowest level since February 2010.

Tim Moore, Economics Associate Director at IHS Markit, said: “December data suggested that the UK construction sector limped through the final quarter of 2019, with output falling in all three major categories of work… The forward-looking survey indicators provide some hope that the construction sector malaise will begin to recede in the coming months… Moreover, construction companies signalled that business optimism has recovered to its strongest for nine months. Survey respondents cited confidence that a more predictable domestic political landscape and clarity on Brexit could deliver a much-needed boost to clients’ willingness-to-spend in 2020.”

Also from UK, mortgage approvals was unchanged at 65k in November. M4 money supply rose 0.8% mom versus expectation of 0.2% mom. BRC shop price index dropped -0.4% yoy.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 108.21; (P) 108.54; (R1) 108.87; More..

Outlook in USD/JPY remains unchanged. Rebound from 104.45 should have completed at 109.72. Intraday bias remains on the downside for 38.2% retracement of 104.45 to 109.72 at 107.70 first. Break will bring deeper fall to 106.48 cluster support (61.8% retracement at 106.46). On the upside, above 108.47 minor resistance will turn intraday bias neutral first.

In the bigger picture, there is no confirmation of medium term reversal. Corrective decline from 118.65 (Dec. 2016) could still extend lower. But in that case, we’d expect strong support above 98.97 (2016 low) to contain downside to bring rebound. Meanwhile, on the upside, break of 112.40 key resistance will be a strong sign of start of medium term up trend.

Economic Indicators Update

GMTCcyEventsActualForecastPreviousRevised
00:01GBPBRC Shop Price Index Y/Y Nov-0.40%-0.50%
07:00GBPNationwide Housing Prices M/M Dec0.10%0.00%0.50%
08:30CHFSVME – PMI Dec50.249.148.8
08:55EURGermany Unemployment Rate Dec5.00%5.00%5.00%
08:55EURGermany Unemployment Change Dec8K0K-16K-14K
09:00EUREurozone M3 Money Supply Y/Y Nov5.60%5.70%5.60%
09:30GBPConstruction PMI Dec44.445.745.3
09:30GBPMortgage Approvals Nov65K65K65K
09:30GBPM4 Money Supply M/M No