A day off in the USA led to a decrease in volatility in the financial markets, however, Asia traded in the red zone in the morning. The reason is the threat of the spread of Coronavirus in China, which can lead to serious problems in the field of tourism and air travel, which led to an increase in the demand for protective assets. As a result, the yen has grown, strong demand for bonds has been observed, US Treasures lose 2.36% in yield, while Swiss and German 10-year bonds – more than 3%.
So far, no conclusions can be drawn as to how serious the threat is, but, the demand for defensive assets will remain steady until clarity appears on this issue.
EUR/USD
The euro was not able to fully participate in the wave of weakening dollar due to a number of factors, such as Brexit and weak economic growth, which began six months ago.
At the same time, a number of fundamental indicators are improving, and the pace of improvement over the past couple of months has been noticeably ahead of the United States. The Economic surprise index for the eurozone has increased rapidly. Most significantly, the data exceed forecasts for the German economy, which is experiencing strong risks due to a trade war between China and the United States and Brexit as the main exporter of the eurozone.
Meanwhile, during the minutes to the December meeting, ECB members expressed their view that the positive impact of its latest initiatives, such as an updated asset repurchase program, lowering the deposit rate and the introduction of a multi-level system of bank reserves, was still insufficient. According to the latest forecasts of the bank, the real Eurozone GDP will increase by only 1.1% in 2020, and thus, there is every reason to expect an upward revision of forecasts on Thursday, which will lead to an acceleration of cash inflows into assets and an increase in demand for the euro.
In turn, Christine Lagarde, as head of the ECB, is preparing to revise the monetary policy of the Central Bank. At a meeting on Thursday, she will present an updated action plan, according to which the revision of the strategy will continue for a year and will end with the establishment of a new range for inflation. It is also expected that the ECB will very resolutely announce that no new stimuli should be expected in addition to those already announced, and economic stimulation should be “picked up” by national governments through increased government spending.
Today, attention will be focused on the publication of ZEW indices for Germany. Strong growth is expected to reach 15p against 10.7p a month earlier. In addition, the situation for the euro is gradually improving in the long term. A number of banks, such as Nordea and Scotiabank, see EURUSD growth prospects to 1.16 by the end of the year, and the current level is favorable for long-term purchases.
At the same time, the short-term technical picture is still slightly bearish. As a result, it is possible to decline to 1.1060 / 80, where the long-term line of the upward trend is located. Attempts to reduce as it approaches Thursday are more logical to use for purchases.
GBP/USD
The pound is still trading lower amid rising expectations about the plans of the Bank of England to lower the rate at one of the next meetings. At the moment, the probability of a decline in January is 68%, in March – 83%, that is, the market is almost certain that BoE simply has no more opportunity to ignore a number of obvious negative trends in the economy.
Now, who will take on the task of reducing the rate? The outgoing head of the Bank of England Carney at his last meeting, or who comes to replace him with Bailey is still unclear. In any case, postponing the decision on the Bailey rate for May is not the best way out, since the growth rate may decline even more, and the UK economy will go down in recession. Moreover, the Office for National Statistics reported retail sales in December. The result of which speaks for itself – a decline of 0.6%, the minimum annual growth, which indicates a critically low level of consumer activity.
Today, a report on the state of the labor market will be published, and PMI data on Friday, which ultimately will determine the final position of the Bank of England.
GBP/USD is being traded at the channel’s border. The situation is bearish for a short time and the threat of a breakdown of support 1.2953 is increasing. Resistance is at 1.3022, 1.3030 and 1.3058. Due to this, movement above is unlikely.
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