The Bank of England has remained neutral throughout last year, despite the global and the UK economy weakening considerably. Many sectors of the British economy have been in contraction/recession for quite some time, but the BOE was waiting to see where Brexit was heading. The GBP turned bullish after the general elections in the UK a month ago, which gave a decent majority to Boris Johnson, with GBP/USD surging more than 5 cents higher. But, once elections were over and the initial optimism wore out, the GBP turned bearish, since it doesn’t really have any reasons to rally.
The British economy continues to weaken and today’s GDP report showed that the economy contracted by 0.3% in November, while manufacturing and industrial production posted some major declines for the same month. This is the third contraction in the last four months, while the decline in major sectors continues. So, the BOE has no choice but to turn dovish and recent comments have increasingly suggest that. Now, odds for a rate cut by September are pretty high, so the GBP has continued to slide today and it has moved below 1.30.
The European Session
- Another Production Cut From OPEC in March? – The Saudi energy minister says OPEC+ will only take decision on oil output cuts in March. he added that it is too early to talk about the decision at this point in time. With the oil market “normalising” after recent US-Iran geopolitical tensions, there is a sense that we may have probably seen the peak for oil prices this year already. So, more production quotas coming up? OPEC’s Barkindo said a little later that Iraq, Nigeria showing better oil output cuts compliance. Oil market is seen as unbalanced in Q1, Q2 2020 for him.
UK November GDP Report – Th UK economy contracted in Q2 and during August and September. It missed recession just slightly, but today’s report showed that the economy contracted again in November. belowarethe details:
- UK November MoM GDP -0.3% vs 0.0% expected
- Prior 0.0%; revised to +0.1%
- Monthly GDP 3M/3M +0.1% vs -0.1% expected
- Prior 0.0%; revised to +0.2%
- UK Manufacturing and Industrial Production – Manufacturing and industrial production have been pretty weak as well for a long time and today’s report for November was another weak one, as shown below:
- Manufacturing production -1.7% vs -0.2% m/m expected
- Prior +0.2%; revised to +0.5%
- Manufacturing production -2.0% vs -1.6% y/y expected
- Prior -1.2%; revised to -0.3%
- Industrial production -1.2% vs +0.1% m/m expected
- Prior +0.1%; revised to +0.4%
- Industrial production -1.6% vs -1.3% y/y expected
- Prior -1.3%; revised to -0.6%
- UK Construction Report – Construction was holding up well last year, but in the last couple of months it turned negative, posting a big decline for October. Although, we saw a reversal today for November:
- Construction output +1.9% vs +0.6% m/m expected
- Prior -2.3%; revised to -2.2%
- Construction output +2.0% vs -1.4% y/y expected
- Prior -2.1%; revised to -0.3
The US Session
- FED’s Rosengren Sees Inflation Back Up at 2% in 2020 – Voting FED member Rosengren made some comments a while ago.
- I expect inflation to rise to 2% this year
- Watching for risks of higher inflation and asset prices
- Downside risks include trade and slower global growth
- This is what a soft landing looks like
- Strong labor market putting upward pressure on wages
- Low interest rates may spur house-price increases
- The US did ok last year but the rest of the world was slower
- BOC Business Outlook Survey – The Bank of Canada released its business outlook survey a while ago. Most of the components seem better than in the previous report.
- Future sales +11 vs +23 prior (the numbers leaked early)
- Investment intentions +11 vs +28 prior
- Employment +43 vs +31 prior
- Some or significant capacity pressures 53 vs 50 prior
- Cost pressures +13 vs -7 prior
- Output prices -4 vs +5 prior
- Overall business sentiment +0.43 vs -0.07 prior
- UK to Decide on Huawei for 5G Service Provider – It was reported earlier today that US officials are in London to urge the UK to ban Huawei from being involved in its upgrade to 5G network. UK PM spokesman, James Slack spoke earlier today, saying that the government will make decision on Huawei in due course. UK and US security and telco officials to meet today. Close intelligence relationship with the US will continue.
Trades in Sight
- The pullback down is complete
- The trend has turned bullish again
- The 100 SMA held as support
- Fundamentals have turned bullish
The 100 SMA did a good job as support
USD/JPY has been trading on a bullish trend since September last year, after US and China calmed their tones and pointed to a partial trade deal back then. The trade deal was agreed on in December and they will sign it soon, since the Chinese delegation is already in the US.
Although, we saw a decent pullback at the end of December, as year-end cash flows were going against the USD and flying towards safe havens such as the JPY. But, the 100 SMA (green) held as support on the daily chart, as shown above and the price bounced off that moving average.
The tensions between US and Iran hurt the sentiment for some time, but weren’t enough to turn this pair bearish again, especially since they are de-escalating. So, the 100 SMA turned into support this time, after USD/JPY had been leaning on the 50 MSA (yellow) for months. Now buyers are back in control for this pair and they are pushing higher.
The sentiment has turned positive again today and safe havens are declining, while risk currencies are making some small gains. Although, crude Oil is declining as well, but that has more to do with the global economy and the de-escalating tensions in the Middle East.