EUR/USD. Analysis on the central bank: euro remains afloat after ECB’s January meeting

Trading 21 Jan 2021 Commentaire »

The European Central Bank, which held its first meeting this year, did not break the growth trend of the EUR/USD pair. Buyers still feel very confident, looking in the direction of the 22nd figure. Following the results of the January meeting, traders were able to test the price barrier of 1.2150 (the Tenkan-sen line on the daily chart), but could not reach the resistance level of 1.2200 (the average line of the Bollinger Bands indicator, coinciding with the Kijun-sen line on the same timeframe). While it is vital in overcoming this level of resistance for the development of an upward movement, since in this case, the pair, firstly, will be between the middle and upper lines of the Bollinger Bands indicator on D1, and secondly, the Ichimoku indicator will form a bullish Parade of Lines signal in which all the lines of the indicator will be under the price. In this case, from a technical point of view, the path to the next, main resistance level at 1.2330 (the upper line of the Bollinger Bands) will be opened. Therefore, you can open long positions for "short distances" (up to 1.2200), or after surpassing this target.

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On the eve of the January meeting, the final data on the growth of European inflation in December were published. The final estimate fully coincided with the preliminary one – the general consumer price index remained at -0.3%, while the core inflation index - at 0.2%. The release itself was ignored by traders, as it came out at the level of forecasts. However, it served as a reminder that the coronavirus crisis continues to have a negative impact on the eurozone economy. Given the general mood, market participants did not expect to hear any optimistic notes from ECB President Christine Lagarde today. Nevertheless, they were heard. And while pessimism generally prevailed, traders focused on the positive aspects of her rhetoric.

In particular, Lagarde attributed the recently launched vaccination process to favorable factors. At the same time, she noted that the period of the pandemic may last until the spring of 2022 – therefore, the ECB intends to be "actively present" until at least March next year. As for Brexit, here, according to Lagarde, the parties were able to avoid "the onset of a crisis situation", which would be layered on top of all other problems.

In other words, Lagarde made it clear that the long-awaited "light at the end of the tunnel" still appeared, so the December forecast for the current year "is still valid". In this context, she also noted that the incoming data "confirms the previous ECB baseline scenario".

Thus, the ECB kept the monetary policy parameters unchanged and did not revise its forecasts, even despite the prolonged lockdowns in the key countries of the European Union. For example, the lockdown in Germany was extended until at least February 14, while tightening quarantine restrictions. Shops (with the exception of food stores and pharmacies) are still closed in the country, schools, kindergartens, hairdressers, beauty salons and sports halls, as well as cinemas, museums and theaters are closed. In addition, Berlin decided to instruct employers to look for opportunities to expand remote work. Other European countries (notably France, Spain, Belgium, and Italy) have extended and/or tightened curfews, while Portugal, Ireland, and the Netherlands have significantly tightened quarantine restrictions.

Nevertheless, the ECB, judging by Lagarde's rhetoric, "is betting on vaccination." At the same time, she admits that it will take time to achieve mass immunity, so downside risks for economic growth still prevail this year, although they have become "less obvious". In other words, the ECB, on the one hand, does not expect any economic breakthrough in the foreseeable future. But on the other hand, the central bank made it clear that with the start of vaccination, the countdown to the end of the pandemic began. Therefore, the expansion of the incentive program is out of the question now. Let me remind you that at the December meeting, the members of the ECB decided to increase the volume of the asset purchase program by 500 billion euros (that is, a total of 1,850,000,000 euros). At today's meeting, Lagarde made it clear that at the moment there is no need to take additional steps in this direction.

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On the eve of the January meeting, many analysts warned that Lagarde may be concerned about the negative impact of the high euro exchange rate on low inflation. Lagarde did touch on the issue today, saying that the central bank would "monitor changes in the exchange rate." But the market expectedly ignored this remark. It is worth recalling here that similar risks were voiced on the eve of the December meeting. While Lagarde stressed that the ECB does not set a target rate for the euro, so it will not artificially underestimate its value. At the same time, she also voiced the phrase that the ECB will monitor the situation related to the exchange rate of the single currency. The market similarly ignored this remark.

Summarizing the above, we can conclude that the January meeting was predictably "passable". The ECB left all the parameters of monetary policy in the same form and did not change the wording of the accompanying statement. However, Lagarde's subsequent rhetoric was not as pessimistic as investors had expected. This fact helped buyers of EUR/USD not only to stay afloat, but also test the resistance level of 1.2150. However, the growth momentum faded quite quickly, which is why the pair's bulls were unable to test the main resistance level of 1.2200 (the daily high is fixed at 1.2173). As soon as the upward trend began to fade, buyers began to take profits, giving way to the sellers of the pair. But the bears were only able to slow down the price growth, while the overall advantage remained for the EUR/USD bulls – especially against the background of a weakening dollar. All this suggests that longs can be opened from current positions for a short distance - up to the 1.2200 level. Or wait for this target to be overcome – in order to go into longswith the main goal of 1.2330.

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Treasury Announces Details Of 2-Year, 5-Year And 7-Year Note Auctions

Trading 21 Jan 2021 Commentaire »

On Thursday, the Treasury Department announced the details of the first auctions of two-year, five-year and seven-year notes of the New Year.

The Treasury revealed it plans to sell $60 billion worth of two-year notes, $61 billion worth of five-year notes and $62 billion worth of seven-year notes.

The results of the two-year note auction will be announced next Monday, the results of the five-year note auction will be announced next Tuesday and the results of the seven-year note auction will be announced next Thursday.

Last month, the Treasury sold $58 billion worth of two-year notes and $59 billion worth of both five-year notes and seven-year notes. All three auctions attracted below average demand.


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ECB's Lagarde Says Downside Risks To Eurozone Growth Outlook Less Pronounced

Trading 21 Jan 2021 Commentaire »

Risks surrounding the euro area growth outlook remain tilted to the downside, but are now less pronounced, the European Central Bank President Christine Lagarde said Thursday.

"The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging, but the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk," Lagarde said in the introductory statement to her post-decision press conference. Amid the resurgence in the coronavirus infections, economic activity is being disrupted in many countries, she noted. Services sector activity is being severely curbed, albeit to a lesser degree than during the first wave of the pandemic in early 2020, she said. Weak demand and significant slack in labor and product markets suggest that inflation is set to remain very weak in the near term, the ECB chief said. "Uncertainty remains high, including relating to the dynamics of the pandemic and the speed of vaccination campaigns," Lagarde said. "We will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook."

The bank expects economic output to continue to decline in the first quarter due to the resurgence in the Covid-19 infections and the consequent lockdown measures in several countries. The recovery of the euro area economy should be supported by favorable financing conditions, an expansionary fiscal stance and a recovery in demand as containment measures are lifted and uncertainty recedes, Lagarde said. The ECB expects headline inflation to increase in the coming months, given the current trend in energy prices and also supported by the end of the temporary VAT reduction in Germany. That said, weak demand, notably in the tourism and travel-related sectors, as well as to low wage pressures and the appreciation of the euro exchange rate would mean underlying price pressures remain subdued.

Earlier on Thursday, the central bank left its key interest rates and quantitative easing measures unchanged and reaffirmed its willingness to adjust policy tools when needed.


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South Africa Central Bank Holds Rate Steady In Split Vote

Trading 21 Jan 2021 Commentaire »

South Africa's central bank left its key interest rate unchanged on Thursday in a split vote, citing slow economic recovery and low inflation. The Monetary Policy Committee decided to leave the repo rate unchanged at 3.5 percent, South African Reserve Bank Governor Lesetja Kganyago said in a statement.

Two members of the committee preferred a 25 basis point cut, while three preferred to hold rates at the current level.

The implied policy rate path projects two increases of 25 basis points in the second and third quarters of 2021, the bank said. "The Committee notes that the slow economic recovery will help keep inflation below the midpoint of the target range for this year and next," the bank said.

"Unless risks outlined earlier materialize, inflation is expected to be well contained in 2021, before rising to around the midpoint in 2022 and 2023."


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Eurozone Consumer Confidence Weakens More Than Expected

Trading 21 Jan 2021 Commentaire »

Eurozone consumer confidence deteriorated at a faster-than-expected pace at the start of the year, preliminary data from a European Commission survey showed on Thursday. The flash consumer confidence index fell to -15.5 from -13.9 in December. Economists had forecast a score of -15.0.

The consumer confidence index for the EU dropped to -16.5 from -15.3 in December. Both readings are below their long-term averages of ?11.0 and ?10.6, respectively. The data was collected from January 1 to January 20.

The final figures will be released along with the results of the monthly economic sentiment survey on January 28.


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*Eurozone Jan Flash Consumer Confidence -15.5 Vs. -13.9 In Dec, Consensus -15

Trading 21 Jan 2021 Commentaire »

Eurozone Jan Flash Consumer Confidence -15.5 Vs. -13.9 In Dec, Consensus -15


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Philly Fed Index Rebounds Much More Than Expected In January

Trading 21 Jan 2021 Commentaire »

A report released by the Federal Reserve Bank of Philadelphia on Thursday showed a substantial acceleration in the pace of growth in regional manufacturing activity in the month of January.

The Philly Fed said its diffusion index for current activity soared to 26.5 in January after slumping to a revised 9.1 in December, with a positive reading indicating growth in regional manufacturing activity.

Economists had expected the Philly Fed Index to inch up to 12.0 from the 11.1 originally reported for the previous month.

The much bigger than expected increase by the headline index was partly due to a significant acceleration in the pace of growth in new orders, with the new orders index spiking to 30.0 in January from 1.9 in December.

The shipments index also jumped to 22.7 in January from 12.0 in December, while the number of employees index surged up to 22.5 from 5.6.

The report also showed a notably faster rate of price growth, as the prices paid index shot up to 45.4 in January from 24.9 in December and the prices receive index spiked to 36.6 from 16.1.

The Philly Fed said changes in future indexes were mixed, but levels remained positive, suggesting overall growth is expected to continue over the next six months.

The diffusion index for general activity over the next six months jumped to 52.8 in January from a revised reading of 43.1 in December.

"Looking ahead, manufacturing will stay on an upbeat track though we expect growth to soften as vaccines and the economy's reopening unleash pent-up demand for deeply-damaged services," said Oren Klachkin, Lead U.S. Economist at Oxford Economics.

He added, "The Biden administration's American Rescue Plan will carry the economy through the soft patch that's developed at the start of the year and bolster the recovery over the course of 2021."

Last Friday, the New York Fed released a separate report showing activity in the regional manufacturing sector unexpectedly grew at a slower pace in the month of January.

The New York Fed said its general business conditions index slipped to 3.5 in January from 4.9 in December, while economist had expected the index to inch up to 6.0.


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Euro Climbs After ECB Maintains Interest Rates, Emergency Bond Buying Scheme

Trading 21 Jan 2021 Commentaire »

The euro spiked up against its major counterparts in the European session on Thursday, as the European Central Bank left its key interest rates and the size of the pandemic emergency purchase programme unchanged and signaled its willingness to act further to help counter the negative pandemic shock on the inflation target.

The Governing Council maintained the main refi rate at a record low of zero percent and the deposit rate at -0.50 percent. The marginal lending facility rate is at 0.25 percent.

"The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics."

The Governing Council retained the pandemic emergency purchase programme at EUR 1.85 trillion.

Net asset purchases under the PEPP will be conducted until at least the end of March 2022 and, in any case, until the Governing Council judges that the coronavirus crisis phase is over.

The ECB said that the PEPP envelope can be recalibrated if required to maintain favorable financing conditions to help counter the negative pandemic shock to the path of inflation.

Proceeds from maturing securities under PEPP will be reinvested until at least the end of 2023.

"The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry," it added.

The currency appreciated during the Asian session, as investors bet that the Biden administration will pursue aggressive stimulus measures to boost the economy.

The euro firmed to a 1-week high of 1.2165 against the dollar, recording a 0.5 percent rise from Wednesday's closing value of 1.2104. Immediate resistance for the euro is likely seen around the 1.24 level.

After falling to a 2-day low of 125.26 at 5:00 pm ET, the euro gained 0.5 percent to 125.93 against the yen. The EUR/JPY pair had closed Wednesday's deals at 125.30. Should the euro gains further, it is likely to test resistance around the 127.5 region.

The Bank of Japan decided to leave its monetary policy unchanged and raised the growth projections.

The board voted 7-1 to retain the interest rate at -0.1 percent on current accounts that financial institutions maintain at the central bank.

The euro bounced off to 0.8868 against the pound, after a drop to 0.8830 at 4:00 am ET, which was its lowest level since May 2020. The euro-pound pair had ended yesterday's trading session at 0.8864. Further rally in the currency may challenge resistance around the 0.90 level.

The Credit Conditions Survey from the Bank of England showed that British households' demand for secured lending for house purchases is set to fall in the first quarter.

Although demand for secured lending for house purchase increased in the fourth quarter, it is set to drop slightly, the survey revealed.

The euro bounced off from a 2-day low of 1.0756 against the franc, with the pair worth 1.0783. At Wednesday's close, the pair was valued at 1.0767. The euro is likely to challenge resistance around the 1.10 mark.

The euro gained 0.4 percent against the loonie, approaching 1.5354. The euro was trading at 1.5290 against the loonie at yesterday's close. Next near term resistance for the euro is likely seen around the 1.56 level.

Having declined to a 1-week low of 1.5597 at 10:45 pm ET, the euro turned higher against the aussie, rising to 1.5660. The EUR/AUD pair had finished deals at 1.5622 on Wednesday. The euro may locate resistance near the 1.58 level.

Data from the Australian Bureau of Statistics showed that Australia's jobless rate dropped a seasonally adjusted 6.6 percent in December.

That was below expectations for 6.7 percent and down from 6.8 percent in November.

Following a 1-week fall to 1.6815 at 7:00 am ET, the euro recovered against the kiwi, with the pair trading at 1.6875. At yesterday's trading close, the pair was quoted at 1.6877. The euro is seen facing resistance around the 1.73 mark.

Eurozone flash consumer sentiment index for January is set for release at 10:00 am ET.


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*S. Africa Central Bank Holds Key Rate Unchanged At 3.5% As Expected

Trading 21 Jan 2021 Commentaire »

S. Africa Central Bank Holds Key Rate Unchanged At 3.5% As Expected


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U.S. Housing Starts, Building Permits Jump To 14-Year Highs In December

Trading 21 Jan 2021 Commentaire »

New residential construction in the U.S. jumped by much more than expected in the month of December, according to a report released by the Commerce Department on Thursday.

The report said housing starts spiked by 5.8 percent to an annual rate of 1.669 million in December from the revised November estimate of 1.578 million.

Economists had expected housing starts to climb by 0.8 percent to a rate of 1.560 million from the 1.547 million originally reported for the previous month.

With the much bigger than expected increase, housing starts soared to their highest level since reaching a rate of 1.720 million in September of 2006.

Single-family starts led the way higher, skyrocketing by 12.0 percent to a rate of 1.338 million, while multi-family starts tumbled by 13.6 percent to a rate of 331,000.

The Commerce Department said building permits also surged up by 4.5 percent to an annual rate of 1.709 million in December from the revised November rate of 1.635 million.

Building permits, an indicator of future housing demand, had been expected to slump by 2.1 percent to a rate of 1.604 million from the 1.639 million originally reported for the previous month.

The unexpected increase lifted building permits to their highest annual rate since reaching 1.722 million in August of 2006.

Single-family permits jumped by 7.8 percent to a rate of 1.226 million, while multi-family permits fell by 3.0 percent to a rate of 483,000.

"We expect the pace of housing starts to moderate in 2021 as homebuilders confront constraints including high lumber prices and shortages of lots and labor," said Nancy Vanden Houten, Lead U.S. Economist at Oxford Economics.

She added, "However, we still expect recovering demand, low mortgage rates and a shortage of supply to support a healthy rate of new home construction, and the risk may be for further upside surprises."

On Wednesday, the National Association of Home Builders released a report showing an unexpected drop in U.S. homebuilder confidence in the month of January amid concerns about rising material costs and the resurgence of the coronavirus.

The report said the NAHB/Wells Fargo Housing Market Index fell to 83 in January after sliding to 86 in December. The continued decline surprised economists, who had expected the index to come in unchanged.

With the unexpected decrease, the housing market index pulled back further off the record high of 90 set in November.


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