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European Central Bank Prepares to Add stimulus

A guest post written by DAR Wong

Currency Market Observations – 10 November 2014

Fundamental Outlook

The US unemployment improves but jobs growth slows down. Both European Central Bank (ECB) and Bank of England (BoE) holds the benchmark rates unchanged amid stagnation. ECB President Draghi stresses readiness to add stimulus if necessary to stave off deflation. UK trade deficit widens with increasing oil imports.

The US Institute for Supply Management’s factory index increased to 59 in October compared to 56.6 in prior month. Trade balance fell in September as trade gap expanded 7.6 percent to USD43 billion, the biggest since May, from revised USD40 billion in August.

Another separate data from Institute for Supply Management’s services index rose to 57.1, exceeding the average for the first 6 months of the year, even though it was below the prior month’s 58.6. Weekly jobless claims dropped 10,000 to 278,000 in the week ended 1 November.

American unemployment slid to a 6-year low in October to 5.8 percent and 214,000 jobs were added to payrolls. As Federal Reserve has officially ended the financial stimulus, chair Janet yellen urges European Central Bank (ECB) policymakers to do whatever they could to revive the ailing economy in-lieu of rising sovereign debts and slowdown.

German industrial production, adjusted for seasonal swings, rose 1.4 percent from August but below forecast, after it contracted a revised 3.1 percent. Trade balance in the largest economy among 18 nations rose EUR18.5 billion in September from EUR17.5 billion in August.

In Eurozone, Markit economics reports the index for both manufacturing and services rose to 52.1 in October from 52 in September, below forecast. The recovery in the Eurozone halts in the second quarter and its inflation stagnates for thirteen month in October. Policymakers are prepared to add in more easing measure after executed the first round of purchasing covered bonds last month.

Last week, European Central Bank (ECB) held benchmark interest rates unchanged in meeting. President Mario Draghi reassures that policymakers are focusing to intensify new stimulus to loosen monetary constraint and prepare to boost the balance sheet to EUR3 trillion.

UK manufacturing index for November remained strong at 53.2 gains after expanding at revised 51.5 in prior month. Another report by Markit Economics says the construction index fell to 61.4 in October from previous month 64.2. Services index also dropped to 56.2, the lowest since May 2013, from 58.7 in September.

Last week, Bank of England (BoE) held interest rates at a record low and unchanged at 0.5 percent amid signs Britain’s economic recovery is ebbing. UK exports rose from a 4-year low in September by 4.2 percent but import also increased 5.8 percent as oil purchases rose. Trade deficit widened to GBP9.8 billion and worst than previous month GBP9.0 billion.

Industrial output rose 0.6 percent in September compared with a drop of 0.1 percent in August. Another separate report on factory output rose 0.4 percent against 0.2 percent gains in August.

Technical Forecast

USD/JPY continues to climb higher amid weakening yen from Japan’s expansion in monetary base. Market is hovering at 115.0 for time being and may continue to rise higher to 118.00 in coming weeks. Technically, we reckon support will emerge at 114.00 levels and tend to push the prices higher if USD index strengthens further. Risk management guards at 113.50 levels.

EUR/USD dipped to 2-year low record last week at 1.2357 levels as we predicted. This week, we foresee the resistance will be resilient at 1.2500 – 1.2550 regions in case of small upward retracement while prone to slide further. Technically, we forecast the trend will consolidate for a while from 1.2350 – 1.2550 regions but breaking below 1.2350 supports will head down to test 1.2200 bottoms.

GBP/USD is supported at 1.5800 – 1.5850 regions for time being. The market may proceed into consolidation from 1.5800 – 1.6200 ranges in coming week if Dollar begins to slow down in bullish trend. However, beware of breaking below 1.5800 supports as this may head down to 1.5500 areas. On the whole, European economy remains sensitive to weakness.

Dar Wong

This post is contributed by OPF Guest Blogger, DAR Wong.

DAR Wong is an approved fund manager in Singapore with 25 years of global trading experiences. You may reach him at dar@pwforex.com

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DISCLAIMER: This post is written for general information only. The author, publisher and/or any third party involved in the distribution of this work assume no legal responsibilities and shall have no liability whatsoever for any direct or consequential losses, costs or expenses arising from the use of the information contained herein.

 






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