Euro Rebound Making Progress, Yen Recovery Lost Momentum

Euro’s rebound made some progress overnight even though momentum was still weak. The common is nevertheless firm in Asian session. Dollar is also strengthening up slightly, together with Sterling and Swiss Franc. Yen is consolidating in tight range as earlier recovery is losing some momentum. Commodity currencies are mixed for now.

Technically, EUR/USD’s break of 1.1120 support turned resistance and EUR/GBP’s break of 0.8476 structural resistance are both bullish signal for the Euro. Attention is now on EUR/CHF. Firm break of 1.0400 resistance will resume the rebound from 0.9970. That, if happens, should solidify Euro’s broad based come back.

In Asia, at the time of writing, Nikkei is down -0.24%. Hong Kong HSI is down -0.81%. China Shanghai SSE is down -0.10%. Singapore Strait Times is down -0.23%. Japan 10-year JGB yield is up 0.0032 at 0.223. Overnight, DOW dropped -0.19%. S&P 500 dropped -0.63%. NASDAQ dropped -1.21%. 10-year yield dropped -0.042 to 2.358.

Fed George: Moving expeditiously to a neutral stance of policy is appropriate

Kansas City Fed President Esther George said yesterday, “it is clear that removing accommodation is required. How much and how aggressively accommodation should be removed is far more uncertain.”

“Given the state of the economy, with inflation at a 40-year high and the unemployment rate near record lows, moving expeditiously to a neutral stance of policy is appropriate,” she added.

“At the same time, the factors I noted earlier, including monitoring risks, the responsiveness of activity to interest rate changes, and yield curve developments will be important guides to that pace in my view.”

On the topic of yield curve inversion, George said, “An inverted curve has implications for financial stability with incentives for reach-for-yield behavior. An inverted yield curve also pressures traditional bank lending models that rely on net interest margins, or the spread between borrowing short and lending long. Community banks in particular rely on net interest margins to maintain their profitability.”

Fed Barkin will make the call on 25bps or 50bps hike in May

Richmond Fed President Thomas Barkin told Bloomberg TV yesterday he’s looking at both a 25bps and a 50bps rate hike at the May FOMC meeting. “I think the question — and we will make this decision when we get to the meeting in May — is how strong does the economy still look in terms of its ability to take rate increases and how high is inflation persisting. I’m looking at both of those and we’ll make our call in May,” he said.

Barkin also said it might take interest rates above neural to bring down inflation. “I think there is a real chance that is true,” he said. “As we get closer to neutral we can make that call.”

Japan industrial production rose 0.1% mom in Feb, to expand further in Mar

Japan industrial production rose 0.1% mom in February, below expectation of 0.5% mom. That’s nonetheless the first rise in three months. index of production stood at 95.8, against the 2015 base of 100.

Auto production rose 10.9% mom, after plunging -17.3% mom in January. Output of transport equipment rose 7.9% mom. Chemical products dropped -9.6%.

Looking ahead, the Ministry of Economy, Trade and Industry expects output to keep expanding, up 3.6 percent in March and 9.6 percent in April, respectively, based on a poll of manufacturers.

China PMI manufacturing dropped to 49.5 in Mar, services dropped to 48.4

China official PMI manufacturing dropped from 50.2 to 49.5 in March, below expectation of 50.0. PMI non-manufacturing dropped from 51.6 to 48.4, below expectation of 50.7. Both indexes were below 50 level together for the first time since the start of the pandemic in February 2020.

“Recently, clusters of epidemic outbreaks have occurred in many places in China, and coupled with a significant increase in global geopolitical instability, production and operation of Chinese enterprises have been affected,” said Zhao Qinghe, senior NBS statistician.

Looking ahead

Germany retail sales and unemployment, UK GDP and current account, Swiss retail sales, France consumer spending, and Eurozone unemployment rate will be released in European session.

Later in the day, US will release jobless claims, personal spending and income with PCE inflation, Chicago PMI. Canada will release GDP.

EUR/GBP Daily Outlook

Daily Pivots: (S1) 0.8465; (P) 0.8482; (R1) 0.8512; More…

EUR/GBP’s rise from 0.8201 extends higher today. The break of 0.8476 structural resistance should confirm medium term bottoming at 0.8201, with a head and shoulder bottom pattern too (ls: 0.8282, h: 0.8201, rs: 0.8294). Intraday bias stays on the upside for 0.8697 medium term fibonacci level next. On the downside, break of 0.8448 minor support will mix up the outlook and turn intraday bias neutral first.

In the bigger picture, a medium term bottom should be in place at 0.8201, on bullish convergence condition in daily and weekly MACD. Rise from there could either be a correction to the down trend from 0.9499 (2020 high), or a medium term up trend itself. In either case, further rise should be seen to 38.2% retracement of 0.9499 to 0.8201 at 0.8697. Sustained break there will target 61.8% retracement at 0.9003. This will remain the favored case as long as 0.8294 support holds.

Economic Indicators Update