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Euro May Fall as Risk Appetite Firms on Dovish ECB

Euro May Fall as Risk Appetite Firms on Dovish ECB

Ilya Spivak,

Talking Points:

  • Aussie Dollar Drops, Yen Gains as China Cash Injection Stunts Risk Appetite
  • Euro May Fall as Sentiment Firms if ECB Hints at Stimulus Expansion Ahead
  • Gauge Trends and Spot Reversals in the Major Currencies with DailyFX SSI

A late-day recovery on Wall Street inspired a chipper mood in early Asian trade, with the sentiment-linked Australian, Canadian and New Zealand Dollars trading higher alongside share prices while the anti-risk Japanese Yen underperformed. The upbeat tone appears to be fading however. Shares have started to retreat and currencies are following suit, with the commodity bloc trimming gains and the Yen recovering to trade barely changed on the session having been down as much as 0.5 percent.

The turn in sentiment appears to have followed news that China injected CNY400 billion (US$60 billion) into the market via reverse repo operations. That amounts to the largest liquidity outlay in three years. In recent months, Chinese monetary stimulus efforts have been frequently met with a risk-averse response. Rather than bolstering optimism, investors appear to be interpreting Beijing’s efforts as a sign that officials are becoming increasingly worried and resorting to ever more dramatic countermeasures.

Furthermore, greater easing is compounding downside pressure on the Yuan and compounding the threat of further devaluation. That has been a driver of negativity in its own right. Currency weakness undermines Chinese consumers’ purchasing power of imported goods, encouraging the short-term oriented and speculatively-minded investors in Chinese shares to reallocate capital from “play money” to more mundane expenditures. This has made for a seemingly counter-intuitive inverse relationship between measures of liquidity supply and the benchmark CSI 300 stock index.

Looking ahead, the ECB monetary policy announcement is in the spotlight. The central bank is expected to stay the course for now. December’s disappointing CPI figures are likely to mean that President Mario Draghi will have to field questions about stimulus expansion at the press conference following officials’ meeting. Comments suggesting greater easing is likely in the near term may breathe new life into risky assets, sending the higher-yielding currencies upward while weighing on the Euro. Rhetoric signaling a lack of urgency in offering further accommodation is likely to trigger the opposite dynamic.

Losing Money Trading Forex? This Might Be Why.

Asia Session

GMTCCYEVENTACTEXPPREV
21:00NZDANZ Job Advertisements (MoM) (DEC)1.1%-2.4%
21:30NZDBusinessNZ Manufacturing PMI (DEC)56.7-54.9
00:00AUDConsumer Inflation Expectation (JAN)3.6%-4.0%
00:00AUDHIA New Home Sales (MoM) (NOV)-2.7%--3.0%
00:00NZDANZ Consumer Confidence Index (JAN)121.4-118.7
00:00NZDANZ Consumer Confidence (MoM) (JAN)2.3%--3.3%
00:01GBPRICS House Price Balance (DEC)50%50%49%
00:30AUDRBA FX Transactions Government (DEC)-1308M--517M
00:30AUDRBA FX Transactions Market (DEC)1175M-485M
00:30AUDRBA FX Transactions Other (DEC)140M-39M
04:30JPYAll Industry Activity Index (MoM) (NOV)--0.7%1.0%
05:00JPYSupermarket Sales (YoY) (DEC)---1.0%

European Session

GMTCCYEVENTEXPPREVIMPACT
08:00CHFM3 Money Supply (YoY) (DEC)-2.7%Low
12:45EURECB Main Refinancing Rate (JAN 21)0.05%0.05%High
12:45EURECB Deposit Facility Rate (JAN 21)-0.3%-0.3%High
12:45EURECB Marginal Lending Facility (JAN 21)0.3%0.3%High
13:30EURECB President Draghi Holds Press Conference --High
15:00EUREurozone Consumer Confidence (JAN A)-5.7-5.7Medium

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3
EUR/USD1.07161.08151.08531.09141.09521.10131.1112
GBP/USD1.39931.40861.41391.41791.42321.42721.4365

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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