As signs that the global cyclical slowdown continue, it is a crucial week for markets with another meeting between the US and China on trade, Fed monetary policy, more Brexit debate and Non-farm Payrolls. We consider the latest outlook for forex, equities and commodities.
The signs of economic slowdown are flashing red, at least. Take the Eurozone for example, where the Composite PMI dropped below 51.0 and is only just in expansion territory. According to HIS Markit, the Eurozone PMI has an 85% correlation to GDP, and a move below 51.0 is consistent with the ECB turning towards an easing bias on monetary policy. This really has been an alarming deterioration in growth prospects and means that current ECB projections of 1.7% GDP growth for 2019 is likely to be slashed in coming months and will be closer to 1% in due course. This is not the environment ripe for tightening rates. The ECB now notes that growth risks have “moved to the downside” (having previously been “broadly balanced”). The market sees the first hike in the deposit rate will not be until Q2 2020. The euro has struggled in the past two weeks amidst falling inflation, worrying growth indicators and now a dovish leaning ECB. Despite Friday’s rally, this points towards ongoing euro underperformance, EUR/USD will be a struggle for the bulls. It is likely that this will remain the case until a longer term dollar correction we expect in 2019 begins to take hold. Whilst the Fed is likely to begin to guide for a pause in rate hikes in the January FOMC meeting, there is still a possibility that if the trade negotiations with China are able to yield agreement, there could still be room for another rate hike later in the year. Only then will the dollar strength through risk aversion of trade fears begin to unwind. In the meantime, the prospects for EUR/USD gains look bleak.
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