A gloomy ghost of an upcoming global recession kept flying above the financial markets last week. Two major concerns fought each other for the leadership in traders’ sentiment impact: the inflationary pressure in the United States and a negative outlook for world’s economy perspective next year. With only two weeks to go before the year-end, major stock indices had extended the decline depth, accelerating the losses on Friday. Although U.S. inflation reports did not confirm the Fed’s forecast of accelerating pressure and eased concerns about the regulator’s further tightening, equities failed to hold the mid-week gains, plunging more than 3% on average in two-days brutal sell-off. Stocks kept plunging led by the financial sector’s decline in the scope of the Federal Reserve meeting and rate decision next week and the global economic growth concerns which were confirmed by several negative macroeconomic reports in China, Japan and Europe. Worsening trade truce perspective between the U.S. and China also weighed on investors’ sentiment, enlarging risk aversion trade. Most of the major currencies also weakened versus the U.S. dollar on safe-haven demand. One of the key headlines was Brexit again with British Prime Minister Theresa May cancelled the vote in Parliament and faced a non-confidence motion. A non-deal Brexit is more likely, given the recent development in the UK, as well as the European Union refused to re-negotiate the deal conditions. The Sterling sold off, breaking through several important technical levels, and charting 20-month lows. Emerging markets were hit by weaker-than-expected macroeconomic data from China. Commodities and industrial metals were under the selling pressure due to the trade war truce doubts and new tariffs threats. Precious metals went off the recent highs as U.S. Treasury yields did not continue rising. Oil prices kept falling due to the uncertain OPEC’s policy.
The U.S. dollar index, measuring the volume-weighted basket of six major currencies, charted new top in 2018, closing the trading week at the highest level since May 2017. The greenback’s safe-haven role had the most impact for such a rally as the macroeconomic data was rather mixed than positive. Producer and Consumer Price Indexes include Core calculation failed to impress with most of the readings came in line with the market expectations. The Federal Budget Balance widened its negative surplus, creating additional concerns about the negative impact from the tax cut reform and U.S. Treasury’s ability to fund the gap in tighter financial conditions. Retail Sales report improved in November, beating the market consensus. However, the decline in both Manufacturing and Services Purchase Managers indices increased worries about the potential recession coming in 2019 with a deeper slowdown of the economic growth. The Federal Reserve will face a tough decision next week regarding the interest rates. On one hand, the market had almost priced in the hike, and the regulator is forced to fight the inflation. On the other side, a further monetary policy tightening would hurt the economic growth as the positive impact of the tax reform is almost exhausted the boost for corporate profits and investment activity in the United States. However, given the greenback’s inverse correlation with equities in 2018, we would not be surprised if USD would keep climbing next week despite a more dovish statement from the Federal Open Market Committee and the hike of another 25 basis points for the interest rates.
The European Central Bank held its meeting last Thursday with the most meaningful impact for the single European currency among other events. EUR/USD was climbing higher on positive expectations before the meeting, testing the highest level in four weeks (1.1447). However, the ECB President Mario Draghi was more dovish than some of the EUR bulls would have expected, and the currency pair sold off as the result. The regulator left the interest rates unchanged with the same level of deposit facility rate and additional liquidity injections at the same monthly volume. Moreover, the Eurozone economic outlook forced Draghi to express supplementary concerns regarding a potential change in the monetary policy with key issues of inflation easing, business activity surveys declining and manufacturing production, as well as exports volumes, falling recently. Political uncertainty in several major European countries also weighs on Euro, increasing the chances for deeper bearish achievements to come, especially in the light of strengthening greenback. Friday’s data was also disappointing with Manufacturing and Services PMI’s in red and wages growth flat. Downside risks persist for EUR/USD in two trading weeks left for 2018 and beyond. However, the bulls would resist, supporting the pair from losing the ground, given several bounces from weekly lows around 1.1270. That level represents a strong technical support for the pair.
The Brexit topic seems to start frustrating investors. The British pound had lost the ground, accelerating the bearish momentum and charting multi-months lows around $1.2480. The weekly decline was one the worst among major currencies (-1.15%), despite the Friday’s bounce on profit-taking speculative flows. That all started on Monday as Theresa May had cancelled the Brexit vote in Parliament amid uncertain outcome. That step forced British politicians to gather for an urgent meeting to discuss the current situation. As a result, May faced non-confidence vote with a more pessimistic perspective to continue her political career. The Brexit story would proceed with a non-deal mode as the European Union is not intended to renew the negotiations saga. ‘Take what is offered or just go away’ - that was the message from Brussels. In contrast to the currency market, equities and gilts managed to recover some of the previous losses last week amid several positive economic reports in the UK. So, Average Earnings index grew in October, increasing potential consumption in the country. The labour market also showed an improvement, adding 79 thousand jobs in 3M/3M calculations. The GDP report was not so optimistic though, declining in the yearly perspective. Manufacturing production fell, while trade balance widened the negative gap. Both fundamental and technical outlooks remain ugly for the British pound and we expect nothing but the bearish continuation for GBP/USD and other Sterling pairs in the nearest future.
Japanese yen stayed in the same tight sideways range, despite the risk aversion flows and negative local economic data. USD/JPY declined on Monday, testing 112.20 support. Buyers stepped in later as both Japanese and U.S. equities rallied on speculative flows. The demand for U.S. Treasuries added bullish momentum for the pair, however, the resistance level at 113.50 seems to be the tough nut to crack for the bulls and USD/JPY finished the trading week slightly lower (113.35). The macroeconomic data was rather disappointing then optimistic in Japan. The Gross Domestic Product declined much faster than it was previously anticipated in the third quarter, Adjusted Current Account worsened the situation in the financial sector. In addition, Machinery Orders and Producer Price Index fell in November, adding concerns about the decreasing export potential of the third largest world’s economy in the scope of global consumption cut. Moreover, Tankan survey indicated a more pessimistic outlook for the industrial sector in Japan, so we expect further weakening of USD/JPY next week in case if the Federal Reserve will not publish too hawkish statement after the interest rate decision. Technically speaking, the bearish reversal pattern would be completed once the support level of 112 yen per dollar will be breached.
All of the commodity currencies were weakening versus the greenback last week. Aussie and Kiwi were vulnerable to the global economic concerns and trade war worries, erasing all of the mid-week gains. AUD/USD was supported around 71.5 cents while NZD/USD slid below 68 cents amid much weaker-than-expected budget balance forecast for February 2019. RBNZ Governor Orr was much more dovish in his latest speech, lowering chances for interest rates hikes in 2019. The most significant impact was Chinese data for Australian and New Zealand dollars though, as the largest market for countries’ export keeps showing signs of a deeper slowdown with Retail Sales, Industrial Production, Consumer Price Index and Manufacturing PMI - all in red. A further decline is likely for both AUD/USD and NZD/USD for the week ahead.
The Canadian dollar kept sliding versus the greenback last week despite the lack of major macroeconomic reports. Besides the USD demand across the board, falling oil prices were weighing on the Loonie. USD/CAD gained strength, rising for another 0.48% due to the absence of any clear measures imposed by OPEC to cut oil production, supporting the black gold. Crude oil inventories fell in the United States, the largest market for Canadian exports. However, the pace was not strong enough to convince oil traders in the robust consumption, and WTI Crude plunged for another 1.77% as the weekly result. An uncertain impact was indicated by BoC officials from exports revenue cut for the Canadian economy. That factor was one of the main concerns for the regulator to stop hiking the interest rates. Next target is placed at 1.3400 round figure for USD/CAD bulls, with a large likelihood to be breached as early as next week. The absence of any crucial resistance levels above makes the currency pair vulnerable to further appreciation.