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Euro may strengthen against the dollar to $ 1.22 - CIBC


China's economy is expected to continue to slow down this year particularly on domestic demand and exports affected by US tariffs. Beijing will most likely have to deploy additional incentive measures.





Despite weak eurozone statistics, Canadian Imperial Bank of Commerce (CIBC) analysts remain bullish on the euro.


"Eurozone statistics for the third quarter turned out to be the weakest over the past four years, which apparently explains the uncertain behavior of the single European currency. It is assumed that external trade pressure, as well as political uncertainty in Italy and France, will continue, causing a further slowdown in the pace of recovery in eurozone GDP," representatives of the financial institution said.


"Meanwhile, the situation in the European labor market remains favorable, which ensures a high level of consumer spending, and hence GDP growth. In the third quarter, wages increased by a record value in almost 10 years. At the same time, the unemployment rate fell below 8% for the first time in the last decade," they added.


"Despite the fact that the balance of risks has probably shifted to the negative side, the ECB continues to consider the economic outlook for the eurozone to be rather positive, which will further allow the regulator to carry out, albeit careful, but still raising interest rates. It is possible that this will happen in the second half of the year against the backdrop of consistently high inflation expectations," the experts noted.


According to the CIBC forecast, by the end of this year, the euro against the dollar may rise to $ 1.22.


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IMF lowers global growth forecasts, what to expect financial markets





The International Monetary Fund has reduced its forecasts for global economic growth for 2019 and 2020 due to weakness in Europe and in some emerging markets, and said that trade tensions could destabilize the world economy even more. This is the second decline in three months. The lender also called a more serious than expected slowdown in the Chinese economy and the possible "problem" Brexit risks that could cause turbulence in financial markets. The IMF expects the growth of the world economy in 2019 to be 3.5 percent, and in 2020, 3.6 percent, which is lower by 0.2 and 0.1 percent, respectively, from forecasts in October last year.


"The trend of global growth is shifting downward. Escalating trade tensions beyond that already included in the forecast remains a key source of risk. Trade policy uncertainties and concerns about escalation and retaliation will lead to a decrease in industrial investment, disruption of supply chains and a slowdown in productivity growth. As a result, worsening corporate profitability prospects may affect financial market sentiment and further weaken economic growth," the IMF said in a statement.


The IMF said that growth in the eurozone will be moderate, falling from 1.8 percent in 2018 to 1.6 percent in 2019, which is 0.3 percentage points lower than predicted three months ago. The IMF also lowered its growth forecast in 2019 for developing countries to 4.5 percent, which is 0.2 percentage points lower than the previous forecast and 4.7 percent in 2018. But it kept its growth forecasts for the USA, 2.5 percent this year and 1.8 percent in 2020, indicating continued growth in domestic demand.


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EUR/USD pair continues to drift south in anticipation of the ECB meeting


In anticipation of the next meeting of the European Central Bank (ECB), which will be held this Thursday, the euro will remain under pressure.





Concerns about the slowdown in the global economy, expectations of the dovish sentiment of the ECB, as well as high demand for safe-haven assets, allowed the "bears" on EUR/USD to continue the attack.


For the second time in three months, the International Monetary Fund (IMF) has worsened the forecast for global GDP growth over the next two years.


In particular, the assessment of the dynamics of Germany's GDP for 2019 was reduced from 1.9% to 1.3% and Italy from 1% to 0.6%. At the same time, the forecast for the US economy remained unchanged, which, apparently, played into the hands of the greenback.


Meanwhile, the EUR/USD bulls are waiting for another test this week. On January 24, the ECB will hold its first meeting this year.


The main intrigue is how "dovish" will be the statements of its chairman, Mario Draghi, at a press conference on Thursday. This time, the ECB will most likely keep its key interest rate at the same level, whether the Finnish Institute refuses to raise the rate in 2019 or even announce the pumping of the banking system with liquidity is not yet clear.


If the comments of the ECB management on the results of the next meeting will have cautious optimism, sales of the euro in anticipation of an important event may turn into purchases based on facts.


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Bank of Japan will continue large-scale incentives


In anticipation of the next meeting of the European Central Bank (ECB), which will be held this Thursday, the euro will remain under pressure.





The Bank of Japan has reduced its inflation forecasts and retained a large-scale incentive program amid growing risks for the economy in the form of trade protectionism and weakening global demand. The trade war between the United States and China, Japan's largest trading partners, is increasing pressure on the third largest economy in the world and undermining politicians' many years of efforts to promote sustainable growth.


As expected, the Bank of Japan has cut its inflation forecasts, reinforcing the view that it will have to continue unprecedented economic support for some time. The regulator noted that despite growing risks such as trade disputes and Brexit, Japan's economy will continue to grow at a moderate pace. However, a recent survey of economists has shown that external factors have increased Japan's chances for a downturn in the fiscal year starting in April, making it harder for the Bank of Japan to achieve a 2 percent inflation target.


The Bank of Japan confirmed its intention to continue buying Japanese government bonds and left the short-term interest rate unchanged at minus 0.1 percent. Many economists believe that the next step of the Bank of Japan will be the normalization of policy. Most expect it to happen in 2020 or later.


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ECB press conference: Highlights of Draghi's comments


The ECB has left its policy unchanged. We give the main comments of the ECB President Mario Draghi at a press conference.


Evaluation but not a policy discussion


"We didn't have to discuss the consequences of the risk balance. Today's meeting was mainly devoted to an assessment: where are we and why are we here, how long will the slowdown take place, will the slowdown worsen or will a lower level wait for us These are the questions that have been asked ".





Muffled inflation:
"General inflation is likely to continue to decline in the coming months. Core inflation remains generally subdued, but pressure on labor costs continues to increase and expand amid a high level of capacity utilization and toughening labor markets."


Mid-term inflation:
"Looking into the future, we expect core inflation to grow in the medium term, with the support of our monetary policy measures, continued economic growth, and rising wage growth."





The economic growth:
"The short-term growth momentum is likely to be weaker than previously thought. In the future, growth in the eurozone economy will continue to be supported by favorable financial conditions, further growth in employment and wages, lower energy prices and continued, albeit somewhat slower, expansion of global activity."


Stimulation:
"Significant monetary policy incentives remain necessary to support further increases in domestic price pressure and overall inflation in the medium term. The Board of Governors is ready to use all of its tools, depending on the situation, in order to ensure a constant movement of inflation towards the goal. "


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S & P: The US economy has lost at least $ 6 billion due to the shutter




Analysts at rating agency Standard & Poor's estimate that the US economy lost at least $ 6 billion during the suspension of government work.


S & P Global Rating experts believe that as a result of the shutdown, the US budget lost $ 1.2 billion a week since the suspension of government departments led to a decrease in productivity and a low level of business economic activity.


The shutdown was caused by the reluctance of the US Congress to allocate $ 5.7 billion for primary funding for the construction of a wall between Mexico and the US, while negative consequences, according to S & P experts, have already exceeded the amount requested by President Donald Trump.


Analysts also noted that, despite the resumption of government agencies, the negative effect of the shutdown is likely to affect financial markets and business confidence in the future of the country's economy.


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China's manufacturing sector alarms currency markets





China's manufacturing sector activity in January was likely to shrink for the second month in a row, heightening concerns about the risks associated with a slowdown in China and a threat to the global economy.


Industrial leader Caterpillar has become another major international company that warned of declining demand in China, followed by chip makers and Apple. According to the average forecast of 33 economists, the official index of purchasing managers in China (PMI) in January will drop to 49.3 points from 49.4 points in December. January figures may be the weakest since February 2016. In addition, in front of the big New Year holidays and many businesses just close. Some are closing even earlier than usual, because the protracted trade war with the United States has a negative effect on orders. If Washington and Beijing do not reach a compromise that will ease the pressure on tariffs, many businesses are likely to close down forever.


In any case, weak PMI data increases the likelihood that Beijing can accelerate and intensify policy mitigation and stimulation efforts this year. Nevertheless, there remains a high probability that in the coming months business conditions in China may deteriorate, growth may fall below 6 percent in the first half of the year from 6.4 percent in the fourth quarter and stabilize only at the end of the year. This is confirmed by sources in the government, who report that the authorities are planning to reduce the growth target to 6-6.5 percent this year from 6.5 percent in 2018.


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The pound will continue to try to gain a foothold, and the dollar is waiting for the Fed report





The pound will continue to attempt to strengthen its position after fears of the "problematic" Brexit have declined, and the dollar will weaken on the eve of the Fed meeting.


Last week, the pound reached $ 1.3218, the highest since mid-October, in the hope that London will be able to make a deal with the EU. The deadline set for Brexit, March 29, is likely to be extended, and the main question for the pound is when and how the renewal decision will be made. As for the dollar, the focus is now shifting back to key events that threaten the dollar with more serious consequences, such as the FOMC (Federal Open Market Committee) meeting, US-China trade negotiations, and the US jobs report. The Fed is expected to leave interest rates unchanged.


Markets are waiting for signals about the future of the Fed's policy after recent official comments made it clear that rates of rate hikes this year will be reduced amid growing uncertainty about the state of the US economy, the global economy and fragile financial markets. Experts estimate the likelihood of a rate hike in 2019 as very low, although some still expect two approaches in the second and fourth quarters. The dollar may face pressure if the Fed decides to highlight the negative effects of the closure of the US government in its report.


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The dollar clings to any opportunity for growth, like its Australian colleague





The dollar continued to increase on the eve of the speech of US President Donald Trump, which, according to investors, may indicate progress in trade negotiations between the US and China. In general, a modest recovery in investor risk appetite led to a sharp rise in US government bond yields, but trading in foreign exchange markets was rather weak, as many Asian markets were closed for the New Year holidays. The Australian dollar gained by recovering its recent losses after the Reserve Bank of Australia (RBA) left rates at a record low.


Now all the attention is focused on the appeal of Trump, which was postponed due to the closure of the US government. Markets do not rule out more optimistic comments on US trade policy, after the closure of the Trump government is likely to seek political victories. This should be positive for the current risk-friendly environment (reliable US data, but cautious by the Fed) and can support the currencies of developing countries against the dollar.


The Aussie strengthened by 0.3 percent, to $0.7247. The currency was trading in negative territory for most of the session, after weak retail sales data in December, but it moved up after the RBA kept rates on hold. It will be difficult for the Australian dollar to overcome the dollar mark of 0.7300, given the outlook for market rates, which are still priced with a high probability of weakening this year.


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Bank of England downgraded forecasts for economic growth due to Brexit





The management of the Bank of England at a meeting on Thursday, February 7, unanimously voted to keep the key rate at 0.75. Regulatory officials said the UK economy slowed down late last year and early this year.


Representatives of the Bank of England said that the country's economy in 2019 could show the slowest GDP growth in 10 years due to the uncertainty around Brexit, as well as a slowdown in global growth.


At the same time, representatives of the regulator said that they would return to raising interest rates in the event of the implementation of a soft scenario of a country's exit from the EU.


In addition, the Bank of England downgraded the growth forecast for the country's economy in 2019 from 1.7% to 1.2%. The growth forecast for 2020 was also lowered - from 1.7% to 1.5%.


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