Euro Outlook: "Longer run studies remain resolutely bearish" say Scotiabank

February 15, 2024 - Written by Tim Boyer

STORY LINK Euro Outlook: "Longer run studies remain resolutely bearish" say Scotiabank

The yen was broadly resilient on Thursday despite weaker than expected Japanese GDP data and the Dollar to Yen (USD/JPY) exchange rate dipped below 150.0 after the latest US retail sales data.

The Euro to Dollar (EUR/USD) exchange rate also recovered to 1.0785 highs from 3-month lows near 1.0700 before trading around 1.0765.

Markets overall still expect a firm dollar tone in the near term and, after a spike lower to 149.50, USD/JPY recovered to just above 150.

US retail sales declined 0.8% in January compared with consensus forecasts of a 0.2% decline while there was a downward revision to December’s data to 0.4% from 0.6%.

This was the largest monthly decline for 10 months.

Underlying sales declined 0.6% compared with expectations of 0.2% growth while the control group recorded a 0.4% decline.

Initial jobless claims declined to 212,000 for the week from a revised 220,000 and below expectations of 219,000, but continuing claims increased to 1.90mn from 1.87mn.

As far as business surveys are concerned, there was a strong rebound in the New York Empire manufacturing index with a rebound to -2.4 from -43.7 the previous month.

There was a rebound in all major metrics while prices increased at a faster rate on the month. Companies were slightly more optimistic over the outlook with inflation pressures expected to ease.

The Philly Fed manufacturing index also posted a notable improvement to 5.2 for February from -10.6 and compared with forecasts of -8.0.

Confidence in the outlook remained subdued while, in contrast to New York, prices are expected to increase at a faster rate.

Elsewhere, industrial production declined 0.1% for January compared with expectations of a 0.2% monthly gain.

Data releases overall were certainly mixed, but markets tended to focus on the retail sales data and the dollar retreated.

According to ING; “January retail sales and manufacturing output were quite a lot weaker than expected, but we are coming off strong levels after upside surprises in late 2023. The outlook remains one of a slowing growth story as high borrowing costs, tight credit conditions and reduced support from pandemic-era accrued savings create a more challenging environment.”

Scotiabank noted; “EUR gains are generating a little positive momentum on the short-term chart—but longer run studies remain resolutely bearish.”

Westpac commented; “A very light calendar after retail sales through to the end of Feb should see DXY trade sideways, in line with the 2024 trend.”

The bank is still broadly positive on the dollar trend; “But beyond that DXY can develop a more consistent day-to-day bullish grind, potentially fuelled by expectations for a hawkish March FOMC.

Overnight, Japan released the latest GDP data with a provisional 0.1% decline for the fourth quarter of 2023. With a 0.7% decline for the third quarter, the Japanese economy was in recession for the second half of 2023.

Westpac commented; “While the data is preliminary and subject to the risk of meaningful revision, the fact that Japan slipped back into recession in Q1 has not been lost on traders with only the external sector adding to growth – as it should be given the incessant weakening in the ¥.”

According to ING; “Even though USD/JPY has not moved much, these would seem to be yen negative in that i) it provides fewer reasons for the Bank of Japan to exit its super-loose policy settings in April, and ii) given that exports were the main engine of growth, Japanese authorities may not be averse to a weak/weaker yen after all.”

It added; “The 152.00 area is clearly a big resistance level for USD/JPY – a break which will have some dusting-off calls for 160. We do not think USD/JPY is particularly stable in this 150-152 area and feel that implied volatility levels are too cheap.”

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TAGS: Euro Forecasts