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The euro continues to weaken despite better than expected European news

We’re back and 2022 trading has officially begun as all the major exchanges are trading today. The euro area kicked off with some positive news and we have some Tier-1 data dropping later this afternoon. The forex space is looking slightly risk-on as commodity pairs do better than the traditional safe-havens, so this could also be good for the equities this morning.

Market Brief

Today is the first full day of the markets as there are no bank holidays across the major exchanges. We also have some Tier-1 data for the first time in a couple of weeks which could be market moving as the news will come out from the OPEC-JMMC meeting that starts today. We should expect oil to drop on news that the February increase in supply goes ahead and vice versa for the price of oil if OPEC+ comes out and says they will hold off or deviate from the release schedule.

Currently, the daily chart for Brent shows that the $80 price level is acting as resistance, but that momentum is building to the upside as the daily 20-EMA pushes higher towards the 50-period EMA. A break higher and a close above $82.00 would signal the increased potential for new highs and a continuation towards the $100 target we outlined last year. The close back below the 20-period EMA would be the first signal that the market expects supply to exceed demand.

During the overnight session, the Japanese Final Manufacturing PMI came out slightly better than expected as did the Chinese Caixin Manufacturing PMI’s. According to the latest PMI data, conditions across China's manufacturing sector improved slightly at year's end. A renewed uptick in sales brought the strongest output gain in a year. Export orders remained stagnant, however, due to weak foreign demand. With demand improving again, purchasing activity rose, but backlogs rose again as staffing levels dropped.

A report by the China Federation of Logistics and Purchasing (CFLP) shows that China's NBS Purchasing Manager's Index (PMI) for manufacturing climbed to 50.9 in December. Based on data compiled by the NBS, the headline figure rose above neutral 50 for the first time since last month and improved from 49.9 to land marginally above estimates.

German retail sales and Spanish unemployment change data also added to the good news stories as they came out better than expected. According to a report released by Germany's statistical office Destatis on Tuesday, turnover in retail trade fell 2.9% in real terms in November compared to a year earlier. In nominal terms, retail sales added 0.2% year-on-year. On a monthly basis, adjusted for calendar and seasonal variations, retail sales increased by 0.6% compared to October in real terms and were up 1.1% nominal terms.

The EURUSD hasn’t been able to capitalise on the better-than-expected European economic data today and as the price action is trading within a rising channel, I fully expect the breakout to be to the downside. Should the EURUSD test lower this is likely to be the main driver of a rising US dollar index.

The DXY is also looking like it wants to break out of a channel, and this would open up the potential for a test of the $97 price level.

The French preliminary CPI month-on-month data missed expectations of 0.3% and came in at 0.2% which is also 0.2% below the previous reading. This is a sign of deflationary pressures as the first data comes in following a drop in recent energy prices. At the last US CPI data release, President Biden came out specifically to talk about how the high CPI reading hadn’t taken into account the drop in oil prices.

In the London session, we will learn how well the UK Manufacturing PMI data did with expectations for the same result as the previous reading of 57.6 and we also get the UK Mortgage approvals number. The EURGBP is dropping and has made a new daily low as expected. The momentum to the downside will push price action along, so I expect this to continue until we start seeing much better economic data out of Europe or the Bank of England adjust back to loosening their monetary policy rather than tightening.

The focus today other than the OPEC+ headlines will come during the US session when the important US ISM Manufacturing PMI data is released along with the JOLTS job opening data.


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