The euro managed to strengthen its position against the US dollar on Monday and even updated the maximum of last week, which is a very good signal for further strengthening of risky assets. The report on the mood in German business circles from the Ifo Institute did not strongly affect the euro exchange rate, although the bulls made an attempt to strengthen the trading instrument in the first half of the day. According to the data, concerns about the spread of the coronavirus did not affect the sentiment index in German business circles. However, the growth in production expectations was offset by the negative construction sector, but the overall level of company sentiment remained fairly high.
According to the report, the Ifo index of business sentiment in Germany rose to 96.1 points in February 2020 from 96.0 points in January, while economists had forecast a decline to 95.3 points. The current conditions index fell to 98.9 points, while the expectations index rose to 93.4 points. The Ifo expects German GDP growth in the 1st quarter to be 0.2%. By the way, a report on economic growth for the 4th quarter of 2019 will be published today, and economists are not hopeful. At best, the indicator will show zero growth. At worst, it will decrease, which will return pressure on the EURUSD pair in the short term. As for the 1st quarter of this year, German GDP growth may slow down due to reduced exports and supply shortages, and the recent outbreak of coronavirus in Italy will create even more problems.
Despite the data on the growth of activity in the area of responsibility of the Fed-Chicago and the Fed-Dallas, the US dollar lost a number of positions against the euro and the pound. The reports indicate that the Federal Reserve-Chicago national activity index in January 2020 was -0.25 points against -0.51 points in December. Let me remind you that values above -0.35 signal economic growth. It is particularly worth noting the indicators of production, which in January amounted to -0.23 points against -0.34 points in December.
Manufacturing activity in the area of responsibility of the Federal Reserve Bank of Dallas also increased, as businesses are more optimistic about the economy and their future. Thus, the overall business activity index in February rose to 1.2 points from -0.2 in January, and the manufacturing index in February rose to 16.4 points against 10.5 points. The business outlook index jumped to 3.6 points from 1.9.
Current indicators once again refute some market participants' expectations that the US Federal Reserve will probably have to start a drastic reduction of the key interest rate in the first half of this year. Most likely, the Committee will wait for more negative signals due to the coronavirus before seriously considering the option of further easing monetary policy. In the meantime, the US dollar is strengthening due to its status as a safe-haven currency.
Fed spokeswoman Loreta Mester said during yesterday's speech that it is necessary to closely monitor the situation with the coronavirus outbreak, as it not only worsens China's short-term prospects but also may affect the overall global economy negatively. As for inflation, Mester expects it to solidify around 2.0% in the near future. Falling short of the target level is a problem for both the economy and the Fed officials. However, Mester does not support increasing monetary stimulus to accelerate inflation, as it is quite risky to lower interest rates in order to achieve a faster return of inflation to the target level.
As for the technical picture of the EURUSD pair, yesterday's large growth in the second half of the day returned the market to the location of buyers of risky assets, even despite the outbreak of the coronavirus in Italy, which continues to spread. For today, buyers need to focus on the support of 1.0840, from which the growth can continue, which will lead to a test of highs in the area of 1.0890 and 1.0930. It is possible that the major players will take their time and move to the level of 1.0820, where the lower border of the new ascending channel passes, which can lead to a larger increase in risky assets in the short term.
CAD
The Canadian dollar yesterday also managed to regain a number of positions against the US dollar after the publication of a report that sales in wholesale trade in Canada increased in December. According to the Bureau of Statistics of Canada, sales in wholesale trade in December increased by 0.9% compared to the previous month - to 63.89 billion Canadian dollars. Let me remind you that in November, sales fell by 1.1% at once. A good indicator at the end of the year should have a positive impact on GDP growth for the 4th quarter, data for which will be released this Friday.
From a technical point of view, the pressure on the Canadian dollar has returned again due to the fall in oil prices and the spread of the coronavirus. The nearest target in the USDCAD pair is resistance, a breakout of which will lead to an update of the highs of 1.3330 and 1.3390. To level the situation, the bears need to return the trading instrument to the support of 1.3265, which will increase the pressure on the pair and lead to a test of the lows of 1.3210 and 1.3160.
