February Forex Outlook

US Dollar: The Dollar Index has been softer over the past two months, only rising one week in December and one week in January. It has been confined to about 100 points on either side of roughly 96.15 where it finished last year. Although the S&P 500 has recouped a little more than half of the loss seen since the record high was set last September near 2940, expectations for Fed policy have not returned to status quo ante. Indeed, after the late January FOMC meeting, the market has nearly priced out any chance of a rate hike this year.  Trade issues with China will come to a head in February ahead of the early March self-imposed deadline. China’s willingness to take steps to reduce the bilateral trade imbalance is helpful and plays into the transactional approach of the Trump Administration and its desire for immediate action, but it is not clear whether it will be sufficient without deeper structural reforms and a verification process.  Expect it to go to the wire.  Domestic US politics will intensify now that the government has re-opened, as the Democrat-led House of Representatives provides a check on the power of the executive. The 200-day moving average is near 95.30, which was frayed at the end of the month. Also, important chart support is seen near 95.00. A break could signal another 100-point loss to retest last September’s lows.   

Euro:  The European Central Bank was more dovish than expected in January, and this lays the groundwork for fresh action at the next meeting in early March. The evolution of the ECB President Draghi’s comments points to the likelihood of a new long-term loan (targeted long-term refinancing operation or TLTRO). Italian and Spanish banks are seen as the biggest beneficiaries of the new loans, and the sovereign bonds have outperformed as they did at the end of last year. The eurozone grew by 0.7% each quarter of 2017 and slowed to 0.4% in the first two quarters of 2018, before slowing to 0.2% in the last two quarters. Germany, the economic engine for Europe, may have escaped the second consecutive quarterly contraction, but it is still reeling from two shocks. The first is domestic and is specific to the auto sector. The second is slower world growth, and especially in China. The New Year has begun on a weak footing as the manufacturing PMI fell below the 50 boom/bust level in January. The median forecast in the Bloomberg survey is for the euro to finish Q1 at $1.16, which is a cent higher than expected a month ago. 

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Read more by Marc on his site Marc to Market.

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