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    European Session – Euro extends decline to 1-month low, yen continues to outperform on risk aversion

    The Chinese market stabilized overnight, with the help of local regulators and authorities, giving some confidence to investors but the effect mostly lasted only during the Asian session and wore off by the European session. It was evident that risk aversion was back as the yen gained ground and the dollar strengthened against most other majors.

    The euro extended Monday’s decline to trade to a one-month low below $1.08. It reached its lowest level since the December 3 ECB meeting at 1.0737. The single currency has recently tended to do well and was bought as a safe haven in times of risk aversion but it came under pressure from Eurozone inflation data today.

    Eurozone flash CPI came in below forecasts in December at 0.2%, basically remaining unchanged from November. It was slightly lower than expectations that inflation would climb slightly to 0.3%. Core inflation which excludes food and energy, came in at 0.8%, against expectations it would stay at 0.9% (i.e. the same as the previous month’s rate). Inflation in the euro area remains stubbornly low and could cause a headache for the ECB whose target rate is 2%. Today’s Eurozone CPI data follow yesterday’s disappointing German inflation figures which showed inflation in Europe’s largest economy was 0.3 %, missing estimates for an increase to 0.4%.

    Sterling made a new nine-month low versus the dollar at $1.4658. Stronger-than-expected UK construction PMI data for December did little to lift the pound. UK construction PMI rose to 57.8 from 55.3. Forecasts were for a smaller increase to 56.

    The yen outperformed again, with the dollar/yen pair dipping briefly below the key 119 level but did not break below Monday’s 2 ½ month low of 118.69. The yen gained more against the euro to hit its strongest in over eight months, pushing the euro/yen pair to 127.74.

    The Australian dollar fell sharply for a second day versus the greenback to reach $0.7145. The aussie has been impacted by this week’s stock market crash in China since the latter is a major trading partner for Australia.

    The New Zealand Fonterra GDT milk auction prices today showed a drop of 1.6% from the previous auction on 15 December 2015 when prices increased 1.9%. Consequently the kiwi fell on the news to a near one-month low of $0.6675.

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