Euro Finds Mild Strength Amid German Bond Selloff, Aussie Dips on China Trade Concerns – Action Forex

Euro is having a modest rebound as markets enter the final US session of the holiday week, supported by a notable rise in Germany’s 10-year benchmark yield. Investors dumped German bonds after President Frank-Walter Steinmeier dissolved the lower house of parliament, paving the way for snap elections on February 23. The move follows the collapse of Chancellor Olaf Scholz’s three-way coalition government, which lost a confidence vote earlier this month, leaving Scholz to head a caretaker government until a new one is formed.

Germany has narrowly avoided a technical recession this year, but its GDP growth has been volatile, alternating between positive and negative quarters over the past year. The stagnation has been exacerbated by political uncertainty, which has deterred business investment. However, some economists see room for positive surprises in 2025 if the snap elections deliver a stable government, paving the way for consistent and predictable economic policies that could restore business and investor confidence.

In contrast, Australian Dollar edged lower on news that China is set to launch an investigation into beef imports, raising concerns about trade restrictions. Australia accounted for 12% of China’s USD 14.2B in beef imports in 2023. While China claims the investigation isn’t targeting specific countries, Australia, along with Argentina and Brazil, could face significant impacts if trade measures are imposed.

In Europe, at the time of writing, FTSE is down -0.09%. DAX is up 0.43%. CAC is up 0.60%. Germany 10-year yield is up 0.059 at 2.383. UK 10-year yield is up 0.051 at 4.623. Earlier in Asia, Nikkei rose 1.80%. Hong Kong HSI fell -0.04%. China Shanghai SSE rose 0.06%. Singapore Strait Times rose 0.27%> Japan 10-year JGB yield rose 0.0164 to 1.104.

US goods exports rise 6.1% yoy in Nov, imports surge 9.6% yoy

US goods exports rose 6.1% yoy to USD 176.4B in November. Goods imports rose 9.6% yoy to USD 279.2B. Trade deficit widened from October’s USD -98.3B to USD 102.9B. larger than expectation of USD -100.9B.

Wholesale inventories fell -0.2% mom to USD 901.6B. Retail inventories rose 0.3% mom to USD 827.5B.

BoJ summary highlights division on timing of rate hikes

BoJ Summary of Opinions from its December 18–19 meeting revealed a divided board on the timing of monetary policy normalization. While some members advocated for action soon, citing upside risks to prices, others expressed caution due to slow wage growth, soft overseas demand, and heightened uncertainties.

One member emphasized that with economic activity and prices aligning with BoJ’s outlook, risks to inflation were becoming “skewed to the upside.” The member argued for a “forward-looking, timely, and gradual” adjustment of monetary policy. Similarly, another member noted that the sustained increase in prices over the past three years, partly driven by Yen’s depreciation, would likely contribute to higher underlying inflation, warranting “preemptive” rate hikes.

Conversely, more dovish members maintained that the current risks to prices “do not suggest a pressing need” for rate hike. One member cited uncertainties surrounding tax and fiscal policies in Japan and the stance of the incoming US administration as reasons to maintain the current policy stance, emphasizing a risk management approach.

Overall, the BoJ board appears focused on assessing the outcomes of next year’s spring wage negotiations and the impact of US policy shifts before making further moves toward policy normalization.

Japan’s Tokyo CPI core rises to 2.4% in Dec, but core-core dips to 1.8%

Japan’s Tokyo core CPI (excluding food) rose from 2.2% yoy to 2.4% yoy in December, marking its highest level since August but falling short of expectations for 2.5%. The increase was largely driven by a 13.5% yoy surge in energy prices, reflecting the phase-out of government subsidies for gas and electricity bills. However, when excluding utility costs, inflation pressures appear steady.

Core-core CPI (excluding food and energy) softened to 1.8% yoy from 1.9% yoy, while services inflation edged up slightly from 0.9% to 1.0%. Meanwhile, headline inflation accelerated to 3.0% yoy from 2.6% yoy, with energy and food prices, including rice, contributing significantly to the increase too.

The uptick in Tokyo inflation highlights lingering pressures from rising utility and food costs, which may weigh on consumer spending and deter firms from implementing further price hikes. These factors, coupled with broader signs of economic weakness, could delay BoJ ’s timeline for raising interest rates.

Japan’s industrial output slips -2.3% mom in Nov, indecisive fluctuation continues

Japan’s industrial production declined -2.3% mom in November, outperforming expectations of a -3.4% mom drop, but marking the first contraction in three months.

The decrease was driven by weaker exports of semiconductor manufacturing devices and cars, highlighting challenges in external demand. Out of 15 industrial sectors, 11 recorded declines, while 3 sectors reported gains.

Production machinery saw a significant -9.1% drop, largely due to falling exports of chip-making equipment to China and Taiwan, while motor vehicle output fell -4.3%, and fabricated metal products dropped -5.7%.

Despite the slump, the Ministry of Economy, Trade, and Industry maintained its view that industrial production “fluctuates indecisively,” while warning of risks tied to the economic outlooks of the US and China.

Looking ahead, METI’s poll of manufacturers predicts a rebound, with output expected to rise 2.1% in December and an additional 1.3% in January.

Separately, retail sales posted a robust 2.8% yoy gain, exceeding expectations of 1.5%, signaling resilience in domestic demand.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0399; (P) 1.0414; (R1) 1.0439; More…

EUR/USD recovers mildly today but stays in range of 1.0330/0629 and intraday bias stays neutral. Stronger recovery cannot be ruled out, but outlook will remain bearish as long as 1.0629 resistance holds. Firm break of 1.0330 will confirm resumption of whole decline from 1.1213. Sustained trading below 1.0404 fibonacci level will carry larger bearish implications.

In the bigger picture, focus stays on 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404. Strong rebound from this level will keep price actions from 1.1273 (2023 high) as a medium term consolidation pattern only. However, sustained break of 1.0404 will raise the chance that whole up trend from 0.9534 has reversed. That would pave the way to 61.8% retracement at 1.0199 first. Firm break there will target 0.9534 low again.