Oil Turns Volatile, Erases Previous Losses

Daily Analysis - 25/02/2016

Building Oil Inventories Don't Deter Price Bounce-Back


WTI Crude Oil fell to lows of $30.53 a barrel following comments from Saudi Oil minister Ali al-Naimi, who ruled out oil production cuts but noted that the agreement to freeze output at January levels was a good start. Yesterday, US weekly crude oil inventories showed a build up of 3.50 million barrels after analysts forecast only 2.02 million. WTI bounced back after the report, closing the day at $32.18 with gains of nearly 2.75%.

Yen Rises Against Peers Despite NIRP

Governor Kuroda of the Bank of Japan commented yesterday that the negative rates introduced in January did not mean an end to QE, and that the Japanese central bank could very well continue to expand if necessary. While the Yen fell on the remarks, risk aversion in the markets saw the currency continue to strengthen for a second day, gaining sharply against the Dollar, the Euro and the British Pound. Losses in GBPJPY were stronger as the Pound weakened on uncertainty concerning a possible Brexit. USDJPY was seen weaker, trading close to the previous yearly low of 110.973, but it managed to recover near the end of the session. The Dollar is currently stronger against the Yen, trading at 112.47 ahead of the European session open.


Home Sales and PMI in US Slide

New home sales in the US for the month of January were down -9.20% from December and fell -5.20% compared to a year ago. Following this negative news, US flash services PMI data showed a contraction in the services sector as well. Flash services in the US declined in February falling to 49.8, below the 50 level that indicated expansion. The PMI decline was the first in two years and surprised to the downside against expectations of an increase to 53.1. Soft growth alongside uncertainty in the global economy weighed on businesses as evidenced by new business growth which slowed for a third consecutive month. The flash services PMI comes ahead of the ISM's data which is closely watched. The US dollar declined on the new home sales and services PMI data, with USDCAD falling to daily lows of 1.3701.


Markets Poised for GBP Reaction to UK GDP

The British Pound continued to slip against its peers for the second day in a row yesterday. Since Monday, the GBPUSD pair is down -3.18%, with losses more pronounced in cross currencies such as the GBPJPY and the EURGBP. On the economic front, the UK's second estimate of fourth quarter GDP is due today, as analysts expect an unchanged print of 0.50%, while on a year over year basis, GDP is expected to remain at 1.90% as per the initial estimates. Exports are expected to rise at a slower pace of 0.50% while imports are expected to show a net gain of 1.40%. Unless there is a strong surprise concerning forecasts, the British Pound is unlikely to react much to the data, with concerns about a Brexit continuing to be the main catalyst for movement. GBPUSD broke down below the 1.40 handle and closed yesterday at 1.3924.


Eurozone Posts Inflation Data

Inflation data from the Eurozone is due today, with expectations for monthly inflation to climb 0.40%, parallel with the prior month, while on a year over year basis up 1.50%. Today's inflation data will be the last ahead of the ECB's monetary policy meeting on March 10th as Mario Draghi and banking officials decide on the central bank's path going forward. Inflation has remained stubbornly low and largely unchanged since the ECB started its QE program in January of 2015. Today's data could surprise considering that inflation across most other developed economies rebounded in January, including the US and the UK. However, despite any short term deviations, longer term inflation remains pressured to the downside. The Euro continued its decline against the dollar through yesterday's New York trading session, falling to lows of 1.0957 before pulling back modestly towards 1.1012.


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