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By XE Market Analysis February 12, 2018 3:46 am
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    XE Market Analysis: Europe - Feb 12, 2018

    The dollar has started the week on a softer tack amid an improved risk appetite sentiment and firmer stock markets. The narrow trade-weighted USD index (DXY) is down 0.3%, near the day's low at 90.08, which is a two-session low. EUR-USD has lifted to the upper 1.22s, logging a peak at 1.2297 after opening in Asia-Pacific markets just under 1.2250. Cable and AUD-USD have seen a similar price action, and USD-CAD has logged two-session lows. USD-JPY has also ebbed, making a low of 108.56, though the pair has remained comfortably above Friday's five-month low at 108.04. In news, Japanese PM has reportedly approved BoJ Governor Able for a second term. ECB's Nowotny said over the weekend that "we in the ECB are certainly concerned about attempts by the United States to politically influence the exchange rate," saying that it will be a topic at the upcoming G20 summit. A research note from the co-head of global equity trading at Goldman Sachs grabbed attention in market talk, as he described the recent equity tumble as signifying a "regime change, one where you sell the rallies rather than buy the dips," which follows a quadrupling of market valuations over the last nine years.

    [EUR, USD]
    EUR-USD has lifted to the upper 1.22s, logging a peak at 1.2297 after opening in Asia-Pacific markets just under 1.2250. The move reflected a broader softening in the dollar, correlating with a rebound in risk appetite and associated recovery in global stock markets. ECB's Nowotny said over the weekend that "we in the ECB are certainly concerned about attempts by the United States to politically influence the exchange rate," saying that it will be a topic at the upcoming G20 summit. We remain bearish of EUR-USD, with the pair having established a downtrend (lower highs, lower lows) over the last week. We base this view on the rekindled commitment of the Fed to a tightening policy course (which is looking to be on track to hike the funds rate four times this year, starting at the March FOMC), juxtaposed to the ECB's evident disquiet about euro strength. Initial EUR-USD resistance is at 1.2335-38.

    [USD, JPY]
    USD-JPY ebbed, making a low of 108.56, though the pair has remained comfortably above Friday's five-month low at 108.04. Japanese PM has reportedly approved BoJ Governor Able for a second term, which should maintain scope for continued accommodative policy in Japan, despite signs that some members are favouring ratcheting back on stimulus. Market participants will maintain a close focus on global stock markets, with the recent sharp correction likely to have heralded in a era of volatility as overly rich valuations meets a tipping point in tightening monetary policy across major global economies. This backdrop, if seen, would likely keep USD-JPY a sell-on-rallies trade. The pair has initial resistance at 108.90-92.

    [GBP, USD]
    Sterling has started the week on a settled footing after Her Majesty's currency finished last week under pressure. The decline was sparked by remarks by the EU's chief Brexit negotiator, Barnier, that a transition deal (which would allow the UK to remain in the single market for up to two years after Brexiting on 29th March 2019) is "not a given," and that border checks on the Irish border were "unavoidable" -- which is seen by many political pundits as potentially major blocking point. The BoE's hawked-up policy guidance, delivered last Thursday, had come with a Brexit caveats attached. With Brexit negotiations having entered a crucial period, we expect the pound to remain a sell on rallies versus the dollar.

    [USD, CHF]
    EUR-CHF broke lower last week, leaving a four-month low at 1.1446. The cross has since settled in the lower 1.1500s. We expect directional bias to remain to the downside while the risk-off phase persists. The cross is seeing its biggest correction seen since the Swiss franc started to trend lower in mid last year, reflecting EUR-USD declines amid dollar outperformance and euro selling amid the ECB's evident disquiet about the extend of the euro's recent rally, which looks to have had a dampening impact on hawkish voices at the ctral bank. There is also some concern appearing in market research notes about the Italian election in early March, given the popularity of anti-EU Northern League.

    [USD, CAD]
    USD-CAD has gained come 3 big figures from the lows seen in late January and early Februray. The stellar U.S. January jobs report lit a fire under the U.S. dollar. The data, having rekindled expectations for Fed tightening, also sparked a spike on sovereign yields and a risk-off theme in global equity and commodity markets, including oil prices. This is a supportive backdrop for USD-CAD, and we expect the pair to remain underpinned this week. Support is at 1.2475-76..

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