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By XE Market Analysis January 7, 2019 3:02 am
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    XE Market Analysis: Europe - Jan 07, 2019

    The Dollar has softened against most currencies today, concomitantly with a decline in U.S. Treasury yields following tempered comments from Fed Chairman Powell, who said the Fed will be patient and flexible in policy decisions. The USD index (DXY) is down 0.3% at 96.0, earlier posting a three-session low at 95.93, while EUR-USD is concurrently up by 0.3%, having flipped back above 1.1400, earlier printing a three-session high at 1.1430. USD-JPY is modestly lower, in the low 108.00s, though has remained comfortably above Friday's low at 107.82. The U.S. currency has also lost ground to the Pound and Dollar bloc currencies. The risk-appetite needle has remaining firmly on the bullish side of the dial following the stellar U.S. jobs report on Friday. S&P 500 futures are up 0.4% in its overnight session after the cash version of the index closed on Friday with a 3.4% gain. The MSCI Asia-Pacific (ex-Japan) index has gained by over 1.3%. Hopes are high for some rapprochement to the U.S.-China trade row as a delegation from the States will meet their Chinese counterparts today.

    [EUR, USD]
    EUR-USD flipped back above 1.1400 on route to printing a three-session high at 1.1430 in a move driven by Dollar softness as U.S. Treasury yields declined following tempered comments from Fed Chairman Powell, who said the Fed will be patient and flexible in policy decisions. We have been taking a more neutral view of the Dollar after being bullish for much of 2018. U.S. monetary policy has ceased to be a support, with Fed fund futures having now priced out a hike for 2019, and now implying a 25 bp cut by mid-2020. On the Euro side of the coin there are increasing signs of flagging economic growth momentum. We see EUR-USD as having entered a broadly sideways range phase as markets continue to fathom the push of the populist political movement in Europe and the pull of a more neutral Fed policy stance. Resistance comes in at 1.1439-40.

    [USD, JPY]
    USD-JPY has declined modestly, to the low 108.00s, though has remained comfortably above Friday's low at 107.82. Tempered remarks from Fed's Powell have pushed U.S. Treasury yields lower, despite the strong jobs report on Friday, which has in turn led to a broad offered tone on the Dollar, though a risk-on backdrop should curtail USD-JPY's downside potential. S&P 500 futures are up 0.4% in its overnight session after the cash version of the index closed on Friday with a 3.4% gain. The MSCI Asia-Pacific (ex-Japan) index has gained by over 1.3%. Hopes are high for some rapprochement to the U.S.-China trade row as a delegation from the States will meet their Chinese counterparts today. USD-JPY has support at 107.29-30.

    [GBP, USD]
    Sterling has firmed up versus the Dollar and Euro over the last couple of sessions. Cable has settled in the mid 1.2700s, up on the 21-month low that was printed at 1.2455 last week. UK markets last week largely ignored stronger than expected headline readings in both December UK manufacturing and services PMI headlines. The former showed that Brexit contingency-related activity had buoyed activity in the sector, with the underlying trend remaining demonstrably weak, while the details of the services report were mostly discouraging, with new work increasing only slightly, job creation at its weakest since July 2016 and confidence for the year ahead falling to its second-weakest reading since March 2009, the blame for which was pinned firmly on Brexit uncertainty. The UK economy is likely to remain in a funk, at risk of seeing growth turn negative this quarter depending how the European and global economies hold up, and depending how Brexit unfolds. This should leave the Pound with an overall flat-to-heavy bias. Cable has support at 1.2709-10, and resistance at 1.2770-73.

    [USD, CHF]
    EUR-CHF has recouped to around the 1.1250 level amid a backdrop of revived risk appetite in global market. The cross had last week punched out a four-month low at 1.1184, which was seen as the Swiss franc picked up safe haven demand in the wake of Apple's revenue warning (which in turn followed December manufacturing PMI data showing weakening across key global economies). The SNB remained firmly on hold at its quarterly policy meeting last month, continuing to rely on the combination of negative interest rates and the threat of intervention to limit appreciation in the currency in times of heightened uncertainty about the global outlook.

    [USD, CAD]
    USD-CAD has posted a lower low for a fourth consecutive session, this time at 1.3355, which is the lowest level seen since December 13. The move has been driven by a broadly softer U.S. Dollar as markets recalibrate Fed policy expectations following tempered remarks by the central bank's chair, Powell. U.S. Fed funds futures have priced out Fed tightening expectations for 2019 and are factoring in a 25 bp rate cut at the 18-month horizon. USD-CAD's early December low at 1.3160 provides a downside waypoint.

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