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By XE Market Analysis January 10, 2019 3:37 am
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    XE Market Analysis: Europe - Jan 10, 2019

    The Dollar is trading on a mostly weaker footing following yesterday's volley of dovish Fed speakers which, along with the FOMC minutes from the December FOMC meeting, affirmed that the "Powell Put" is resonating with others on the team. EUR-USD punched out a three-month high at 1.1570 ahead of the London interbank open, though has since corrected back under 1.1540. The Dollar has also weakened against Sterling, Yen and other currencies, though had held up better against the Dollar bloc and other currencies with higher beta performance characteristics as global stock markets come under pressure. USD-JPY has dropped to a one-week low at 107.77, partly driven lower by Yen outperformance as most stock markets in Asia and U.S. equity index futures came under pressure. The risk-off turn is stemming in part from a lack of communication from the U.S. and China following three days of trade talks, which weren't at a senior level, and which concluded yesterday, leaving markets with a sense of disappointment. Much weaker than expected inflation data out of China, with headline December CPI tumbling to just 0.9% y/y from 2.2% y/y in November, also fuelled narratives about slowing demand in the trade-war afflicted Chinese economy. Despite this, the Yuan lifted to a five-month high, reflecting a broadly weaker tone in the Dollar.

    [EUR, USD]
    EUR-USD punched out a three-month high at 1.1570 ahead of the London interbank open, though has since corrected back under 1.1540. We expected the pairing to remain a buy-on-dips opportunity for now, anticipating a transition to a higher trading band as markets continued to price in the shifting Fed policy outlook. A volley of dovish Fed speakers, along with the FOMC minutes from the December FOMC meeting, affirmed that the "Powell Put" is resonating with others on the team. We're still not overly bullish given signs of flagging growth momentum in the Eurozone. EUR-USD has support at 1.1520, and resistance at 1.1610-13 (levels which encompass the current position of the 100-week moving average).

    [USD, JPY]
    USD-JPY has dropped to a one-week low at 107.77, driven lower by Yen outperformance as stock markets in Asia and U.S. equity index futures drop. The risk-off turn is stemming in part from a lack of communication from the U.S. and China following three days of trade talks, which concluded yesterday. China's Global Times reported yesterday that both sides would simultaneously release statements today (AM, Beijing time), but as of yet this hasn't happened. Much weaker than expected inflation data out of China, with headline December CPI tumbling to just 0.9% y/y from 2.2% y/y in November, also fuelled narratives about slowing demand in the trade-war afflicted Chinese economy. Despite this, the Yuan lifted to a five-month high, reflecting a broadly weaker tone in the Dollar following a batch of dovish remarks by Fed members yesterday, which, along with the FOMC minutes from the December FOMC meeting, affirmed that the "Powell Put" is resonating with others on the team. Market participants will be looking for clarification of the trade situation between the U.S. and China. USD-JPY and Yen crosses are in the meanwhile likely to retain a downward directional bias. USD-JPY has support at 107.28-30, and resistance at 108.14-15.

    [GBP, USD]
    The Pound should continue to remain in directional stasis in trade-weighted terms into next Tuesday's UK Parliament vote on the EU Withdrawal Agreement and outline for a future relationship. The government yesterday lost another vote in Parliament, which passed an amendment that will, in the event of that next Tuesday's Brexit deal is voted down, force the government to announce a Brexit Plan B within three days. This could open the door to a new referendum and "soft Brexit" options being tabled. It continues to look highly probable that the Withdrawal Agreement will be rejected by Parliament. Of all the possible scenarios that will open up at that point, our best guess is that a new EU referendum will be the path of least resistance, despite elevated media talk and preparations for a no-deal Brexit scenario. We think a no-deal scenario is unlikely given the overwhelming majority of MPs are against allowing this to happen. Cable has support at 1.2709-10, and resistance at 1.2800.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.1200s. 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 amid a bout of turmoil in global markets. 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 lifted today following a phase of six consecutive down days, which yesterday left a five-week low at 1.3179. The pair has since lifted to a rebound-high-so-far of 1.3251. A souring in risk appetite has seen oil price correct some while eliciting a correction in recently outperforming currencies, such as the Canadian Dollar, which have a relatively high beta performance characteristic. USD-CAS has support at 1.3200-02, which marks the prevailing position of the 100-day moving average, and resistance at 1.3251-53.

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