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By XE Market Analysis January 15, 2014 2:43 am
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    XE Market Analysis: Europe - Jan 15, 2014

    The JPY and AUD were the joint underperformers in a strong USD environment, which has remained firm since yesterday's firm U.S. ex-autos retail sales and solid inventory report sparked upward revisions to Q4 GDP. U.S. Treasury yields drifted higher, and Fed hawks Plosser and Fisher continued to argue that without a swift elimination of QE, inflation risks would rise again. The latest World Bank report also heralded that a "self-sustaining recovery" has commenced in advanced economies, which helped feed a broad risk-on tone in markets. Wall Street closed higher and Asia equity markets advanced, aided by tech outperformance, telecoms M&A and bank earnings news. This backdrop helped the yen lower, following its usual inverse correlation with risk appetite. The AUD broke from its normal correlation with risk appetite and declined as it proved sensitive to data showing declines in credit growth and new loans in Australia's biggest trade partner, China. USD-JPY logged a four-day peak of 104.47. EUR-USD fell to a five-day low of 1.3627. AUD-USD also made a four-day peak, to 0.8911.

    [EUR, USD]
    EUR-USD traded lower after capping out at a two-week high of 1.3699 on Tuesday. The USD found support from U.S. data that showed strong retail sales (ex-autos) and solid inventory report that sparked upward revisions to Q4 GDP, which was backed up by hawkish remarks from Fed Plosser and Fisher. EUR-USD has seen choppy price action since last week's U.S. jobs report, which has muddied the nearer-term technical picture, though in the broader view we still think the pairing is making a topping formation. Initial support is marked at 1.3600. Resistance at 1.3668-1.3674, which encompasses both the 20- and 50-day moving averages.

    [USD, JPY]
    The JPY has underperformed amid a strong USD and risk-on environment following firm U.S. data, the latest World Bank report that heralded that a "self-sustaining recovery" has commenced in advanced economies, and encouraging corporate earnings reports. This backdrop helped the yen lower, which followed its usual inverse correlation with risk appetite. We continue to expect that USD-JPY's major-trend peak at 105.44 will fall as the BoJ's expansive monetary policy should continue to drive the yen to fresh lows during 2014. Data this month showed Japan's monetary base surged 46.6% y/y in December to a record Y193.5 tln, illustrating the impact that the BoJ's reflationary policy is having. The BoJ is targeting a monetary base to Y270 tln by the end of the year.

    [GBP, USD]
    Sterling's outlook is looking generally less bullish following CPI figures that showed inflationary pressures to be rapidly unwinding and real sector data and survey evidence that have shown that the economy hasn't been sustaining recovery momentum as well has had been thought. The data backdrop supports the BoE's ultra-easy policy stance. We still expect the pound to hold up against the likes of the yen, but to loose ground to the dollar. GBP-USD's six-month rally now looks to have capped out and we see scope for a correction to 1.6000. Initial resistance is marked at 1.6450.

    [USD, CHF]
    The CHF has seen some choppy price action in recent sessions, but overall we expect the currency to remain on a bigger-picture softer footing as a consequence of the unwinding in the Swiss currency's safe haven premium as the period of Fed policy uncertainty ended with its decision to commence QE tapering. Resistance comes in at 1.2400, support at 1.2320 and 1.2300.

    [USD, CAD]
    USD-CAD has broken sharply higher over the last week, partly driven by weaker Canadian data and the consequent underpinning of favourable yield differential movement. The pair broke 1.0700, 1.0800 and now 1.0900, taking out its Dec-20 major trend peak of 1.7337 on route. The price action marks a break higher after some pretty choppy price action over the last several of weeks. Resistance can now be expected at 1.1000, support at 1.0920-1.0900.

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