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By XE Market Analysis January 29, 2014 2:41 am
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    XE Market Analysis: Europe - Jan 29, 2014

    All eyes will be on the Fed after the European close, though ahead of the announcement, we expect FX trade will be limited to position adjustments, though Turkey's rate hike may keep the greenback supported into the announcement. The FOMC began its policy meeting, the last one under Chairman Bernanke, on Tuesday. We don't expect any big surprises with the decision, to be announced at 14 ET (and there is no press conference). A $10 bln taper for February is expected by most Fedwatchers, bringing asset purchases down to $65 bln for the month. We also expect reiteration of dovish forward guidance. There is also non-negligible risk the Fed lowers the current 6.5% unemployment rate threshold. For the dollar, we expect the market to look to risk assets for directional clues after the Fed. A $10 bln taper is largely priced in now, and if Wall Street can rally, and EM currencies don't melt down further, we may see the greenback post gains.

    [EUR, USD]
    EUR-USD moved back to the top of its recent range in London, following it knee-jerk move lower in the aftermath of the sharp Turkish interest rate hike. Thr FOMC will now take the spotlight, though it remains to be seen how risk appetite plays out post-Fed. The Eurozone fundamental picture is euro bearish, and ECB Draghi reaffirmed this week that interest rates will remain low or lower for an extended period, while the IMF reminded us that Eurozone inflation is "way below target". We look for relatively quiet trade into the FOMC this afternoon.

    [USD, JPY]
    USD-JPY has settled around the mid- to high-102s. The technical picture remains bearish for USD-JPY, with last week's price action seeing both the 50- and 100-day moving averages breached along with the completion of a head and shoulder reversal formation, which targets 101.20. Fundamentals aren't a factor at the moment and the yen's fortunes will remain dependant on how risk assets do after the FOMC announcement.

    [GBP, USD]
    BoE's Carney said from Davos at the weekend that, "I am not signaling an exit of UK monetary policy here just to be clear," referring to his recent acknowledgements of economic improvement. The recent sharp drop in the U.K. unemployment rate to 7.1% brought the BoE's self-prescribed 7.0% target to within a whisker's reach, but Carney last week said that other factors will be taken into account with regard to monetary policy, which of course we already know are inflation and financial stability criteria. Sterling has remained choppy of late, with cable moving between 1.6450 and 1.6650 for a week now. Good resistance is marked at 1.6650, levels above here saw strong selling interest last Friday. Overall, we are mildly bearish on sterling, though more so against the EUR, CHF and JPY than the USD for as long as the backdrop of risk-off persists.

    [USD, CHF]
    EUR-CHF had settled to a consolidation in the mid-1.22s after dropping amid the recent risk-off theme. The Turkish central bank move however, took a big chunk of risk aversion off the table however, sending the cross over 1.2290 in early Asian trade. Support is marked at 1.2240-50, which encompasses lows and the 200-day moving average, while resistance is seen near 1.2310.

    [USD, CAD]
    USD-CAD posted fresh trend highs of 1.1177 in N.Y. trade, though fell back under 1.1140 into the Asian session following Turkey's sharp rate hike. The FOMC meeting on Wednesday will be key for the CAD near term, though a dovish BoC may keep USD-CAD's bigger picture trend upward sloping.

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