EUR/USD slightly off post-ECB top

On Friday, in technical trading, the euro reversed only a small part of Thursday’s gains, as markets were looking for a new equilibrium. At the same time, the dollar was well bid across the board EUR/USD closed the session at 1.1156 (from 1.1177 on Thursday). USD/JPY finished the session at 113.86 (from 113.19).

This morning, Asian equity markets extend the positive equity momentum. Chinese production and retail sales showed a further loss of momentum. In public appearances, Chinese officials including the PBOC governor kept a balanced tone on further policy stimulation. Japanese Machinery orders jumped unexpectedly higher. The data leave the way open for the BOJ and the PBOC to maintain a growth-supportive policy. After a breather last week, commodities like copper resume their comeback. Oil stabilizes, but Brent holds north of $40 p/b. AUD/USD cleared the 0.75 barrier on Friday. The rally slows this morning, but at AUD/USD 0.7555, the Aussie dollar still trades near multi-month highs.
USD/JPY hardly profits from the risk-on sentiment. The pair trades in the 113.80 area. In Europe, there are plenty of headlines on the defeat of Merkel’s party in regional elections. For now, there is no big impact. EUR/USD trades in the 1.1160 area.

Today, the calendar is extremely thin with only euro zone industrial production data. A significant rebound is expected by 1.7% M/M in January, following two consecutive monthly declines. As the bar is already quite high, we have no reasons to distance ourselves from the consensus. Even so, the (positive) impact on the euro should be limited. Markets will look forward to the BOJ policy decision (tomorrow) and to the Fed decision on Wednesday. For both central banks no formal policy change is expected. For a preview of the Fed meeting (see the fixed income section). We expect traders to keep a wait-and-see attitude on the USD ahead of the Fed meeting. Given the soft market positioning, the risk for the Fed is to be less dovish than the market, keeping the downside of the USD well supported.

Of late, we advocated sideways EUR/USD trading within the 1.1193/1.0810 range. The top of this range was extensively tested after last week’s ECB meeting and is still within reach. Some further repositioning in favour of the euro is still possible short-term. 1.1376 is the next important resistance. For now, we assume that this level will hold, unless the news flow from the US would turn really negative. We look out for an EUR/USD topping out process.

USD/JPY perfectly holds within the 110.99/114.87 sideways consolidation pattern. The pair still shows no clear trend, but it looks like the downside is well protected. This is partially due to market fears for BOJ action in case of a sharp rise of the yen. At the same time, the dollar might perform rather well in the run-up to this week’s Fed meeting.

Cable extends rebound

On Friday, the global market repositioning in the wake of Thursday’s ECB decision was also the driver for sterling trading. The UK data (trade balance and construction output) were weak, but largely ignored. EUR/GBP to a large extent copied the decline of EUR/USD. EUR/GBP traded in the 0.7830 area at the start of the European session, but the pair filled bids around 0.7750 at noon.
However, it was not only a euro correction. Cable was also well bid, even as the dollar was in good shape across the board. The pair traded with an upward intraday bias. It even touched a ‘rebound top’ in the 1.4435 area and closed the session at 1.4382 (from 1.4281 on Thursday). EUR/GBP closed the session at 0.7753 (from 0.7827).

Today, there are no important eco data on the agenda in the UK. Later this week, the BoE will announce its policy decision on Thursday. No material change from the February assessment is expected.

Of late, sterling bottomed out as the Brexit-fears moved to the background, For cable, the hypothesis of a bottoming out process remains in place. For EUR/GBP the picture is damaged by Thursday’s overall post-ECB euro rebound. As is the case for EUR/USD, we look for signs of a topping out process in EUR/GBP. The medium-term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Short-term, EUR/GBP tested a first support at 0.7696 and this area was temporary broken last week. However, the test was rejected. 0.7652 is now the first important level on the downside.

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